4.75.27 Office/Correspondence Examination Program (OCEP) and Exempt Organizations Compliance Unit (EOCU)

Manual Transmittal

October 04, 2018

Purpose

(1) This transmits revised IRM 4.75.27, Exempt Organizations Examination Procedures, Office/Correspondence Examination Program (OCEP) and Exempt Organizations Compliance Unit (EOCU)..

Material Changes

(1) In order to reflect the Tax Exempt and Government Entities reorganization., IRM 4.75.27 (OCEP) has been formally merged with IRM 4.75.9 Exempt Organization Compliance Area (EOCA), changing the name to Exempt Organizations Compliance Unit (EOCU), reflecting the improved reporting on EO forms and returns and describing the roles of the new Compliance, Planning and Classification function within Government Entities and Shared Services.

(2) Revised 4.75.27.1 to incorporate service-wide memorandum, Heightened Awareness, Sensitivity and Understanding of Internal Controls September 14, 2016.

(3) In exhibit 4.75.27-1, removed obsolete letter 3606 with letter 3606-A.

(4) IRM 4.75.27.3; Replaced all references to compliance projects with workstreams.

(5) IRM 4.75.27.4.2(7); Replaced the obsolete L.1475 with L. 1475-A.

(6) IRM 4.75.27.7; Added the new IDR guidelines.

(7) Changed all references to IRM 4.76 to Audit Technique Guides.

Effect on Other Documents

This material supersedes IRM 4.75.27, Exempt Organizations Examination Procedures, Office/Correspondence Examination Program (OCEP) dated August 18, 2016.
This revision incorporates the Interim Guidance Memorandum TEGE-04-1116-0021, New Process for Information Document Requests, dated Nov. 16th, 2016.

Audience

Tax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(10-04-2018)

Margaret Von Lienen
Director, Exempt Organizations
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This manual focuses on the agent’s responsibility to audit returns either by an office interview or through a correspondence audit. Topics addressed include:

    1. The selection and classification of EO returns

    2. Techniques for auditing a workstream

    3. Audit procedures and guidelines for OCEP cases

    4. Audit procedures for undeliverable mail

    5. Audit procedures for failure to respond

    6. Revocations vs. terminations of exempt status

  2. The procedures in this manual apply to Exempt Organization Examination agents and reviewers in the following series:

    • GS-512

    • GS-526

    • GS 987

    • GS-501

  3. Policy Owner: Director, Exempt Organizations

  4. Program Owner: Exempt Organizations

Background

  1. This section contains:

    1. Specific guidance for EO revenue agents and tax compliance officers.

    2. Specific procedures for correspondence and desk audits for office audit unique problems and converting an office audit into a field audit when necessary.

Authority

  1. Policy Statement 4-119 states that the primary objective of the EO audit program is regulatory, emphasizing continued qualification of exempt organizations. IRM 1.2.13.1.36

  2. IRC 7602 gives agents the authority to:

    1. Examine any books, papers, records or any data necessary to complete an audit.

    2. Issue a summons for information necessary to complete an audit.

    3. Take testimony under oath to secure additional information needed.

    4. Ask about any offense connected with the administration or enforcement of the Internal Revenue laws.

Responsibilities

  1. During an audit, agents are responsible for determining if an organization:

    1. Continues to meet its requirements for exemption and retain its tax-exempt status.

    2. Should have its correspondence audit converted into a field audit.

    3. Filed all required tax and information returns.

    4. Reported information and tax liabilities correctly.

Program Controls

  1. Agents consult the Knowledge Management Network (K-Net), to ensure proper issue development and consistent application of the law.

Acronyms

  1. The table lists commonly used acronyms and their definitions.

    Acronym Definition
    EO Exempt Organizations
    AIMS Audit Information Management System
    K-NET Knowledge Management Network
    RAR Revenue Agent Report
    TAM Technical Advice Memorandum
    TE/GE Tax Exempt/Government Entities
    STAT NOTICE Statutory Notice of Deficiency
    PF Private Foundation
    NOL Net Operating Loss
    OCEP Office Correspondence Examination Program

Overview

  1. The Office/Correspondence Examination Program (OCEP) is an ongoing program in which EO Revenue Agents and Tax Compliance Officers audit returns either by an office interview or through correspondence.

