TE/GE established the discrepancy adjustment program to reduce the number of income tax referrals to LB&I and SB/SE for minor adjustments to income.

The discrepancy adjustment program allows EO examiners to adjust certain line items on related income tax returns for issues they find in audits of an exempt organizations.

Discrepancy adjustments fall within the scope of Rev. Proc. 2005-32. Discrepancy adjustments do not constitute examinations, inspections, or re-openings under IRC 7605(b).

See also Policy Statement 4-3, IRM 1.2.13.1.1(4) .

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

The IRS adopted the Taxpayer Bill of Rights in June, 2014. Agents are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3) and IRM 1.2.10.37.

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

The table lists commonly used acronyms and their definitions.

Even if a potential discrepancy adjustment exists, you can still make a referral to one of the other operating divisions.

Use Form 5666 for income tax adjustments when the related income tax return:

Attach all documentation that supports the income tax adjustment to the back of Form 5666.

See the instructions on the back of Form 5666 and at IRM Exhibit 4.75.16-8, Exhibit 4.5.1-12.

Consider the support of a cooperating agent from another operating division if:

See IRM 4.75.21.6, Collateral Audit, for further detail.

You may audit related tax returns that are, or have been, audited by another operating division. However:

You must conduct IDRS research when considering a discrepancy adjustment.

Conduct IDRS research to determine if:

Common transaction codes (TC), what they mean and how they may affect your discrepancy adjustment:

If TC 922, 925, 976, or 977 is followed by TC 300 or TC 290, the Service Campus made a tax assessment:

Include a copy of the IDRS research in the case file.

Get your group manager's approval before initiating a discrepancy adjustment and document concurrence in the CCR.

Establish the tax return on AIMS and RCCMS. See IRM 4.75.28.4.2.1 for Form 1040 instructions, and IRM 4.75.28.4.2.2 for Form 1120 instructions.

Complete the following line items if using Form 5597 to establish the case:

Add discrepancy adjustment returns to your Form 6490, EP/EO Technical Time Report, on WebETS as soon as you establish the case on RCCMS and AIMS.

Charge any nominal time you spent before establishing the case on RCCMS and AIMS to the related return or activity.

Use the appropriate activity code for the type of return you’re establishing. See Document 6379, Exempt Organizations Management Information Systems Codes.

Verify the AIMS-generated activity code in RCCMS and the code use on Form 6490 agree before you close the case.

Use the same project code as the related audit. If there is no project code, use "0000" .

Ensure the statute of limitations date on any Form 1040 and 1120 is correct and protected. Secure consents to extend the statute as needed.

Refer to IRM 25.6, Statute of Limitations, for detailed instructions on income tax return statutes.

Ensure the correct statute of limitations date is reflected on AIMS and RCCMS.

Prepare Form 895, Notice of Statue Expiration, for those returns in which the statute of limitations for assessment will expire within 270 days.

You may propose adjustments on returns with short statutes if the adjustments are significant. Get group manager approval before issuing a "30-day letter" on a return with less than 12 months left on the statute. When issuing a 30-day letter in these cases, include:

You may accept Form 872 by fax if you have contacted the taxpayer by phone or in-person. Document on the CCR:

Determine whether to assess penalties on the discrepancy adjustments. Include a brief discussion in the work papers on which penalties apply and whether you are assessing them. See IRM 20.1, Penalty Handbook for a discussion of penalties.

Managerial approval is required (in writing) before certain penalties can be assessed. See IRC 6751(b)(1).

When you impose penalties on a Form 1040 or Form 1120 discrepancy adjustment:

Every notice IRS sends to an individual that includes an amount of interest due must also include both, a:

If the IRS doesn’t provide a notice to the taxpayer who has timely filed their tax return, specifically stating the taxpayer’s liability within a "specified period of time" , the IRS must suspend the interest. (See IRC 6404(g)). The "specified period of time" is 36 months for notices provided after November 25, 2007. (See (26 CFR 301.6404-4(a)).

Suspension of interest under IRC 6404(g):

IRC 6404(g) does not apply to:

For timely filed Forms 1040 covered by the 36-month notification deadline, interest will be suspended beginning on the day after the close of the 36-month period and ends 21 days after the notice is provided. "Notice" is considered to be made when the 30-day letter package is mailed. The suspension period begins 36 months after the later of (1) the date on which the return is timely filed, or (2) the due date of the return without regard to extensions.

