4.81.5 Conducting the Examination

Manual Transmittal

December 04, 2018

Purpose

(1) This transmits revised IRM 4.81.5, Tax Exempt Bonds (TEB) Examination Program and Procedures, Conducting the Examination.

Material Changes

(1) Revised IRM Section 4.81.5.1, Introduction, to add the internal controls as required by IRM 1.11.2.2.5, Address Management and Internal Controls. Renamed the section to Program, Scope and Objectives. Added Program Controls and Acronyms.

(2) Revised the manual to comply with the Plain Writing Act. For additional information on the Plain Writing Act, see http://www.plainlanguage.gov

(3) Updated exam procedures for contacting taxpayers by phone per the May 20, 2016 policy memo from the Deputy Commissioner of Service and Enforcement.

(4) Updated exam procedures for case closing for protested unagreed cases per the Interim Guidance Memo TEGE-04-0817-0027 dated June 21, 2018.

(5) Updated exam procedures for Information Document Requests.

(6) Updated exam procedures -- Form 3210 is not required when closing 100 percent electronic cases per the February 8, 2018 Memo from the Director, Indian Tribal Governments/Tax Exempt Bonds.

(7) Updated exam procedures for the scope and resolution of cases involving redemption of 100 percent of the outstanding bonds per the October 18, 2016 Interim Guidance Memo from Director, Tax Exempt Bonds.

(8) Updated 6700 penalty procedures to remove references to the TEB ATAT Committee and to reflect the involvement of the Lead Development Coordinator.

(9) Added information regarding survey of cases.

Effect on Other Documents

This revision supersedes IRM 4.81.5 dated January 28, 2016. This IRM incorporates and replaces Interim Guidance Memorandum on Case Closing Procedures for Protested Unagreed Cases, TEGE-04-0817-0027 dated June 21, 2018 and Interim Guidance Memorandum on the resolution of cases involving the redemption of 100% of the outstanding bonds.

Audience

Tax Exempt and Government Entities
Government Entities and Shared Services
Indian Tribal Governments/Tax Exempt Bonds

Effective Date

(12-04-2018)

Christie J. Jacobs
Director, Indian Tribal Governments/Tax Exempt Bonds
Government Entities and Shared Services
Tax Exempt and Government Entities

Program, Scope and Objectives

  1. Purpose: This IRM section lists guidelines for ITG/TEB revenue agents (agents) to use for efficient case processing and inventory management.

  2. Audience: ITG/TEB revenue agents (agents), group managers, the senior managers and other employees in the ITG/TEB that examine or process Tax Exempt Bond (TEB) cases.

  3. Policy Owner: Director, Indian Tribal Governments/Tax Exempt Bonds

  4. Program Owner: Director, Indian Tribal Governments/Tax Exempt Bonds

Program Controls

  1. All TEB examinations will be conducted in accordance with the Taxpayer Bill of Rights, consistent with the taxpayer rights in IRC Section 7803(a)(3).

Acronyms and Terms

  1. This manual uses the following acronyms and terms.

    Acronym or Term Description
    AIMS Audit Information Management System
    Agent ITG/TEB Revenue Agent
    Appeals Office of Appeals
    Director Director, Indian Tribal Governments/Tax Exempt Bonds
    FO Field Operations
    FOM ITG/TEB Field Operations Manager
    IDR Information Document Request
    ITG Indian Tribal Governments
    IRC Internal Revenue Code
    K-NET Knowledge Management Groups
    LB&I Large Business & International
    LDC Lead Development Coordinator
    OTSA Office of Tax Shelter Analysis
    Pub 1 Publication: Your Rights As A Taxpayer
    RCCMS Reporting Compliance Case Management System
    TEB Tax Exempt Bonds
    TLS Tax Law Specialist

Case Management

  1. Effective case management is essential for a quality exam and directly impacts the IRS’s balanced measures --- business results, customer satisfaction and employee satisfaction. A well-managed inventory improves quality and cycle time, increases customer satisfaction with the examination process, and enhances employee job satisfaction.

General Inventory Management

  1. While appropriate inventory management methods for a particular case may vary, work all cases promptly and according to organizational priorities.

  2. Agents should:

    1. Consider organizational goals when prioritizing work.

    2. Have a strategy for working cases that includes timely follow-up actions; for example, put reminders on your calendar to follow-up.

    3. Review each case for necessary action at least once every 30 days, absent unusual circumstances (for example, cases in suspense).

    4. Plan work at least a week in advance. Prioritize which cases will be worked each day.

    5. Complete all actions possible on a case before moving on to the next case/activity.

  3. Plan your work to promptly communicate with taxpayers, including responding to telephone calls and letters. Allow time to complete administrative processes.

  4. Notify your managers when you need cases. Ask for the number of cases that you can start within 10 business days.

  5. Tell your manager about unusual or problem situations so she or he is involved in the issues.

  6. Be professional: set the tone for the exam. Timeliness is one measure of a quality examination. The IRS and the taxpayer depend on your professional judgment to ensure that exams are processed accurately and efficiently. Every case has its own unique set of circumstances. However, the agent should generally apply the following guidelines:

    • Establish exam expectations with the first taxpayer contact, including ensuring the taxpayer understands the exam process. Be prompt and attentive to the taxpayer throughout the exam to reinforce the established expectations. Ensure the taxpayer understands what information we are requesting during the exam and the date they must provide it. Follow-up immediately when deadlines are not met.

    • Review requested documents as soon as possible after receipt and inform the taxpayer of any delays.

    • Work a case until no additional action can be taken, including requests for additional documents. Document the reasons for inactivity of more than 30 days on the case chronology record.

    • Promptly discuss any identified noncompliance with taxpayers, request any necessary clarification of facts or additional information, and consider any actions that might resolve the case expeditiously.

    • Close resolved exams immediately.

    • Consider using the bypass procedures under IRM 4.81.5.5.2.4 if representatives attempt to unnecessarily delay an examination.

