4.75.28 Discrepancy Adjustments

Manual Transmittal

June 08, 2017


(1) This transmits revised IRM 4.75.28, Exempt Organizations Examination Procedures, Discrepancy Adjustments.

Material Changes

(1) As of the publication of this manual, TE/GE is undergoing a restructure which will affect titles, authorities, and offices.

  • All references to The Examination Program and Review (EPR) and the authorities granted to the manager of that office will be changed, pending announcement for the authorized replacement.

  • All references to Case Selection and Delivery (CS&D) are changed to CP&C Classification and CP&C Case Assignment.

  • All references to Examination Special Support (ESS) are changed to "EO Closing Unit," EGC 7997.

  • All references to "EO Classification-Referrals" are changed to "EO Referrals Group."

(2) All sections were written to comply with the Plain Writing Act. For additional information on the Plain Writing Act, see http://www.plainlanguage.gov.

(3) Reorganized the information for clarity.

(4) Added IRM, Program Scope and Objectives.

(5) Added table in IRM to provide a summary of useful IDRS command codes and their purposes.

(6) Incorporated contents of the November 19, 2015, Memorandum from the Deputy Commissioner for Services and Enforcement, entitled Revision of Policy for Use of Fax in Taxpayer Submissions to IRM and IRM

(7) Added "Establishing Form 1040 in RCCMS" in IRM

(8) Added "Establishing Form 1120 in RCCMS " in IRM

(9) Removed the following exhibits:

  • IRM 4.75.28-1, Discrepancy Adjustment Letters and Forms

  • IRM 4.75.28-3, Modified Letter 3605

  • IRM 4.75.28-4, Modified Letter 3619

  • IRM 4.75.28-5, Modified Letter 3603

  • IRM 4.75.28-6, Sample Rebuttal Letter

(10) See the following table for a list of old sections of IRM 4.75.28 and the corresponding new sections.

Previous Manual Section New Section
IRM, Overview IRM, Overview
IRM, Identifying Discrepancy Adjustments Contents moved to IRM, Overview
IRM, Referrals to Other Operating Divisions, IRM, Examination Activities by Other Operating Divisions IRM, Alternatives to Discrepancy Adjustments
IRM, IDRS Research, IRM Establishing the Case on AIMS and RCCMS, IRM, Statute of Limitations, IRM, Time Reporting IRM, Processing Discrepancy Adjustments
IRM, Preparation and Issuance of Discrepancy Adjustment Package IRM, Preparation and Issuance of Discrepancy Adjustment Package

Effect on Other Documents

This material supersedes text currently contained in IRM 4.75.28, dated July 15, 2013.


Tax Exempt and Government Entities
Exempt Organizations

Effective Date


Margaret Von Lienen
Acting Director, Exempt Organizations
Tax Exempt and Government Entities (EO)

Program Scope and Objectives

  1. Purpose: This manual describes situations when a discrepancy adjustment is appropriate and the procedures for processing the adjustment.

  2. Audience: The procedures in this manual apply to EO Examination employees in the following series:

    • GS-512

    • GS-526

    • GS-987

  3. Policy Owner: Director, EO

  4. Policy Program: EO

  5. Tax adjustments and penalties are reported on Form 4549-E, Income Tax Discrepancy Adjustments. See IRM for instructions for the completion of Form 4549, which is substantially the same for Form 4549-E.


    See IRM 20.1, Penalty Handbook, for detailed information on penalties.


  1. 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.

  2. 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.


  1. 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).

  2. See also Policy Statement 4-3, IRM .


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

    1. Meets the requirements for exemption.

    2. Has the proper foundation status (501(c)(3) organizations only).

    3. Filed all required tax and information returns.

    4. Reported information and tax liabilities correctly.

  2. 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

Program Controls

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


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

    Acronym Definition
    AC Action Code
    AIMS Audit Information Management System
    BMF Business Master File
    CCR Case Chronology Record
    CP&C Compliance Planning and Classification
    EGC Employee Group Code
    EO Exempt Organizations
    FAST Field Agent Support Team
    IDRS Integrated Data Retrieval System
    IMF Individual Master File
    LB&I Large Business & International
    POA Power of Attorney
    RAR Revenue Agent Report
    RCCMS Reporting Compliance Case Management System
    RRA ‘98 IRS Restructuring and Reform Act of 1998
    SB/SE Small Business/Self-Employed
    TC Transaction Code
    TE/GE Tax Exempt/Government Entities


  1. A discrepancy adjustment may arise when there is a discrepancy between a filed income tax return and facts developed during an audit of an exempt organization.