    1. Office interview audits are those in which the issues can’t be resolved through correspondence and the agent requests to review the records in an IRS office. See IRM 4.75.27.4.1.

    2. Correspondence audits are those in which the taxpayer can readily mail information to resolve the questionable issues. See IRM 4.75.27.4.2.

  2. While generally limited in scope, OCEP audits usually have no more than four issues. However, if determined appropriate, field groups can apply OCEP procedures to more complex returns. OCEP audits provide an efficient alternative to field audits.

  3. OCEP procedures can apply to all returns within the jurisdiction of TE/GE Exempt Organizations. See IRM Exhibit 4.75.12-1, Returns Within the Jurisdiction of TEGE Exempt Organizations.

  4. The IRS adopted the Taxpayer Bill of Rights (TBOR) which outlines the 10 fundamental rights of taxpayers when dealing with the IRS. Publication 1, Your Rights as a Taxpayer, was updated to include the modified language from the Taxpayer Bill of Rights. Be aware of these rights and read the TBOR .

Workstreams

  1. References to compliance projects are now referred to as workstreams.

  2. Use the correspondence audit technique for workstreams, but convert the audit to an office-interview or a field audit, if facts and circumstances warrant.

  3. Specify the workstream issue(s) in the letters you send to the taxpayer. The workstream issue(s) and objective(s) are detailed in the workstream action plan.

General OCEP Audit Procedures

  1. Audit procedures that apply to field audits generally apply to OCEP audits. Exceptions include:

    1. OCEPs, in which audit scope is limited to the issues identified by the classifier or the objective of a specific workstream.

      Note:

      You must still meet the basic requirement to reconcile a return and to prepare a supporting workpaper.

    2. Complete filing checks in IRM 4.75.12, Required Filing Checks will not apply, except to ensure all required Form 990 series returns and employment tax returns are filed. (See Policy Statement 4-4.)

      Note:

      Research Integrated Data Retrieval System (IDRS) to verify information returns were filed, when applicable. Use the Payer Master File (PMF) IDRS command code PMFOL, Information Returns Master File (IRMF) IDRS command code IRPTR, and Business Master File (BMF) IDRS command code BMFOL, to satisfy the compliance check requirements of IRM 1.2.13.1.2.

  2. Consider expanding the audit scope if you encounter questionable items on the return or have questionable information.

  3. Use OCEP pattern letters, if applicable. See Exhibit 4.75.27-1 for a list of suggested forms and letters used in OCEP audits.

  4. Request non-filed returns in the initial audit letter or at the appointment, as well as explanations for not filing returns. Use IDRS to verify filing compliance. See IRM 4.75.10.2.2.1, IDRS.

  5. Request information, books and records for the specific years under audit. However if you observe current activities or receive current information that raises compliance concerns about recent tax years, you may consider expanding the years under audit.

    Note:

    Expansion of the audit period always necessitates a discussion with the group manager and his/her concurrence noted in the CCR.

  6. If you can’t complete an audit under OCEP procedures due to complexity, geographical location, etc., the group manager may convert the OCEP audit to a field audit.

  7. At the closing conference, as you conclude your audit:

    • Present your findings.

    • Explain proposed adjustments.

    • Solicit agreements.

  8. Conduct the conference for:

    1. office-interview audit cases - either in person or phone.

    2. correspondence case - phone.

      Note:

      See IRM 4.75.13.7.2, Closing Conference, for further information on closing conferences.

  9. Contact the taxpayer to determine if they sent you any original documents. If so, make copies of the documents and return the originals.

Office-Interview Audit Procedures

  1. Office-interview audits usually take place at the agent’s post of duty.

  2. If an office-interview audit is required away from your post of duty, arrange an audit at another mutually agreeable IRS office.

  3. The taxpayer should not have to travel more than 50 miles.

  4. Use a letter for all initial taxpayer contacts. Before mailing the initial appointment letter, confirm the taxpayer’s address electronically (such as IDRS or Internet search).

  5. Inform a principal officer or a properly authorized representative that the return is being audited and to bring the specified records to the office at the scheduled time.

  6. Use these letters:

    1. To initiate the audit: Letter 3606-A, Office Correspondence Examination Program Letter, or a workstream initial contact letter. Notify the organization of the interview’s time and location and the records to bring. Refer to the new Information Document Requests process in IRM 4.75.10.7

    2. To request an additional appointment after a compliance check or an information review: Letter 1475-A, Request for Appointment After Review of Information, modified for EO.