Risk Analysis and Examination –Scope and Depth

  1. Examination scope defines the exam parameters, including identifying the tax compliance items that you will test. Throughout the examination, you should use professional judgment and risk-based decision-making to determine the exam scope, including the originally determined scope. See IRM 4.81.4.3 for additional information about exam scope.

  2. Prior to surveying an exam case, the agent must obtain approval from their group manager and the group manager must notify the Field Operations Manager (FOM). The group manager will inform the agent that the FOM was notified by secure e-mail. Agents must document in the case file (the case chronology record) that approval for the survey was obtained from the group manager and notification was given to ITG/TEB Field Operation’s manager.

    1. All surveyed cases must contain a clear explanation of the circumstances and rationale for closing the case as a survey. Although a lengthy explanation is not required, the case chronology record must document the clear rationale for the survey; a reviewer must be able to validate the decision-making process.

    2. Agents will continue to generate a closing record in RCCMS and complete the mandatory fields for a surveyed closure. On the closing record, the agent will select the appropriate Survey Reason Code from the drop-down list provided in completion of the field entitled “Survey Reason Code.” Provide a narrative explanation supporting the decision to survey the case in RCCMS in the “Remarks and Comments” field located on the Closing Record “General” tab.

  3. If an issuer redeems 100% of the outstanding principal amount of the bonds during an exam, consider closing the exam without further action if your group manager concurs and obtains written approval from the FOM.

    1. If you have a basis to conclude that the bonds do not comply with the law, prior to closing the exam with further action, consider:

      Factors Closing Considerations
      • Reasons for non-compliance

      • Is the transaction abusive?

      • Were interested parties involved in aspects of the transaction that resulted in non-compliance?

      • Were reasonable steps taken by the issuer/borrower to ensure compliance with the law?

      • Did the issuer/borrower take steps to self-correct prior to the start of the exam?

      • Issue Letter 5859 Full Bond Redemption-Compliance Issue Identified

      • On RCCMS, use disposal code 115, Full Bond Redemption Without Agreement, and ARDI Code 1-Fully Paid.

      • Report the Principal amount of bonds redeemed and present value of the tax on the interest that would have accrued on the bonds to their stated redemption date in the RCCMS closing record.

      Note:

      There may be circumstances that warrant referring a bondholder or other party to the transaction to another business unit under current referral procedures. Consider, among other factors, whether the bondholder holds a significant amount or percentage of the bonds. Consult your manager to determine if a referral is warranted.

    2. If there is no indication that there is a compliance problem with the bonds:

      • Issue closing letter (Letter 4411, No Change- Tax-Exempt Bond Qualification).

      • Close on RCCMS with disposal code 107, No Change.

    3. This resolution method does not apply if:

      • The bonds are redeemed with other tax-advantaged bonds.

      • The bonds are direct pay bonds.

      • The issuer did not make appropriate rebate payments on the bonds.

      • The issuer asks to negotiate or enter into a closing agreement. (See IRM 4.81.6 if they request a closing agreement.)

  4. Examination depth is the extent to which you develop a compliance issue. It demonstrates the degree of intensity and thoroughness applied in determining an item’s correctness. Use judgment to determine exam depth for items considered during the exam. Planning your exam depth helps you better estimate the time needed to complete the exam. The following factors help determine exam depth:

    • Type of records available or expected to be made available for consideration of the issue.

    • Complexity of the issue.

    • Materiality of the issue.

    • Whether the issue was identified in the assignment process as needing a more in-depth review. (For example, a referral on a particular issue or an issue identified for an examination.)

    • Whether the issuer or other entity with control over bond proceeds had strong internal controls or post–issuance compliance procedures.

Surveying Cases - Before and After Assignment

  1. A TE/GE group may determine not to examine a return selected for examination and close it by survey. Employees will carry out this duty per Policy Statement "Fairness and Integrity in Enforcement Selection" . See IRM 1.2.10.37. Surveys are not subject to mandatory review. These cases should be closed fully electronically as 100 percent paperless closings.

  2. Before deciding to survey, agents and managers must consider all case facts. Analyze the following factors (not all-inclusive) to help you decide whether to survey the return:

    • Consideration of existence and/or non-existence of classified issues and Large, Unusual, or Questionable (LUQs) items.

    • Completion of return and related return reconciliation.

    • Evaluation of audit potential, whether an audit would likely result in a material change.

    • Repetitive audit or compliance activity – prior audit of same issuer resulted in no change or minimal adjustments.

    • Consider surveying returns with less than 18 months until the ASED.

    • Consider whether the case should be reassigned to another group/area if your group lacks the resources.

    • Consider whether an organization/entity has already taken steps to correct an identified issue.

    Note:

    Cases controlled on NMF cannot be closed electronically as 100 percent paperless closings; therefore, these cases are excluded from this procedure.

  3. Prior to surveying an exam case, obtain approval from your group manager. The group manager must notify the ITG/TEB Field Operation’s manager (FOM). The group manager will inform the agent that the FOM was notified by secure e-mail. Document the case file (the case chronology record) to indicate that approval for the survey was obtained from your group manager and notification was given to the FOM.

  4. All surveyed cases must contain a clear explanation of the circumstances and rationale for closing the case as a survey. Although a lengthy explanation is not required, the case chronology record must document a clear rationale for the survey. A reviewer must be able to validate the decision-making process.

  5. When you decide to survey a case, use the appropriate disposal codes:

    Type of Survey Closing Disposal Code AIMS/RCCMS Use When
    Survey Before Assignment (SBA) 31/910 Manager: you analyze the return before assigning it or contacting the taxpayer/representative (rep), and determine an exam isn’t warranted.
    Survey After Assignment (SAA) 32/908 Agent: you analyze the return and without contacting the taxpayer/rep. or reviewing any books and records, and you believe that examining the return wouldn’t result in material change in exempt status, foundation status, plan qualification, tax- advantaged bond status, or tax liability.
    Surveyed After Initial Contact 36/909 Agent: you determine, after contacting the taxpayer/rep, but before inspecting records that: Examining the return wouldn’t result in a material change in exempt status, foundation status, plan qualification, tax- advantaged bond status, or tax liability. The taxpayer is deceased, has a terminal illness, is in a disaster area, or other extraordinary circumstances exist.
    Claims Allowed in Full (Surveyed) 34/103 Agent: you determine the claim issue is clearly allowable in full and the return doesn’t otherwise warrant examination.
  6. Complete on RCCMS the designated mandatory fields for a surveyed closure:

    • Select the appropriate Survey Reason Code from the drop-down and when appropriate, provide a narrative explanation supporting your decision to survey in the General tab, Remarks and Comments field.