  2. Examples of discrepancy adjustments that may result from an audit include:

    • Compensation to employees not included on Form W-2 or Form 1099

    • Payments to an independent contractor, for services rendered, which were not reported on a Form 1099

    • Distributions for certain grants, scholarships and prizes that are not excludable from gross income

    • Payments to others classified incorrectly as debt payments (or loan proceeds), where there is no bona-fide debt

    • Disallowance of the exclusion from gross income of a housing allowance or a parsonage allowance

    • Capital gains or interest to a seller when an exempt organization purchases real property

    • Adjustments to the return of a taxable subsidiary of an exempt organization

    • Payments made on behalf of officers of the organization, including, and not limited to non-accountable items (personal use of the organization’s vehicle or other assets), and personal paid expenses (inurement), and which were not reported on a Form W-2 or Form 1099

    • Denial of charitable deductions taken under IRC 170(c)

    • Denial of business deductions under IRC 162(e) for contributions (or dues paid) for lobbying or political purposes

  3. Discrepancy adjustments are prepared for income tax adjustments to:

    1. Form 1040, U.S. Individual Income Tax Return

    2. Form 1040A, U.S. Individual Income Tax Return

    3. Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents

    4. Form 1120, U.S. Corporation Income Tax Return

  4. Use Form 4549-E, Income Tax Discrepancy Adjustments, when making discrepancy adjustments.

Alternatives to Discrepancy Adjustments

  1. Due to the fact SB/SE will not accept referrals under a certain dollar criteria, examiners are encouraged to make discrepancy adjustments whenever possible.

  2. Alternatives to making a discrepancy adjustment include:

    1. Soliciting and securing amended tax returns

    2. Making a referral to the appropriate operating division on Form 5666, TE/GE Referral Information Report

    3. A combination of (a) and (b)

    4. Requesting a collateral examination

Referrals to other Operating Divisions

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

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

    1. Is a Form 1120S, U.S. Corporation Tax Return for an S-Corporation, or other specialized Form 1120 series tax returns, such as Form 1120-L, 1120-PC, etc.

    2. Is a Form 1065, U.S. Partnership Return of Income

    3. Shows a net operating loss

    4. Was filed by a taxpayer that has filed for bankruptcy

    5. Was filed by a taxpayer that was dissolved, merged or sold

    6. Is under the jurisdiction of LB&I or listed as a Coordinated Industry Case

    7. Was never filed

    8. Involves complex credit carry backs

    9. Involves capitalized pension or profit sharing costs


    Situations described in (a) through (d) above may be processed as discrepancy adjustment cases with the approval of the Director, EO Examinations and the affected operating division Director.

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

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

Collateral Audit

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

    • The related return is to be worked in cooperation with the audit of the original return,

    • The discrepancy adjustment involves specialized or complex income tax returns, or

    • A more detailed inspection of the taxpayer's books and records is necessary to resolve an income tax issue.

  2. See IRM, Collateral Audit, for further detail.

Audit Activity by other Operating Divisions

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

    If: Then:
    a. The return is open in another operating division Refer the discrepancy issue to the agent assigned the case for resolution.
    b. The other operating division has completed the audit Process the discrepancy adjustment, provided the case wasn’t previously closed after an Appeal or Area Counsel determination.
    c. The return is in inactive status (for example, unassigned in another operating division) Make a referral to the other operating division.


    An AMDISA print will show the Employee Group Code (EGC) for the agent assigned to the case. Find the EGC contact information at AIMS/ERC Contacts.


    It can take up to 365 days for an audited income tax return to drop off AIMS after another operating division closes it. You can’t establish the return on EO AIMS as a discrepancy adjustment until this happens. For this reason, consider securing an amended return, if the return has been previously audited. See IRM 4.75.22, EO Delinquent, Amended and Substitute for Return Procedures.