IRC 6404(g) applies only if the "30-day letter" package (or similar notice) is mailed to the taxpayer after the specified period has expired.

If IRC 6404(g) applies, interest should be calculated on Form 4549-E from the original due date of the Form 1040 return through the 36 month period.

If IRC 6404(g) does apply and interest is being suspended, include the following in the "Other Instructions" section of Form 3198-A, and in the "Other Information" section of Form 4549-E: "IRC 6404(g) applies and notice was provided on (insert the date Form 4549-E was mailed to the taxpayer)" . On the file copy of Form 4549-E, add "Interest should be suspended beginning (insert the date the suspension period begins) through (insert the date the suspension period ends)" . The EO Closing Unit will input TC 971 with AC 064.

If IRC 6404(g) does not apply, interest should be calculated on Form 4549-E from the original due date of the return through 30 days after issuing the 30-day letter. In the "Other Instructions" section of Form 3198-A and in the "Other Information" section of Form 4549-E, include the following: "IRC 6404(g) does not apply" .

In cases involving discrepancy adjustments on jointly filed returns, taxpayers may request relief from joint and several liability under IRC 6015. Taxpayer may use Form 8857, Request for Innocent Spouse Relief, or a similar statement containing the same information signed under penalties of perjury.

If you receive Form 8857 or similar statement, date stamp the request and mail it within 10 business days to:

If innocent spouse relief is requested while the case is opened, you must include an addendum to your 30-day letters to both spouses (and 90 day letters if necessary). The addendum should:

Don’t solicit tax payments from the requesting spouse while a request for spousal relief is pending. You may however solicit tax payments from the non-requesting spouse. Refer the taxpayer to Pub 971, Innocent Spouse Relief.

Check the "Innocent Spouse" block in the Mandatory Review section of Form 3198-A.

If a taxpayer files a formal claim with a Campus Center on Form 843, Claim for Refund and Request for Rebate, Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return, while the income tax return is open on AIMS, the Campus Center will send the claim to you.

Contact CP&C Classification if you receive a claim from the Campus Center. You’ll either be given assistance in ruling on the claim or be instructed to transfer the claim to the appropriate operating division for audit.

If EO retains jurisdiction over the claim and the discrepancy adjustment is open, describe the disposition of the claim in the "Other Information" section of Form 4549-E. See IRM 4.75.37 for guidance on statements to describe the disposition of claims.

If the claim is fully or partially allowed, enter the claim description and amount on the appropriate adjustment line of Form 4549-E.

If a formal claim is fully or partially disallowed, include Form 2297, Waiver of Statutory Notification of Claim Disallowance in the discrepancy adjustment report.

If a taxpayer who makes a credible claim that he or she is unable to manage his or her own affairs by reason of physical or mental impairment, and requests additional time to file a claim under IRC 6511(h), refer the matter to the appropriate operating division on Form 5666.

You may offer an install agreement to a taxpayer who is unable to pay the full amount owed if he/she is eligible. See eligibility criteria at IRM 4.20.4.2(6).

Send Form 9465, Installment Agreement Request, to the taxpayer with the 30-day letter package or after you have received the taxpayer's reply to the 30-day letter.

If the statute is imminent, secure Form 872 to ensure sufficient time to process the case.

If a taxpayer submits a request for an installment agreement:

Keep a copy of all forms in the work papers for information purposes.

Close the discrepancy adjustment case. The Campus collection function will contact the taxpayer about "setting up" an installment agreement.

Input the appropriate ARDI code for the installment agreement on Form 5599 Item 42. Check the installment agreement box on Form 3198-A in the Mandatory Review section..

See IRM 4.20.4, Examination Collectibility, Installment Agreements, for more information on installment agreements.

If the taxpayer has filed bankruptcy, take the appropriate steps to protect the government’s interest. See IRM 4.27, Bankruptcy, for further guidance.

See IRM 4.75.22.4.1, Payment Processing, for instructions on how to process payments, if received.

In general, we don’t extend the time to reply to a 30-day letter (26 CFR 601.105(d)). However, extensions can be granted under certain circumstances, such as:

Taxpayers must make requests for extensions of time to respond to the 30-day letter in writing and state the reason(s) why additional time is needed.

Since many requests are made by telephone, grant the extension verbally and confirm it in writing upon receipt of the written request.

Get your group manager/designated management official’s approval before granting an extension. Notify the taxpayer in writing of the extension and specific extended response date.