    • Managers document their review and approval of the survey closure on the RCCMS Case Chronology Record. Manager’s comments will include any applicable Special Handling instructions as required.

      Note:

      To have an electronic 100 percent paperless closing, the return must have been established using Return Requisition Code 3 – Return, Chargeout & Labels Not Requested. Additionally, the Closing With field on the General Tab of the Closing Record must be completed by selecting option 7 – Paperless Non-Examined.

  7. Use the following survey reason codes on the RCCMS Closing Record, General tab, Survey Reason Code field for all surveys.

    SRC Description Use When
    A No Large, Unusual or Questionable (LUQ) Items The main reason for the survey is:
    1. classified issues don’t exist

    2. the return contains no LUQ items

    B No Change in Prior Year The main reason for the survey is that the same issues identified on the current year return were just as significant in any of the four preceding years and were no-changed or had a small tax change.
    C Beyond Cycle (includes statute issue) The main reason for the survey is based upon currency and/or statute considerations.
    D Lack of Resources The main reason for the survey is due to a lack of resources. Managers should exercise due diligence, with their area manager’s agreement, to assess whether they can reassign the return to another group/area before surveying it.
    E Other The main reason for the survey is other than A through D. Justification is critical as to the reasons why; therefore, a detailed statement is required.
         
  8. SRC A – No Large, Unusual or Questionable (LUQ) Items:

    • Narrative statements are optional for Survey Reason Codes A – D but explain details if you think it’s appropriate. For example, for Survey Reason Code A, include specific details as to why you have determined the classified issue(s) doesn’t exist. This will help in refining the workload selection process.

  9. SRC E –Other:

    • Include a clear and concise narrative statement on the RCCMS Closing Record, General Tab, Remarks and Comments (field is limited to 250 characters).

    • Explain why we aren’t examining the return. A generic entry such as "survey" is not acceptable.

  10. Examples of "Other" category:

    • Claim Allowed in Full.

    • During pre-audit research, it was determined that the taxpayer has self-corrected the issue.

Managerial Responsibilities

  1. Group managers have overall responsibility for the efficient processing of their group’s cases.

  2. Generally, only assign agents cases that they can start within 10 business days.

  3. Effective inventory management requires ongoing group manager involvement in, and monitoring of, case work. Group managers should conduct workload, case and Form 6490, TE/GE Technical Time reviews to ensure that cases are progressing to resolution.

    Note:

    Form 6490 reviews are defined as discussions with each agent regarding his or her inventory; for example, verification of the accuracy of the Form 6490 report, including case status, actions taken with respect to assignments, compliance with the statute, Information Document Requests (IDR) and other procedures.

  4. The manager should ensure effective inventory management by:

    1. Notifying the agent of a case assignment, including any special classification concerns or strategies related to the assignment.

    2. Conducting regular reviews and discussions with agents (individually or collectively as appropriate) to assist in, and monitor assignment progress.

    3. Actively engaging with the agent(s) in monitoring, addressing and resolving to completion all adverse case determinations.

  5. Ensure agents understand the importance of involving the manager in appropriate situations.

  6. Timely process all closed cases.

    Case Type Process Time and Action
    Cases with closing agreements
    • Within three business days of receiving an executed closing agreement from the taxpayer, notify the agent of additional information needed to complete the package and then forward the execution package by encrypted email to the Director (with a copy to the Director’s Program Assistant or other designated person) for signature.

    • Confirm that any required actions contained in the closing agreement have occurred, including resolution payments, redemptions, notices, and escrows.

    • Close the RCCMS case within 10 business days of being notified that the closing agreement has been executed and the closing letter issued.

    All other closed cases Within 10 business days of accepting the closed case:
    • Complete all reviews.

    • Issue closing letters or return the case to the agent for additional actions.

    • Document actions in the case file.

    Case reassignments due to retirement, extended details, or other factors. Handle as quickly as possible and advise issuers of any reassignment within 10 business days.

Identification of Records to Review

  1. Generally, a tax-advantaged bond exam is conducted to determine compliance with federal tax laws and regulations. Records of the issuer, conduit borrower, and other parties to the transaction are the primary sources of information available for review during an exam. You should identify and review records necessary to determine compliance.

Issuer as the Taxpayer and the Requirement to Maintain Records

  1. The issuer of the tax-advantaged debt is treated as the taxpayer throughout the exam process. The issuer is responsible for maintaining and producing adequate records to substantiate the tax-advantaged status of the bonds. Generally other parties to the transaction, including conduit borrowers, will also maintain records and might do so as part of a contractual agreement with the issuer.

Determination of Appropriate Records to Review

  1. Consider exam scope, depth and the type of bond under examination when you initially determine the books and records to review.

  2. The bond transcript and other documents in the bond issuance closing file will likely document compliance with requirements that apply when the bonds are issued and, unless amended, apply for the life of the bonds.

  3. For post-issuance compliance matters (for example, expenditure, investment and use of bond proceeds), review post-issuance modifications to records and records created after issuance, that substantiate compliance with applicable requirements.