Processing Discrepancy Adjustments

  1. Steps to process discrepancy adjustments include:

    1. Conduct IDRS research.

    2. Establish the case on AIMS and RCCMS.

    3. Add the case on WebETS.

    4. Evaluate and control the statute of limitations.

IDRS Research

  1. You must conduct IDRS research when considering a discrepancy adjustment.

  2. Conduct IDRS research to determine if:

    1. The return has been filed (TC 150 posting).

    2. The return is currently under audit by another operating division.

    3. Sufficient time remains on the statute to work the case.

    4. The taxpayer has filed for bankruptcy.

    5. The return was amended since it was initially filed.

    6. The Campus has already made an assessment of tax related to the discrepancy adjustment under consideration.


    You can use a RTVUE or BRTVU print as the equivalent of a tax return if it provides sufficient line item detail of the Form 1040 or 1120. You must however carefully review IDRS transcripts to determine if the return was adjusted after the TC 150 posting.

    To determine: Review command code(s):
    If the return has been established on AIMS by another operating division. AMDISA
    • Statute

    • If return has been filed

    • If return has been audited

    • If return has been amended after the TC 150 posting

    • If additional tax assessment has been made after the TC 150 posting

    BMFOLT (Form 1120) or IMFOLT (Form 1040, TXMODA
    If taxpayer has filed bankruptcy. BMFOLT, BMFOLI, IMFOLT, IMFOLI
    The taxpayer’s last known address. INOLES
    Income verification IRPTRO, TRDBV
  3. Common transaction codes (TC), what they mean and how they may affect your discrepancy adjustment:

    TC Indicates
    976 or 977 Taxpayer filed an amended return
    922 Service Campus selected the taxpayer’s Form 1040 for a possible adjustment
    925 Service Campus selected the taxpayer’s Form 1120 for a possible adjustment
    290 or 300 Additional assessment
  4. If TC 922, 925, 976, or 977 is followed by TC 300 or TC 290, the Service Campus made a tax assessment:

    1. Secure and review BMFOLA (Form 1120) or IMFOLA (Form 1040) transcripts.

    2. Determine if the tax assessment already made is for the same issue you’re considering.

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

Establishing the Case

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

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

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

    1. Item P7-8: Enter a source code of 50.

    2. Item P10-12: Enter the primary business code as follows:

      Primary Business Code Area
      401 Northeast
      402 Mid-Atlantic
      403 Great Lakes
      404 Gulf Coast
      406 Pacific Coast
    3. Item P20-23: Enter the agent’s group code (i.e., 79XX).

    4. Item P25-26: Enter an MFT of 30 for Form 1040. Enter an MFT of 02 for Form 1120.

    5. Item P28-29: Enter a status code of 12.

    6. Item P31: Enter 3 for return request indicator

    7. Item P33-36: Enter the project code of the related Form 990. If there is none, enter 0000.

    8. Item P48: Enter a flowthru indicator of 1.

    9. Item P1-12: Enter the taxpayer’s EIN/SSN.

    10. Item A: Enter the taxpayer’s name. For Forms 1040, list the individual’s last name first.

    11. Item P14-17: Enter the name control for the taxpayer.

    12. Item P19-24: Enter the tax period.

    13. Item P26-28: Enter the three digit activity code. Refer to Document 6379.

    14. Item B: Enter the taxpayer’s address.

    15. Item C: Enter the reason for the establishment of the Form 1040 or 1120.

    16. Item D: Enter the agent’s name, organization and date.

    17. Item E: Secure the group manager’s signature.

    18. Item 2: Enter the tax period and the applicable statute of limitations date. If the statute has been extended, also enter that date (statute update).

Establishing Form 1040 on RCCMS
  1. Establish the tax return on AIMS and RCCMS.

  2. For the "Codes" tab:

    1. Input the "Name Control" .

    2. Input the "Project Code" .


      This is normally the "Project Code" of the related Form 990.

    3. Input "Source Code" 50.

    4. For "Master File Type" , select IMF.

    5. Input the "Status Code" .


      Forms 1040 are normally established in status 12.

    6. For "Grade" , enter the grade of the case.

    7. Input the "Related Return Source Code" .

    8. For "Return Requisition Code" , select "3 - Return, Chargeout and Labels Not Requested" .

    9. For "MFT Code" , select 30.

    10. Check the "Related Return" box.

    11. Check the "Flowthru" box.

    12. Input the Reason for request/Related return.

    13. Input comments as appropriate.

    14. Select "Save and Close" .

  3. Confirm that the "New Case" option is selected in RCCMS. This will establish the 1040 as its own activity in its own case.


    Don’t save an individual 1040 activity in the same case on RCCMS as the related Form 990. If this is done, it is a disclosure issue.

Establishing Form 1120 on RCCMS
  1. Establish the tax return on AIMS and RCCMS.