Extensions are normally granted for 30 days or less unless a specific reason supports additional time.

Discrepancy adjustment cases are considered agreed if you secure a properly signed Form 4549-E from the:

You can accept faxed Forms 4549-E showing additional tax of any amount if you’ve made taxpayer contact and the CCR documents:

Stamp the received date on Form 4549-E.

If the taxpayer (and spouse for jointly filed returns) agrees with the discrepancy adjustment, the 30-day letter is the final letter. Closing letters aren’t prepared for agreed discrepancy adjustments.

Try to secure full payment of taxes, interest and penalties.

If the taxpayer is unable to pay the balance owed within 120 days, consider offering an installment agreement. See IRM 4.75.28.5.5. EO Exam agents have the same authority for installment agreements as SB/SE Exam agents.

If you receive payment, follow the check processing procedures outlined in IRM 4.75.22.4.1, Payment Processing.

Close case using procedures in IRM 4.75.28.8.

If the total discrepancy adjustment to one taxpayer results in an over-assessment, or an agreed but unpaid deficiency of $50,000 or more, you must process the case within 22 calendar days (16 business days) after the agreement is filed or the over-assessment is determined. See section 3103 of RRA ‘98.

Use disposal code "03" on AIMS and "102" on RCCMS. See Exhibit 4.75.28-1.

If the taxpayer disagrees with the proposed adjustments, inform him/her of:

Encourage a taxpayer that doesn’t agree with the proposed adjustment to file a valid written protest for the case to go to Appeals.

If agreement can be reached on one or more issues, encourage the taxpayer to enter into a partial agreement by executing a Form 4549-E covering the agreed issues. A typical situation might be where the taxpayer agrees to the discrepancy adjustment; however, he does not agree to the penalty associated with the adjustment to his tax liability.

Partial agreement procedures aren’t appropriate if the taxpayer agrees to the proposed adjustments in a specific tax period but doesn’t agree with proposed adjustments in a prior or subsequent tax period.

For partial agreements, complete two separate Form 4549-E reports:

Present the agreed report to the taxpayer for signature on Form 4549-E. Issue the second report to the taxpayer with both agreed and unagreed issues with the 30-day letter. Include all enclosures listed on the 30-day letter.

If the taxpayer signs only the Form 4549-E partial agreement report but doesn’t sign the report containing both agreed and unagreed issues, prepare an explanation of which items and amounts were agreed to by the taxpayer. Include the explanation in the case file when closing to EO Mandatory Review.

Close the case to EO Mandatory Review as an Unagreed case. Include the statement "discrepancy adjustment is partially agreed" in the "Mandatory Review " section of Form 3198-A. See case closing procedures at IRM 4.75.28.8.

Depending on whether a protest was submitted, use DC "07" or "10" on AIMS and "601" or "604" respectively on RCCMS. See Exhibit 4.75.28-1.

Close the case for issuance of a statutory notice of deficiency in the following instances:

Modify the discrepancy adjustment report to state that the taxpayer didn’t respond to the 30-day letter. Include a copy of the report in the case file and save in the Office Documents folder in RCCMS.

A failure to reply to a 30-day letter is considered an unagreed case for processing purposes. Notate: "Unagreed Discrepancy Adjustment" in the "Mandatory Review" section of Form 3198-A.

Close the case to Mandatory Review. See case closing procedures at IRM 4.75.28.8.

Use DC "10" on AIMS and "604" on RCCMS. See Exhibit 4.75.28-1.

If the 30-day letter is returned as undeliverable, make an attempt to obtain the correct address.

Staple the following Forms (as applicable) to the outside of the file folder from top to bottom:

Complete Form 3198-A as follows:

See IRM 4.75.16.7.1 for further details.

Include in the inside-left of the case file folder documents identified in IRM 4.75.16.7.2. Include a computer disk containing the RGS data if the case is protested to Appeals.

Organize the inside-right of the case file folder from top to bottom in accordance with IRM 4.75.16.7.3.

Working return(s): Attach documents identified in IRM 4.75.16.7.4, such as a current AMDISA print, Form 2848, and Form 872. An RTVUE or BRTVU print will be accepted as the equivalent of a tax return if it provides sufficient detail to determine if there is a discrepancy, or if it gives sufficient line item detail to compute 1040 or 1120 income taxes. For unagreed cases, obtain the original return before the case is sent to the Tax court or Appeals.

Include all IDRS research. See IRM 4.75.28.4.1.