  4. During an exam, you may review any records necessary to make a bond tax compliance determination.

  5. Generally, when applicable to the case, review records substantiating the following:

    1. Compliance with applicable requirements when the bonds are issued.

    2. Sources and uses of bond proceeds.

    3. Allocations of bond proceeds to expenditures, investments, or other uses.

    4. How the facilities financed by the bonds were used.

    5. How the bond proceeds were invested before being used.

    6. How payments were made on the bonds, including sources of payments.

    7. Any post-issuance changes to bond documents, related contracts, or projects financed with bond proceeds.

  6. Review records that substantiate how bond proceeds were spent. These include records substantiating:

    1. The amount, date and payee of expenditures, including invoices and checks.

    2. The separate project to which the expenditure relates or the purpose of each expenditure.

    3. Computations of the average reasonably expected economic life of any assets financed with proceeds of the bonds.

    4. The date the project was placed in service.

    5. Equity contributions.

    6. Proceeds used for working capital purposes: cash flow statements, financial statements and other records that establish compliance with the applicable requirements or exceptions.

  7. Review any records pertaining on the investment of gross proceeds of an issue. These records should include the following investment information:

    1. Funds to which the investment is allocated (for example, construction fund, debt service fund, reserve fund, and escrow fund).

    2. Investment agreements (including repurchase agreements).

    3. Purchase price (including the amount of accrued interest stated separately).

    4. Nominal rate of interest.

    5. Par or face amount.

    6. Purchase date.

    7. Maturity date.

    8. Amount of any original discount or premium.

    9. Investment type (for example, Treasury securities, banker’s acceptance, investment contract, commercial paper, tax-exempt bonds and SLGS).

    10. Frequency of periodic payments (and actual dates and amounts of receipts).

    11. Compounding period.

    12. Date of sale or other disposition.

    13. Amount realized on disposition (including the amount of accrued interest stated separately).

    14. Transaction costs (for example, commissions) incurred in acquiring, carrying, or disposing of the investments.

    15. Substantiation of whether the investments were acquired and disposed of at fair market value.

  8. Examine records with information on how the bond-financed facilities are used, including:

    1. Contracts, leases, or other documents substantiating use of the financed facilities, including detailed records taxpayers maintain on use.

    2. In the case of a qualified 501(c)(3) bond, records sufficient to identify any use in an unrelated trade or business, regardless of the term of an arrangement.

    3. In the case of bonds that are required to have proceeds used for specified purposes (for example, certain qualified private activity bonds and tax credit bonds), records that substantiate compliance with that required use.

    4. Management contracts, rental agreements and other third-party contracts useful in the determination of private use.

    5. Records to establish the issue price of the bonds.

Common Records

  1. Issuers frequently keep and can provide a bond transcript with:

    • Applicable legislation

    • Agreements

    • Certifications

    • Legal opinions

    • Documentation that verifies compliance with applicable tax and statutory requirements

    • Other information about the bond issue

  2. A trustee is involved with most tax-advantaged bond issuances.

    1. That trustee likely maintains transactional records on the investment and use of bond proceeds.

    2. In conduit issues (for example, certain types of qualified private activity bonds), the conduit borrower maintains some records.

    3. Trustees, conduit borrowers, and any party other than the issuer are considered third parties in a tax-advantaged bond examination.

    4. See IRM 4.81.5.5.3 for procedures relating to third party contacts.

  3. These records are often important to review in an exam of a tax-advantaged bond issue, but they are not all inclusive:

    • Official statement or other disclosure document (for example, a private placement memorandum)

    • Trust indenture (or other document providing terms of the bonds such as the trust agreement or authorizing resolution/legislation)

    • Loan agreement

    • Bond counsel’s opinion and other tax opinions

    • Arbitrage certificate (or tax certificate) and any other agreements, certifications, or documents related to the tax status of the bonds (for example, TEFRA approval, volume cap allocation certificates, notice of official intent to reimburse, and arbitrage rebate calculations)

    • Bond purchase agreement

    • Investment agreements and related tax certifications

    • Swap agreements (including the master agreement, schedule, credit support annex, confirmations, and related definitions) and related tax certifications

    • Reimbursement agreements

    • Remarketing agreements

    • Related tax returns (for example, Form 990, Form 1120, Form 1120-S, Form 1065, and Form 1040) and related depreciation schedules

    • Continuing disclosure filings

    • Management contracts

    • Research contracts

    • Leases

    • Deeds

    • Financial records accounting for bond proceeds

    • Trustee statements

    • Bank statements

    • Requisitions

    • Invoices

    • Floor plans

    • Trade tickets

    • Public notices and meeting transcripts or minutes

    •  

Review Procedures

  1. Agents determine the appropriate methods for reviewing records. You should generally use methods consistent with the scope and depth of the exam. This section covers basic steps for analyzing and testing records. During your exam, you may determine that other methods are appropriate or necessary to determine the bonds’ tax compliance.

Evaluating and Documenting Internal Controls

  1. Internal controls are the issuer’s policies and procedures (and the conduit borrower’s with respect to its books and records) that are intended to identify and measure business operations that impact bond compliance and ensure the accuracy of operating records. These include procedures the issuer or conduit borrower has in place to monitor post-issuance compliance.

  2. If you evaluate the issuer’s internal controls and how are carried out, it will help you:

    1. Determine the reliability of the books and records and the depth in which you should review them.

    2. Assess control risk.

    3. Determine appropriate audit techniques you should use during the exam.

  3. "Control risk" is the risk that a material misstatement in the books and records could occur and not be detected by the business’s internal control structure, policies, or procedures.

    Example:

    An issuer who adopts and implements post-issuance compliance procedures that effectively and regularly monitor compliance with private use restrictions or arbitrage requirements has a lower control risk than an issuer without these procedures. Evaluate internal controls to focus on high risk areas and accounts, and less on areas or accounts that have little or no likelihood of a tax consequence.

  4. Collect the information needed to review internal controls by:

    1. Interviewing the issuer and/or representative

    2. Inspecting the documents and records

    3. Requesting information

    4. Observing the taxpayer’s activities and operations.

  5. Document the internal controls you evaluated, including:

    • Post-issuance compliance monitoring procedures

    • The control environment

    • The accounting system

    • Other control procedures

Post-Issuance Compliance Monitoring Procedures
  1. An issuer implements post-issuance compliance monitoring procedures to foster compliance with the federal tax requirements applicable to tax-advantaged bonds. They are an important part of internal controls. Effective procedures may significantly reduce control risk.