  2. For the "Codes" tab:

    1. Input the "Name Control" .

    2. Input the "Project Code" .


      This is normally the "Project Code" of the related Form 990.

    3. Input "Source Code" 50.

    4. Select BMF for "Master File Type" .

    5. Input the "Status Code" .


      Forms 1120 will normally be established in status 12.

    6. For "Grade" , enter the grade of the case.

    7. Input the "Related Return Source Code" .

    8. For "Return Requisition Code" , select "3 - Return, Chargeout and Labels Not Requested" .

    9. For "MFT Code" , select 02.

    10. Check "Related Return" .

    11. Check "Flowthru" .

    12. Input the Reason for request/Related return.

    13. Input comments as appropriate.

    14. Select "Save and Close" .

  3. Confirm that the "New Case" option is selected in RCCMS. This will establish the 1120 as its own activity in its own case.


    Don’t save an individual 1120 activity in the same case on RCCMS as the lead case. If this is done, it is a disclosure issue.

Time Reporting

  1. 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.

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

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

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

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

Statute of Limitations

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

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


    You should rarely accept restricted consents on discrepancy adjustment cases. See IRM 25.6.22 for the limited circumstances when restricted consents apply and special procedures to follow.

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

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


    EO Exams requires statute controls for returns with assessment statutes that expire within 270 days. While IRS-wide statute procedures in IRM 25.6.23 require controls on statutes that expire within 180 days, follow EO Exam statute controls which impose tighter controls.

  5. 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:

    1. 30-day letter

    2. Form 872, Consent to Extend the Time to Assess Tax

    3. Letter 907, Request to Extend Assessment Statute

    4. Pub 1035, Extending the Tax Assessment Period

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

    1. Person contacted,

    2. Form of contact (phone or in-person),

    3. Date of contact, and

    4. The fact taxpayer wishes to send the Form 872 by fax.

Preparation and Issuance of the Discrepancy Adjustment Package

  1. The discrepancy adjustment package includes:

    1. Letter 3605, EO Initial 30 day letter for Discrepancy Adjustment

    2. Pub 1, Your Rights as a Taxpayer

    3. Two copies of Form 4549-E, Income Tax Discrepancy Adjustments, with applicable interest and penalty calculations and explanations

    4. Form 886-A, Explanation of Items

    5. Form 9465, Installment Agreement Request (optional)

    6. Return envelope

  2. Prepare Form 4549-E as the basic report form for discrepancy adjustments. Include the following comments in the "Other Information" section on page two:

    1. "This discrepancy adjustment does not constitute an examination of your tax return."

    2. "See the attached Form 886-A for an explanation of the issues."

    3. "IRC 6404(g) does not apply" or "IRC 6404(g) does apply" See IRM for specific notations.

  3. Use Form 886-A for your write-up of the issues. Organize the report as follows:

    1. Issue – Clearly state the issues.

    2. Facts–Provide pertinent details surrounding the issue.

    3. Law– Provide a summary of Code sections, Revenue Rulings, court cases, etc., that relate to the issue(s) raised.

    4. Government’s Position– Discuss each issue separately and apply the law and the facts relevant to each specific issue. List a summary of taxes due and the applicability of penalties.

    5. Taxpayer’s Position– State the taxpayer’s position including any rebuttals the taxpayer has made on the Government’s position. If the taxpayer hasn’t provided a position on the Issue(s), a simple statement to that effect is sufficient.

    6. Conclusion– Restate the Government’s position as a conclusion. If the taxpayer provides a position on the issue(s), list the Government’s rebuttal to it.

  4. Address penalties and interest in both the work papers and the Form 886-A. See IRM and IRM

  5. Mail the discrepancy adjustment package to the taxpayer by Certified Mail at the "last known address" .

    1. Get an INOLES print to obtain the taxpayer’s last known address.

    2. Use a subsequent address if other sources confirm that the taxpayer’s address has changed from the one on INOLES.


      If you’re unsure of the validity of the subsequent address, send the certified letter to both addresses.


      See IRM 4.75.10 , EO Pre-Examination Guidelines and Procedures for detailed procedures on locating taxpayers and what constitutes proper notice.

  6. If the discrepancy adjustment is for a joint return:

    1. Verify the last known address for each spouse.

    2. Send a copy of the discrepancy adjustment report to each spouse, even if they live at the same address (required by RRA 98 Section 3201(d)).


      Prepare and address each letter individually. Use the primary social security number on both letters.