      Note:

      Letter 1475-A , Request for Appointment After Review of Information, is the EP version of the obsolete Letter 1475. You may convert it to Microsoft Word and easily change all EP references to EO. See IRM 4.75.15.3, Signing and Issuing Letters, for additional guidance in issuing nonstandard letters.

  7. Include Pub 1, with any initial contact letter.

  8. To save documents to RCCMS, refer to IRM 4.75.16.7, Case File Assembly.

Correspondence Audit Procedures

  1. The correspondence audit technique is normally used to audit workstream returns.

  2. All initial taxpayer contacts are now made by letter. Confirm the taxpayer's address before mailing the initial letter.

  3. Use Letter 3606-A, Office Correspondence Examination Program Letter, for the initial contact letter along with Form 4564, Information Document Request.

    Note:

    Refer to the new process for Information Document Requests in IRM 4.75.10.7

  4. If you can’t satisfactorily complete the case by correspondence, your group manager can convert the case to an office-interview or field audit.

  5. If you need to contact a third party for additional information, see IRM 25.27.1, Third Party Contact Program.

  6. Notify the taxpayer by letter if you change the audit to an office-interview or field audit. Use Letter 1475-A (DO), Request for Appointment After Review of Information , modified for EO when you convert the correspondence audit to an office-interview. See IRM 4.75.27.4.1 (6) and IRM 4.75.15.3 , Signing and Issuing Letters, for additional guidance in issuing nonstandard letters.)

General OCEP Audit Guidelines

  1. Return cancelled checks, receipts and other original records the taxpayer submitted during the audit. Use Form 3699, Return of Documents to Taxpayer, or Letter 1020 (DO), Correspondence and Interview Examination. Letter 1020 (DO) advises the taxpayer of the status of the audit and documents returning records to the taxpayer.

  2. Place all pertinent correspondence in the back of the file. (Correspondence enclosures may not be pertinent, see IRM 4.75.16.7.3(1)) Contact the taxpayer to determine whether they submitted any original documents. If so, make copies of the documents and return the originals.

  3. Keep only records you need to document workpaper conclusions in the files.

    Caution:

    At the first indication of a revocation, the agent must be careful to keep all records that were received from the taxpayer. At the same time the agent must begin compiling an administrative record. For a discussion on proposed revocations and administrative records, refer to IRM 4.75.32, Declaratory Judgment Cases and The Administrative Record.

  4. General on-site audit guidelines are in IRM 4.75.11, On Site Examination Guidelines. They may be useful in an OCEP audit. Refer also to Exempt Organization’s, Audit Technique Guides, for audit guidelines appropriate for an OCEP based on the type of organization under audit.

Procedures for Undeliverable Mail and Failure To Respond

  1. If you can’t locate a taxpayer, or the Post Office returns the initial contact letter as undeliverable, refer to IRM 4.75.16.5.11, Unable to Locate, for instructions on locating the taxpayer and closing unable-to-locate taxpayers. Use Letter 3844, Undeliverable Mail - Request for Change of Address for Exempt Organizations.

  2. Refer to IRM Exhibit 4.75.16-15 for examples of closing procedures for "unable to locate" situations.

Failure to Respond

  1. If the taxpayer doesn't respond within 10 days, call the taxpayer or designated representative to discuss the items requested on the IDR (See IRM 4.75.10.8.2):

    1. Determine within five business days if you’ll grant an extension. If an extension is warranted, you may allow the taxpayer up to 15 business days to provide the required information.

    2. Send an extension approval letter.

    3. If the case is part of a workstream, use an internally-drafted letter.

    4. In all other cases involving tax-exempt organizations, use Letter 3844-A (DO), Exempt Organizations Compliance Area Follow-Up, which informs the taxpayer that if they do not furnish the requested information, the IRS will propose revocation.

    5. If the taxpayer continues not to respond or if the response is inadequate, you may grant a second extension with up to 15 business days with your manager’s approval.

  2. If you don’t receive the information after the second extension, begin the enforcement process.

    Note:

    Consider POA by-pass procedures per IRM 4.11.55.3, Examining Officer’s Guide, Power of Attorney Rights and Responsibilities.