  2. Early in your exam, consider if the issuer or conduit borrower has adequate compliance monitoring procedures.

    Example:

    During the exam, you determine a rebate report should have been prepared but was not, indicating the issuer may have a deficiency in their post issuance compliance procedures.

  3. Do not look for a particular form of post-issuance compliance monitoring procedures. Instead, verify whether there are procedures designed to be effective at finding and preventing noncompliance under the circumstances of the issuer and the bond issue you’re examining.

    Example:

    A university follows its documented process under which a person who has experience with the tax requirements is responsible for regularly reviewing all research grants and other contracts to determine possible private business use of bond-financed research facilities. You determine that they have an effective post-issuance compliance monitoring process.

  4. It may be helpful to review reports and audit results of local, state, and federal regulators, and other third parties to determine post issuance compliance.

  5. The existence of effective post-issuance compliance monitoring procedures may indicate a lower level of risk. However, the opposite may not be true. You don’t automatically find noncompliance when an issuer fails to provide documentation of post-issuance compliance monitoring procedures. An issuer isn’t required to implement procedures. An issuer that doesn’t have procedures may nevertheless demonstrate compliance. Effective procedures, however, should be considered when determining the exam depth.

Certain Elements of Post-Issuance Compliance Monitoring Procedures
  1. Effective post-issuance compliance monitoring procedures may include the following:

    1. Procedures for conducting due diligence review at regular intervals

    2. The official or employee responsible for review

    3. Training that will be given to the responsible official/employee

    4. Procedures for retaining adequate records to substantiate compliance (for example, records relating to expenditure of proceeds)

    5. Procedures reasonably expected to identify noncompliance without delay.

    6. Procedures for ensuring that the issuer will take timely steps to correct noncompliance

  2. Due Diligence Review at Regular Intervals:

    Use these procedures for periodic monitoring of how the financed property and proceeds are used to ensure that requirements are met, including:

    1. Monitoring investments acquired with gross proceeds for arbitrage violations, including computing rebate at appropriate intervals and paying any required rebate.

    2. Periodic monitoring, measuring and recording of the percentage of nonqualified use during each appropriate period while the bonds of an issue are outstanding. Determine at the end of each appropriate period whether any nonqualified use results in noncompliance with the qualified use requirements applicable to the bonds.

    3. When noncompliance is found, ensuring resources are devoted to correcting that noncompliance including implementing remedial actions under applicable regulations or other guidance. If no remedial action is provided under applicable regulations, submitting a voluntary closing agreement request to ITG/TEB promptly after the issuer identifies noncompliance.

    4. Providing for periodic training of employees responsible for monitoring compliance, including training on the requirements for tax-advantaged bonds, monitoring and measuring the use of proceeds and bond-financed property, and the remedial actions and voluntary closing agreement program. Alternatively, training on procedures for selecting and engaging qualified consultants to handle this compliance review.

    5. Ensuring a qualified employee or consultant reviews long-term arrangements for use of bond-financed property for compliance with the applicable use requirements before the arrangement is entered into or renewed.

    6. If applicable, seeing that a qualified employee or consultant ensures that the financed property is used or operated in compliance with the applicable use requirements.

  3. Identifying the official or employee responsible for review. Review procedures for assigning a person(s) or position(s) who is responsible for monitoring compliance with each of the tax requirements applicable to a bond issue. In making this assignment, consider:

    • The issuer’s size and organizational structure.

    • The size and complexity of the issuer’s tax-advantaged bonds.

    • The nature of the tax requirements applicable to the bond issue.

    • Other relevant facts and circumstances.

  4. Retention of Adequate Records to Substantiate Compliance. Procedures for establishing, identifying and maintaining books and records material to determining a bond’s compliance with tax requirements, whether those records are created before, on or after the date the bonds are issued. Generally, these records include:

    1. All the different categories of records that are material to tax compliance.

    2. The location where each category of records will be retained.

    3. The department, employees, or function responsible for maintaining each category of records.

Accounting Systems for Bond Transactions
  1. The recordkeeping requirement for tax-advantaged bonds is not necessarily met by complying with record retention under standard accounting principles.

    1. Accounting systems for many business entities follow Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB) that define the types of summary records (for example, journals and ledgers), financial statements, and required disclosures.

    2. The Governmental Accounting Standards Board (GASB) proclaims the standards that apply for most governmental entities issuing tax-advantaged bonds.

    3. While the GASB standards address accounting treatment for liabilities, assets, revenues, and disclosure for bonds related to the overall financial position of the entity, they don’t generally address the accounting for bond proceeds of a transaction in sufficient detail to determine compliance with federal tax requirements.

    4. Often, bond proceeds are deposited into trust accounts and the detailed activity may not be reflected on the GAAP books of the governmental entity.

    5. Conduit financing transactions may only require minimal disclosures in the notes to the financial statements of the issuer (See: Summary of Interpretation No. 2 Disclosure of Conduit Debt Obligations—an interpretation of NCGA Statement 1 (Issued 8/95)).

    T

  2. While the accounting principles may not be sufficient to prove compliance with the tax law requirements, in most cases it is impractical for an issuer to establish a formal set of double entry books accounting for disbursements of bond proceeds (similar to a disbursements journal) or an investment subsidiary ledger accounting for investments purchased and sold.

    1. When an issuer summarizes the financial activity related to a bond transaction, identify the records maintained and procedures used to produce those summaries.

    2. To the extent those records adequately establish a system of accounting (for example, journals, ledgers, and financial statements) for proceeds and investments of the bonds; this may significantly simplify your exam.

  3. An accounting system for bond transactions should include, at a minimum, three basic elements:

    1. Summary of how and when the gross proceeds were expended.

    2. Summary of how and when the gross proceeds were invested, including purpose and nonpurpose investments, and details about the investments.