  7. Update AIMS and RCCMS to status code 13 after you issue Letter 3605.


  1. 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.

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


    You don’t need approval to asses penalties under IRC 6651, IRC 6654, and IRC 6655.

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

    1. Get your manager’s approval on the CCR for the appropriate penalties before you mail the discrepancy adjustment package to the taxpayer.

    2. Notify the taxpayer in writing that penalties are being assessed. Provide the penalty name, code section and a computation of the penalty.


      The RGS program automatically lists the penalty name, code section, and computations as part of the Form 4549-E report if selected through the penalty menu.


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

    • Detailed computation of the interest charged.

    • Code section citation under which the interest is imposed.

  2. 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)).

  3. Suspension of interest under IRC 6404(g):

    1. Applies only to individuals, not to corporations.

    2. Applies only to timely filed returns (returns filed by the original due date or by the extended due date if a valid extension was filed).

    3. Has an impact on discrepancy adjustments only with regard to the assessment of interest.

  4. IRC 6404(g) does not apply to:

    • Any penalty imposed by IRC 6651

    • Any case involving fraud

    • Most listed transactions

    • Any criminal penalty

    • Certain other situations noted in IRC 6404(g)(2)

  5. 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.

  6. 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 on October 15, 2016, the 30-day letter is mailed for a discrepancy adjustment being proposed on a 2013 Form 1040 that is timely filed on April 15, 2014, IRC 6404(g) does not apply and interest should not be suspended for any period of time since the 30-day letter package is mailed before the end of the 36-month specified period.

  7. 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.

  8. 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.

  9. 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" .

Relief from Joint and Several Liability

  1. 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.

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

    Cincinnati Submission Processing Center (CSPC)
    Stop 840F
    201 W. Rivercenter Blvd
    Covington, KY 41012

  3. 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:

    1. Acknowledge receipt of the request for innocent spouse relief under IRC 6015.

    2. Inform the taxpayer that TE/GE Exempt Organizations does not make a determination of innocent spouse relief.

    3. Inform the taxpayer the determination of innocent spouse relief will be made by the appropriate IRS business unit after the discrepancy adjustment matter is concluded and the tax assessed.

  4. 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.

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

Claim Filed

  1. 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.

  2. 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.

  3. 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.


    Don’t include the word "audit" when describing a claim’s disposition.

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

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

  6. 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.

Installment Agreement Procedures

  1. 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

  2. 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.

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

  4. If a taxpayer submits a request for an installment agreement:

    1. Stamp the receipt date on the request.

    2. Complete Form 3177, Notice of Action for Entry on Master File, with TC 971 AC 043, Pending Installment Agreements.

    3. Fax or secure e-mail Form 3177 to the FAST within 24 hours of the taxpayer's request.

    4. Forward the request to the appropriate Campus Center address identified in the Form 9465 instructions.

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

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

  7. 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..

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

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

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

Taxpayer's Reply

  1. The taxpayer may or may not reply to your proposed discrepancy adjustment within the 30-day period. If the taxpayer:

    • Requests more time to reply, see IRM .

    • Agrees, see IRM

    • Disagrees, see IRM

    • Partially agrees, see IRM .

    • Doesn’t reply, see IRM

  2. If the discrepancy adjustment package was returned undeliverable, see IRM

  3. If relief from joint and several liability or innocent spouse relief is requested, refer to IRM

  4. If the taxpayer requests an installment agreement, refer to IRM

Taxpayer Requests Extension to Reply to 30-Day Letter

  1. 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:

    1. The taxpayer retains a representative and demonstrates a need for more time to prepare a meaningful protest.

    2. The taxpayer retains a new representative.

    3. Sickness or injury of the taxpayer or representative.

    4. Issues are complex and require extensive research.

  2. 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.

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

  4. 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.

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

Taxpayer Agrees

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

    • Taxpayer

    • Taxpayer and spouse for jointly filed returns

    • Authorized POA

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

    1. The date of contact, and

    2. The taxpayer’s desire to submit the Form 4549-E by fax.

  3. Stamp the received date on Form 4549-E.

  4. 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.

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

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

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

  8. Close case using procedures in IRM

  9. 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.