  3. A tax-exempt organization’s failure to respond to an OCEP audit may result in revocation of its exempt status. See 26 CFR 1.6033-2(i)(2) and 26 CFR 1.6001-1(c) .

  4. Prepare audit reports for failure-to-respond cases that:

    1. Contain a list of the information they failed to provide.

    2. Describe its relevance to the status involved.

    3. Provide clear support for the conclusion that failure to substantiate the information leads to material questions as to whether the organization is entitled to continue exempt status.

  5. If the taxpayer doesn’t respond or the response is incomplete:

    1. Discuss within 10 business days with the internal IRS team.

    2. Coordinate the issuance of the summons with Area Counsel.

    3. Follow the summons procedures in IRM 25.5.

  6. Follow established revocation procedures. Refer to:

    • IRM 4.75.13.8.1, Issue Development - Revocation of Tax-Exempt Status,

    • IRM 4.75.15.8.1, Closing Letters and Reports of Examination - Revocations

    • IRM 4.75.16.4.8, Case Closing Procedures - Form 5666 - Revocations

    • IRM 4.75.16.5.6, Revocation Due to Inadequate Records or Failure to Provide Requested Information

    • IRM 4.75.31, Conversion of Returns Upon Revocation of Exemption.

Revocation versus Termination of Exempt Status

  1. Review EO’s Audit Technique Guides on issues that result in proposing revocation. If findings clearly indicate an organization doesn't materially meet the rules for continued exemption, revocation of exempt status is appropriate. Ensure the case file and audit report provides clear support for this adverse action. Follow the revocation procedures listed in IRM 4.75.27.7 (6). Refer to IRM 4.75.32 Declaratory Judgment Cases and The Administrative Record

  2. If an organization has gone out of business, termination is appropriate. Follow the termination procedures in IRM 4.75.16.5.10, Terminations. In cases involving IRC 170, include in the termination letter a statement terminating the deductibility of contributions.

Exempt Organizations Compliance Unit Overview

  1. The purpose of the EOCU is to:

    • Address potential noncompliance primarily using correspondence contacts.

    • Leverage Exempt Organizations (EO) Examination resources to increase contacts in the EO community.

  2. This section of the manual contains an overview of the Exempt Organizations Compliance Unit (EOCU).

Types Of Work

  1. The EOCU performs a variety of work including:

    • Educational Workstream

    • Compliance Checks

    • Case Building

Inventory Control

  1. The EOCU uses the Reporting Compliance Case Management System (RCCMS) to oversee its inventory.

RCCMS

  1. RCCMS was developed specifically for TE/GE Business Operating Division (BOD) personnel who are involved in any part of the full life cycle of compliance activities. RCCMS is an information system that provides a single electronic case and inventory management system across the TEGE business units.

Quality Measurement

  1. EOCU uses the following quality measurement tools:

    • Exempt Organizations Compliance Unit Quality System (EOCUQS). See Exhibit 4.75.27-2, EOCU Attribute Matrix

    • Tax Exempt Quality Measurement System (TEQMS)

Exempt Organizations Compliance Unit Quality System (EOCUQS)

  1. The EOCU developed a hybrid quality system to measure the quality of compliance checks and case-building completed by employees. The system incorporates elements of TEQMS used by SB/SE.

  2. The EOCUQS serves to demonstrate the impact of EOCU work on both the business results and customer satisfaction components of the balanced measures system

  3. Managers and Leads may use EOCUQS to complete individual case reviews. EOCUQS is also used to evaluate a statistically valid sample of cases at the EOCU area level.

Tax Exempt Quality Measurement System (TEQMS)

  1. For an explanation of TEQMS, refer to IRM 4.70.6, Explanation of TEQMS.

  2. For detailed information on TEQMS, refer to IRM 4.70.6, Tax Exempt Quality Measurement System (TEQMS).

Staffing

  1. The EOCU staffing includes the following positions:

    • Lead Tax Examining Technicians, GS-0592-Responsibilities include conducting compliance check and case building, performing quality reviews, and participating in the development and application of all EOCU processes.

    • Tax Examining Technicians, GS-0592 -Responsibilities include conducting compliance checks and case building.