    3. If applicable, a summary of how the bond financed facility was used.

Summary Records of Expenditures
  1. Summary records of expenditures are statements summarizing how the bond proceeds were expended. Those records may include:

    1. For each separate project or purpose, the aggregate amount of proceeds and the aggregate amount of equity or proceeds of other obligations (that is., obligations for which no Form 8038 series return is required to be filed) spent on such project or purpose.

    2. A description of each separate project or purpose.

    3. The date(s) or date range of the expenditures.

    4. Except for working capital expenditures, the average reasonably expected economic life of each separate project or purpose.

    5. The date(s) each separate capital expenditure project or purpose was placed in service.

    6. Records relating to equity contributions of projects financed with proceeds.

    7. A record of the final allocation of proceeds of the issue to expenditures.

  2. The "project or purpose" of an expenditure should be sufficiently detailed to allow you to determine whether there was a qualified use of proceeds and bond-financed property.

    Example:

    All capital expenditures for a new building generally may be treated as used for a single project or purpose if the entire building may be treated as a single project for purposes of the private activity bond restrictions of IRC 141. If applicable, the expenditure’s project or purpose description should include information sufficient to establish that the project or purpose is within the scope of expenditures permitted under the public approval of the issue. Expenditures for issuance costs and working capital should be stated as a separate project(s) or purpose(s); and expenditures for qualified guarantee fees should be separately stated.

Summary Records of Investments
  1. Summary records of investments are statements summarizing how the gross proceeds were invested. Determine what records are needed. Those records may include the following types of information:

    1. The amount paid for each investment.

    2. The date the payment for each investment was made.

    3. The amount received from each investment.

    4. The date each payment was made and receipt received.

  2. In appropriate cases, you may determine that a rebate report analyzing investment activity for a period, regardless of whether the rebate report uses the "investment method" showing all reinvestments or the "disbursement method" showing only payments for investments and payments for expenditures, sufficiently summarizes how the proceeds were invested.

Summary Records of Qualifying Use
  1. Summary records of qualifying use are statements summarizing how the bond financed property was used. Determine what records are needed. Those records may include the following types of information::

    1. A list of all contracts or arrangements for use of the proceeds or bond-financed property, including any contracts or arrangements that are identified as resulting in nonqualified use.

    2. The issuer’s confirmation that all such contracts or arrangements were reviewed by a party qualified to determine whether they result in nonqualified use.

    3. A calculation of the total amount of nonqualified use of bond proceeds or bond-financed property (as a percentage of proceeds or net proceeds, as applicable) in each year of the period.

  2. In general, the issuer’s confirmation that all contracts and arrangements were reviewed as described in the preceding paragraph should be based on a review by a responsible officer or officers who know the tax requirements and the types of actions that can result in nonqualified use of bond-financed property. Alternatively, that confirmation may be based on consulting with a person who is knowledgeable in such tax matters.

Agent’s Use of Summary Books and Records
  1. The exam procedures in this section do not authorize or otherwise permit destruction of any records related to the bond transaction. More specifically, if you, as agent, decide to use summary records, you are not authorizing that the supporting documentation be destroyed.

  2. You may use summary records when actual expenditures, investments, or qualifying use result in a significant number of transactions that would create unnecessary burden to review individually and you can establish the reliability of the summary records presented as appropriate for the exam. In these instances, you may use summary records to establish facts and other matters.

  3. You may determine that an issuer’s post-issuance compliance monitoring procedures and internal controls help establish the accuracy and reliability of the summary records. If you determine that the post-issuance compliance procedures and internal controls provide appropriate checks and controls and those procedures have been followed, you may accept an issuer’s Summary Record of Investments, Summary Record of Expenditures and any Summary Records of Qualifying Uses as sufficient to establish certain factual and other matters in those records, without requiring substantiation of the content.

  4. When using summary records, document in the case file the steps you took to evaluate the adequacy of the issuer’s internal controls to ensure reliability of the summary records and steps taken to test the accuracy of the summary records.

  5. In evaluating whether use of summary records is appropriate for a particular exam, consider the facts and circumstances relating to that exam.

    Example:

    It may be appropriate to do more rigorous testing of the accuracy of summary records when referral information, prior experience with the issuer, conduit borrower, or transaction professional, or prior experience with the type of bonds being examined indicates a higher likelihood of inaccuracy within the records.

  6. If you to use summary records, you may require those records be substantiated to evaluate any compliance matter. Examples of requiring substantiation include, but aren’t limited to:

    1. You receive later information indicating that summary records do not fairly, accurately, or completely reflect the actual expenditure, investment, or use of proceeds of an issue.

    2. The summaries are not sufficient to substantiate the bonds compliance with applicable Code provisions.

    3. You later discovers that the issuer’s compliance procedures are inadequate.

    s

Testing of Summary Records

  1. Test the reliability of summaries of records using appropriate exam and sampling techniques.

    Example:

    When determining the reliability of a rebate report as a summary record of investments, verify that the report accounts for all gross proceeds; review the report for reasonableness of any large, unusual, or questionable items; test a sample of the calculations; and trace a sample of detail transactions from trust statements to the report.

  2. Use appropriate sampling techniques to substantially enhance the process of examining the books and records.

  3. There are two basic types of sampling: judgment sampling and statistical sampling, which are discussed in the following subsections.

Judgment Sampling
  1. Judgment sampling requires the use of professional judgment to perform the sampling procedure and evaluate the results of the sample.

  2. One type of judgment sampling is block sampling. Block sampling may:

    1. Use groups of continuous items selected from an account balance or class of transactions.

    2. Include selecting all items in a numerical or alphabetical sequence.

      Example:

      During an exam you test the accuracy of records on one year of investment returns to reach a conclusion about the reliability of records of investment returns over the life of the bonds.

  3. Another type of judgment sampling is Dollar Limitation Sampling (cut-off sampling). In the dollar limitation sampling method, you:

    1. Select a minimum dollar amount.

    2. Create a sample by selecting all items exceeding that dollar amount.

    3. Avoid spending excess time on review of small, insignificant amounts

    4. May be combined with block sampling.

Statistical Sampling
  1. Statistical sampling is a procedure that allows a sample of a universe to predict the whole universe. It’s also called probability sampling or random sampling.