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

Taxpayer Disagrees

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

    1. The right to discuss the proposed adjustment with a supervisor.

    2. His/her appeal rights.

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

Taxpayer Disagrees - Provides Additional Information Showing No Discrepancy Adjustment is Needed
  1. If you received additional information during the 30-day period which verifies that no adjustment is warranted:

    1. Keep a copy of the return (or applicable RTVUE or BRTVU print) in the case file.

    2. Include the original return (if secured) with the closed discrepancy adjustment case file.

    3. Explain in the work papers why the case is being closed "no change" .

    4. Prepare and issue Letter 3604, Acceptance of Return after Consideration of Additional Information.

  2. Close the case per IRM

  3. Use DC "02" on AIMS and "107" on RCCMS. See Exhibit 4.75.28-1.

Taxpayer Disagrees - Provides Additional Information that Doesn’t Change the Discrepancy Adjustment
  1. If the taxpayer submits additional information that doesn’t change the original discrepancy adjustment report, modify the report to include the taxpayer’s position and the government’s response to that position. Issue Letter 3603, EO 30-day letter for Discrepancy Adjustment after Consideration of Additional Information w/No Change to Original Proposed Adjustment, along with a copy of the modified report via certified mail.

  2. Close case per IRM

Taxpayer Disagrees - Provides Additional Information that Changes the Discrepancy Adjustment
  1. If the taxpayer submits additional information that changes the original discrepancy adjustment amount (but doesn’t eliminate it) or penalties, issue Letter 3619, EO 30-day letter for Discrepancy Adjustment Revised Proposed Adjustment, with a revised report to the taxpayer via certified mail.

  2. Proceed to case closing procedures at IRM

Taxpayer Disagrees - Indicates Intent to Protest
  1. If the taxpayer doesn’t furnish a written reply within the 30-day period but indicated his/her intent to file a protest, issue Letter 923, Extending Time to File Protest, which grants an additional 15 days to respond. Issue Letter 923 no later than seven calendar days after the original 30-day letter’s response date.

  2. Group managers at their discretion may establish group procedures for approving and issuing Letter 923.

Taxpayer Disagrees - Submits Written Protest
  1. If the taxpayer submits a written protest, review the protest to determine if:

    1. The protest is valid. (See Pub 5). See also IRM 4.75.20.

    2. The case needs further development.

  2. If the case need further development, make a referral on Form 5666 to the appropriate operating division.

  3. If the protest is valid, update the AIMS and RCCMS status code to "12" .

    If the Protest Shows Issue the following:
    No discrepancy adjustment is necessary Letter 3604, Acceptance of Return After Consideration of Additional Information
    The original report is correct with no changes needed Letter 5326, Rebuttal Letter, EO Examinations, and Form 886-A rebuttal to protest
    A change should be made to the proposed discrepancy amount or penalties Revised Form 4549-E and Letter 3619, EO 30-day Letter for Discrepancy Adjustment - Revised Proposed Adjustments
  4. If protest is valid and the case is going to Appeals, prepare a computer flash drive containing 30-day letter(s) and report(s).

  5. Close the case per IRM

  6. If you issue a rebuttal letter, use DC "07" on AIMS and "601" on RCCMS. If you issue Letter 3604, use DC 02 (107) when preparing the closing record. See Exhibit 4.75.28-1.

Taxpayer Provides Additional Information that Requires a Referral
  1. If the taxpayer furnishes additional information that raises technical income tax questions or requires further development, make a referral on Form 5666 to the appropriate operating division.

  2. Prepare and issue letter indicated in Exhibit 4.75.28-2.

  3. Close the case per IRM

  4. Use DC "13" on AIMS and "501" on RCCMS. See Exhibit 4.75.28-1.

Taxpayer Partially Agrees

  1. 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.

  2. 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.

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

    1. Prepare one report showing only the agreed issues. Write "Partial Agreement" on top of the Form 4549-E.

    2. Prepare a second report that includes both the agreed and unagreed issues.

  4. 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.

  5. 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.

  6. 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

  7. 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.

Taxpayer Fails to Reply

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

    1. It appears reasonable that the taxpayer or authorized representative received the 30-day letter and the taxpayer neither agrees nor protests within the 30-day period.

    2. The taxpayer didn’t receive the 30-day letter and the IRS exercised due diligence in determining the taxpayer’s last known address.

    3. The taxpayer is temporarily away and not expected to return within a reasonable period of time.

    4. You followed up on the case without success.

  2. 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.

  3. 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.

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

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

Discrepancy Adjustment Package Returned as Undeliverable

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

    1. If the taxpayer’s correct address is identified, re-mail the 30-day letter to the new address. The period in which the taxpayer may reply starts with the date the letter was re-mailed.