    • Clerical/Secretarial, GS-0303/GS-0318- Responsibilities include assembling case folders and files for compliance check and case-building, preparing letters for educational and case-building workstreams, receiving and distributing mail, and supporting management with various clerical functions.

  2. The Support Staff includes the following:

    • Analysts, GS-0501/GS-0301 — Responsibilities include data management and reporting, providing technical assistance, and participating in the development and application of all EOCU processes.

Exempt Organizations Compliance Unit (EOCU)

  1. The primary goal of the EOCU is to improve reporting on:

    • Form 990, Return of Organization Exempt From Income Tax

    • Form 990-EZ, Short Form Return of Organization Exempt from Income Tax

    • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation

    • Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Person

    • Form 990-T, Exempt Organization Business Income Tax Return

    and, to leverage communications with our customers.

  2. In order to meet these goals, EOCU will primarily engage in the following types of work:

    • Conducting compliance checks

    • Issuing educational letters to taxpayers

    • Case Building

  3. The contacts made with customers (the EO community) will be conducted in accordance with the project process.

Educational Workstream

  1. The purpose of an educational workstream is to improve compliance with EO tax law and increase the accuracy of return filing.

  2. EOCU employees send educational letters to a designated population in order to inform and educate them.

  3. This type of project is designed with no expectation of a response.

Compliance Check Workstreams

  1. A compliance check is a review conducted to determine the following:

    • Whether an organization is adhering to record keeping and information reporting requirements.

    • Whether an organization’s activities are consistent with its stated tax exempt purpose

  2. A compliance check is a review of information and forms that organizations are required to file or maintain including:

    • Form 990 series returns and notices

    • Form 941, Employer’s Quarterly Federal Tax Return

    • Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

    • Form W–2, Wage and Tax Statement

    • Form 1099 series information returns

    • Form W–4, Employee’s Withholding Allowance Certificate

    • Other required returns and statements.

  3. The compliance check is also a tool to help educate organizations about their reporting requirements and to increase voluntary compliance.

  4. EOCU tax examiners (TEs) primarily work compliance check cases from start to finish.

  5. Compliance checks are not audits and do not directly relate to determining a tax liability for any particular period. Initial contact letters for compliance checks will include Pub. 4386, Compliance Checks, explaining the distinction.

  6. Refer also to the Charity and Nonprofit Audits IRS webpage

Case Building Workstream

  1. Case-building is a type of compliance check workstream. The primary difference is the cases are not worked from start to finish by EOCU personnel. When responses are received, they are generally forwarded to a triage team consisting of workstream team members who review the contents and decide what, if any, further action is appropriate. See IRM 4.75.8.2.4.1.

Classification

  1. When a delinquent return with a questionable item (Secured via a compliance check) is received, they will be forwarded to Classification.

  2. Compliance check cases involving a delinquent return with questionable items (secured via a compliance check) or other issues (e.g., no-response, questionable response, filing wrong return, non-filer, potential revocation, fraud, etc.) are closed to Classification.

Case File Retention

  1. Retain compliance check and case-building workstream cases for one year after the final case is closed.

  2. The clerical staff is responsible for destroying or disassembling the case files of ongoing workstreams one year after the fiscal year end in which the cases were closed

  3. Undeliverable educational letters and replies to educational letters that are converted to compliance checks may be disassembled and destroyed after six months.

  4. The Database will notify the clerical staff when the final case has been closed. Refer to Document 12990, records control schedule 24 item 9.

OCEP Letters and Forms

LETTER/FORM TITLE
Letter 566-N Request for Verification-Contact Letter
Letter 1020 Correspondence and Interview Examination
Letter 1475-A Request for Appointment After Review of Information

Note:

An EP letter modified to EO use, replacing the obsolete L.1475

Letter 3844-A Exempt Organizations Compliance Area Follow-Up
Letter 3606-A Office Correspondence Examination Program Letter
Form 3699 Return Original Document of Taxpayer
Letter 3844 Undeliverable Mail -Request for Change of Address for Exempt Organizations
Letter 3488-B Correspondence Audit Request for Additional Information
Pub. 1 Your Rights as a Taxpayer (mailed with initial contact letters)

Note:

You may also use internally-drafted letters for the initial contact letter or follow-up letters with your manager’s approval.

Exempt Organizations Unit Quality System-EOCU Attribute Matrix

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