  2. Using statistical sampling may be appropriate if you attribute the results of the exam to a larger population.

  3. (3) Generally, you shouldn’t independently undertake a statistical sampling application. Discuss the facts and circumstances with your manager and determine if you need to request a Computer Audit Specialist (CAS). Using a CAS will be rare in the exam of a tax-advantaged bond. Refer to IRM 4.10.2.7.5, Referrals for Specialists, for instructions to request CAS assistance. Also refer to IRM 4.47.1,, Computer Audit Specialist Program (CAS).

Unreliable or Incomplete Records
  1. If the taxpayer’s records are unreliable, lost, destroyed, or not available due to circumstances beyond the taxpayer’s control, you may allow the taxpayer to present reconstructed records. Discuss this with your manager along with whether to issue a summons to secure records from other possible sources. See IRM 4.81.5.6.3 concerning summonses and IRM 4.81.5.5.3 concerning third party contacts. Remember, it is the issuer’s responsibility to substantiate compliance.

  2. When you determine that the issuer’s records are incomplete, nonexistent, or suspect, document the case chronology with the reason and describe all your attempts to obtain or reconstruct the taxpayer’s records. Consider resolving the issue through a closing agreement.

  3. If you allow the issuer to present reconstructed records, document this decision in the case file along with the reasons that it is reasonable to use the reconstructed records.

Taxpayer Contacts and Other Contacts

  1. This section explains the process for the initial contact with the taxpayer at the beginning of an exam.

Taxpayer Contacts

  1. When the agent opens the exam, the agent will first contact the taxpayer through an initial exam letter.

Contacting the Taxpayer to Open an Examination
  1. Contact the taxpayer by mail when opening an exam case using the appropriate initial contact letter. All initial contact with taxpayers is to be made by mail per a change in the May 20, 2016 policy Memo from the Deputy Commissioner of Services and Enforcement. After mailing the contact letter and sufficient time has lapsed for the taxpayer to respond, you can then initiate contact with the taxpayer by telephone as needed.

  2. After your initial contact by mail:

    1. If no response is received from the issuer, call the issuer no earlier than 14 calendar days or 10 business days, whichever is longer, from the mailing of the letter to confirm that the issuer received the letter and Information Document Response (IDR).

    2. Call the issuer to discuss the issues being examined and the items being requested on the IDR.

    3. Confirm the time for producing the requested information.

  3. Use Letter 4557, General Program Examination Letter for a general program examination.

  4. Follow these procedures when you prepare the opening letter:

    1. Determine the current address for the issuer using the Integrated Data Retrieval System (IDRS) command INOLES. You may rely on an address acquired from the issuer’s website if it appears to be more current than the issuer's last known address.

    2. Address the opening letter and IDR to the governmental entity issuing the bonds using the most current address for the issuer’s EIN.

    3. Include the name of the bond issue in the reference line of the opening letter and IDR based on the Name of Issue field from the Form 8038 series return, generally following the format:

      $[Par Amount], [Issuer’s Name] [Type of Bonds] ([Project N]), [Series], dated [Dated Date] and issued [Issue Date], including CUSIP [CUSIP Number of the last maturity]

      Example:

      For example, $10,000,000 City of XYZ Multi-Family Housing Bonds (ABC Project), Series A, dated May 1, 20XX, and issued May 15, 20XX, including CUSIP NNNNNNAAA)

    4. Include your contact information and your manager’s contact information on the letter. Include your contact information on the IDR.

    5. Sign the opening letter.

    6. Scan the dated opening letter and IDR and post the scanned documents to the RCCMS case file.

    7. Mail the opening letter, IDR, and identified enclosures to the issuer.

  5. Include in the opening letter:

    1. Pub 1, Your Rights as a Taxpayer. The publication fulfills the requirement in IRC 7521(b)(1)(A) that taxpayers be informed of the exam process and their rights under this process at or before the initial interview. (See RRA section 3503).

    2. Supplemental Instructions for Form 2848, Power of Attorney. The instructions provide guidance and clarification to tax-advantaged bond issuers, conduit borrowers and other tax-exempt bond related taxpayers who wish to authorize an individual to represent them before the IRS or inspect confidential tax return information related to the bond issuance.

    3. Initial Form 4564, Information Document Request (IDR) requesting specific documents, files, or information from the issuer.

      • Request documents, files, and information necessary and appropriate for the exam based on the exam plan and other factors considered during exam pre-planning, including the type of bond issue being examined and the initial scope of the examination.

      • Be specific, understandable, and specify a response due date.

  6. Request a case update to status 12, Assigned, Taxpayer Contact, on RCCMS with update to AIMS when you begin charging time to the case.

Employee Contact - RRA Section 3705
  1. IRS employees who work tax related inquiries must give taxpayers information to identify the appropriate employee who can address any further questions (RRA section 3705) Therefore, provide the following contact information:

    1. During a telephone or personal contact - name and identification number.

    2. On all correspondence, a telephone number taxpayer can call with questions.

Taxpayer Representatives

  1. In certain situations, the issuer or conduit borrower appoints an attorney or other qualified person to represent them before the IRS.

Power of Attorney (Form 2848) and Tax Information Authorization (Form 8821)
  1. Issuers and conduit borrowers use Form 2848, Power of Attorney and Declaration of Representative, to authorize an attorney or other qualified person to represent them before the IRS. See IRM 1.25.1, Rules Governing Practice Before the IRS.

  2. Solicit, from the issuer or conduit borrower, a Form 8821, Tax Information Authorization, in certain situations. This form authorizes the designated individual to receive or inspect tax return information, but will not authorize the designee to represent the issuer or conduit borrower before the IRS. These situations include but are not limited to:

    • When the representative appointed is not designated in paragraphs (a)through (r) of Part II of Form 2848.