    2. If the taxpayer's correct address cannot be determined, close the case as unagreed using procedures in IRM

Case File Assembly

  1. Prepare a complete paper case file when closing an unagreed case to Mandatory Review .

  2. Use a separate folder for each taxpayer’s income tax return established on AIMS and RCCMS.

  3. Label each folder with Taxpayer Name, EIN/SSN, Year and Return (Form 1040 or Form 1120).

  4. Use red folders to identify cases with less than 270 days remaining on the statute of limitations.

  5. For case file assembly instructions for the outside of the case file, see IRM

  6. For the case file assembly for the inside of the case file, IRM

Case File Assembly - Outside of Case File

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

    1. Form 895, Notice of Statute Expiration

    2. Form 3198-A, TE/GE Special Handling Notice

    3. Form 5456, Reviewer's Memorandum - EP/EO

    4. Form 5457, Response to Reviewer's Memorandum - EP/EO

    5. Form 5599, TE/GE Examined Closing Record. See Exhibit 4.75.28-1

  2. Complete Form 3198-A as follows:

    1. Check the box for EO.

    2. Complete your information in the "Required Entries" - Person to Contact, Employee ID#, Phone #, PBC, and Group.

    3. Complete the information related to the case file in the "Required Entries" section - EIN/SSN, MFT, Year and Taxpayer’s Name. Also mark any box that applies to the case.

    4. Enter the statute date of the case to which the Form 3198-A is attached in the "Required Entries" section under "Earliest Statute Date Is: " .

    5. Mark the case as a discrepancy adjustment in the "Special Features" section.

    6. Mark the "Mandatory Review" section if unagreed or otherwise subject to Mandatory Review. If unagreed, notate: "Unagreed Discrepancy Adjustment" .

    7. Notate in the Other Instructions section "IRC 6404(g) does not apply" or "IRC 6404(g) does apply" . See IRM for specific notations.

    8. Ensure all case folders remain together. Attach a Form 3198-A to each case folder. Write on the bottom of the form in large red letters: "Multiple Returns/Case Folders Involved - DO NOT SEPARATE" .


      See examples of permissible separation of case file folders at IRM

    9. Include an entry if the discrepancy adjustment is partially agreed.

    10. Check the "Installment Agreement" block in the Mandatory Review section if applicable.

    11. Check the" Innocent Spouse" block in the Mandatory Review section, if applicable. Fill in the appropriate blanks.

    12. Complete any other applicable part of the form.

  3. See IRM for further details.

Case File Assembly - Inside the Case File

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


    Don’t include any prohibited ex parte communications to Appeals. See Rev. Proc. 2012-18 for guidance concerning ex parte communications.

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

  3. Working return(s): Attach documents identified in IRM, 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.

  4. Include all IDRS research. See IRM

Case Closing Procedures

  1. Prepare Form 5599. See Exhibit 4.75.28-1.

    1. No-change cases - use DC 02 (RCCMS DC 107).

    2. Agreed tax changes - use DC 03 (102).

    3. Unagreed tax changes with protest to Appeals - use DC 07 (601).

    4. Unagreed tax changes without protest - use DC 10 (604).

    5. Referrals to other business operating divisions - use DC 13 (501).

  2. For unagreed cases, mark the case subject to "Mandatory Review" on Form 3198-A and notate: "Unagreed Discrepancy Adjustment" . See IRM

  3. If interest is being suspended under IRC 6404(g), notate Form 3198-A as described in IRM

  4. Prepare Forms 5772, EO Workpaper Summary, and Form 5773, Workpaper Continuation Sheet, along with any supplemental workpapers. The workpapers:

    1. Will be limited to the discrepancy adjustment issue(s).

    2. Must include a brief discussion on the applicability of penalties and whether or not penalties are being assessed

    3. Include all IDRS research. Ensure AMDISA (attached to the return), RTVUE, BRTVU, and INOLES prints are current (no more than 30 days old).

  5. Save a copy of Forms 5772, 5773, supplemental workpapers, and all other relevant documents within RCCMS.

  6. Complete the closing tabs as required within RCCMS.

  7. Close the discrepancy adjustment case at the same time as the related unagreed EO case (Form 990) if the discrepancy adjustments are:

    • Set up because of an unagreed EO issue

    • Related to a TEP case

  8. Simultaneous closing with a related agreed EO case (Form 990) is recommended, but not required.


    If the related Form 990 case file is closed separately, include copies of all relevant materials to document the discrepancy adjustment in the discrepancy adjustment file.

  9. In audits involving multiple case folders, ensure all case folders remain together. Attach a Form 3198-A to each case folder. Write on the bottom of the form in large red letters: "Multiple Returns/Case Folders Involved - DO NOT SEPARATE" .


    See examples of permissible separation of case file folders at IRM

Completion of Form 5599

Complete Form 5599, TE/GE Examined Closing Record, for all discrepancy adjustment cases. See the following table for items which must be completed upon closing of the case.

Item Instruction
P7 - 18 — TIN Insert the EIN or SSN for the Taxpayer.
P21 - 22 — MFT Form 1040 = 30; Form 1120 = 02
P24 - 29 — Tax Period Insert the tax year being adjusted.
P31 - 34 — Name Control Insert the first four letters of the last name for Form 1040 or the first four letters of the name for Form 1120.
C — Name Insert taxpayer’s name (last name first for Form 1040).
02 — Penalty Reason Code No entry unless penalties previously assessed are being abated. See IRM 4.5.2, for applicable codes.
08 — Agreement Date Insert the date the signed Form 4549-E is received.
12 — Tax Liability Insert Code "300" and the amount of the increase in tax as shown on line 14 of Form 4549-E, OR Insert Code "301" and the amount of decrease in tax that resulted from the discrepancy adjustment.
12 — Penalties Insert Code "320" for civil fraud penalty and amount of penalty. Insert Code "160" for the amount of any delinquency penalty to be assessed on late filed returns.


Accuracy related penalties should be reflected on item 15.

12 — Interest Leave blank. Interest will be computed and input by the closing unit.
13 — Disposal Code
02 = No Change
03 = Agreed Tax Change
07 = Unagreed - Protest to Appeals
10 = Unagreed - Without Protest
13 = Referral to Other Operating Division
14 — Statute Extended to Insert current Statute of Limitations date if the statute has been extended. If the statute has not been extended, leave this item blank.
15 — Increase in Adjustment Dollars Insert code "680" for accuracy related penalties assessed under IRC 6662. Insert Code "806" to reflect tax withheld , but not previously claimed by the Taxpayer or credited to his/her account by the Service Center. This is the amount from line 15 of Form 4549-E (i.e., additional withholding).
15 — Decrease in Adjustment Dollars Insert Code "765" if reducing an earned income credit.
28 — Examiner’s Time Time can be entered in whole hours and in tenths of hours.
30 — Technique Code Applicable codes:
1 = Office Interview Examination
2 = Office Correspondence Examination
4 = Field Examination
31 — Examiner’s Grade Enter applicable grade level.
32 — Case Grade Enter the grade of the case in the blocks from left to right as two digits
Grade 9 = 09
Grade 11 = 11
Grade 12 = 12
Grade 13 = 13
33 — Examiner’s Name Last name, first initial
40 — Project Code Use same project code as used for Form 990.
41a — No Change Issue Codes Enter "99999999" for 1040 with Disposal Code "02." Otherwise, no entry is required.
42 — ARDI Code An entry is required only if the disposal code is "03" Leave blank if case is being closed" No Change" or is "Unagreed" .
Applicable Codes:
1— Fully Paid
2— Not Paid
3— Partially Paid
4— Installment Agreement with payment
5— Installment Agreement without payment
50 — Employee Group Code Enter your group number.
701 — Principal Issue Code See Document 6379 for the appropriate code.

Notice of Recommended Audit

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
1100 Commerce Street, MS 4920 DAL
Dallas, TX 75242–1100
[Insert name of entity] Taxpayer Identification Number:
[Insert street address] [Insert TIN]
[Insert city, state, and zip code] Form:
[Insert form number]
Tax year(s) ended:
[Insert tax periods]
Person to contact/ID number:
[Insert name, ID number]
Contact numbers:
Telephone: [Insert phone number]
Fax: [Insert fax number]
This following is suggested language to notify a taxpayer of our recommendation for audit consideration of their tax return.
Dear [insert salutation]:
Thank you for your reply to our letter regarding the proposed tax adjustment to the tax return(s) and year(s) shown above.
Our proposed tax adjustment was not based on an audit, but on information already available to us. We have considered your reply to the proposed adjustments and are forwarding your case for audit consideration
If your return is selected for audit, we'll notify you. No further action by you is necessary at this time.
Thank you for your cooperation.
[Insert name]
Director, EO Examinations