    • When direct communication between the agent and the conduit borrower with respect to the issuer’s tax matters may expedite the exam, the Form 8821 should be signed by the conduit borrower.

    • When direct communication between the agent and the issuer with respect to the conduit borrower’s tax matters may expedite the examination, the Form 8821 should be signed by the conduit borrower.

    • When direct communication with other parties to the transaction that are not designated to represent the issuer under a Form 2848 is necessary (for example, communication with bond counsel, financial advisors, trustee, rebate consultants, underwriters, bidding agents, or investment providers), the Form 8821 should be signed by the issuer under examination.

  3. A person appointed to inspect and/or receive confidential tax information on Form 8821 may appoint his or her own power of attorney on Form 2848, but cannot give the representative rights or privileges the Form 8821 appointee doesn’t already have.

  4. In many cases, communication with other parties to the transaction will not require an authorization on Form 8821 if the communication is limited to requesting and/or receiving information. It is important for agents to understand their authority to receive information from, and to disclose return information to, third party witnesses. IRC 6103(k)(6) addresses disclosure by certain officers and employees for investigative purposes that allow the disclosure of return information. This is allowable to the extent that such disclosure is necessary to obtain information, which is not otherwise reasonably available, with respect to the correct determination of tax. Agents may identify themselves, their organizational affiliation with the IRS, and the nature of their investigation when making an oral, written, or electronic contact with a third party witness. This can include an IRS badge, credential, or business card, or through the use of an information document request, summons or correspondence on IRS letterhead or which bears a return address or signature block that reveals affiliation with the IRS.

  5. A valid Form 2848 and/or Form 8821 should contain the following information:

    • Issuer/conduit borrower name, EIN, and business address.

    • Name, address, and phone number of the representative/appointee.

    • Type of tax (legal name of the bond issue, including issue amount) and tax form number (Form 8038 series).

    • Year or period (date of issue).

    • Signature, with date, of an appropriate official of the entity designating the authority.

    • On Form 2848, the representative must sign and date the declaration (Part II) and enter the designation under which practice before the IRS is authorized.

  6. Do not honor the Form 2848 if the appointed representative is not qualified to sign Part II of the form or the form is incomplete or inaccurate. Do not accept the Form 8821 if it is incomplete or inaccurate. Return invalid forms.

  7. Process valid Form 2848 or Form 8821 authorizations that the issuer provides for a return under examination to the Centralized Authorization File (CAF) Unit within five work days of the IRS receipt date:

    1. Enter the name, telephone number, function (Tax Exempt Bonds) of the person reviewing the authorization, and the date of the review in the space provided on the first page of the authorization.

    2. Ensure that the Period column of line 3 of the authorization indicates the "YYYYMM" period format for the return(s) to which the authorization applies. For any period that is not in an "YYYYMM" format, the period(s) should be noted in the margin to the right of the issue date or other period specified.

    3. In the margin to the right of the Periods column of line 3, enter "RPT # NNN" for the report number of the period(s) covered by the authorization. The report number is essential for proper recording to the master file account to which the authorization applies.

    4. Fax a copy of the Form 2848 or Form 8821 to the Ogden, Memphis or Philadelphia campus based on the "Where to File" chart included in the instructions to the Form 2848. See IRM 21.3.7 for additional information regarding the CAF.

    5. Note across the top of page 1 "Faxed to (Ogden or Memphis Campus or Philadelphia) on (Date)" .

    6. Document the receipt and processing of all Form 2848 and Form 8821 in the Case Chronology Record (Form 5464).

  8. Keep the original Form 2848 and Form 8821 authorization in the case file. Staple a copy of any subsequent authorization to the top of the prior authorization. For electronic workpapers, post an electronic copy of the authorization may be posted to the Office Documents section of the workpapers using the Adobe push pin method or use the TEB naming conventions.

  9. When writing to the issuers who have an authorized representative, send the issuer will be sent the original correspondence, with a copy sent to the first and second authorized representatives, if indicated on the Form 2848 checkbox next to the representative’s name in section 2.

Identifying and Addressing Conflicts of Interest in Examinations
  1. Be alert to all facts and circumstances of a practitioner’s representation to identify any apparent conflicts of interest and to be ready to address it with a representative if a conflict arises under section 10.29(a) of Circular 230.

  2. Circular 230, Section 10.29(a) defines a conflict of interest to exist when either::

    • The representation of one client will be directly adverse to another client.

    • There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner.

  3. Circular 230, Section 10.29(b) states that a practitioner may represent a client despite a conflict of interest if:

    • The practitioner reasonably believes that they will be able to provide competent and diligent representation to each affected client.

    • The representation is not prohibited by law.

    • The affected clients each have waived the conflict and given informed consent to the representation, confirmed in writing by each client.

  4. Because bond attorneys provide opinions to their clients on whether a bond issuance will qualify for tax-advantaged status, be sensitive to conflict-of-interest issues in examinations that involve the tax-advantaged status. Not all situations will present a conflict of interest.

    Example:

    A conflict of interest doesn’t necessarily arise because an attorney is representing the bond issuer after that attorney provided the opinion underlying the issuance of the bond, such as when the focus of the exam is post-opinion compliance. Consider other facts in each situation under exam involving a potential conflict of interest.

  5. If you have reason to believe, based on all pertinent facts and circumstances available, that a representative has a conflict of interest as defined above, promptly raise the issue with the representative and request that the representative act to address the conflict of interest.

    1. If you’re persuaded, based on the representative’s response to your concern over a conflict of interest, that there is not one under the facts and circumstances, or the representative has provided written assurance that the conflict has been waived as discussed below, treat the matter as resolved.

    2. A representative may also resolve a conflict of interest by withdrawing and rescinding the power of attorney.

  6. If the representative responds that he or she has obtained or will obtain the client’s informed consent to the representation notwithstanding the conflict of interest:

    • Specifically require a letter or other signed document from the representative stating that after being informed of the conflict of interest, each affected client has waived the conflict and given informed consent to the representation and such consent was confirmed by each client in writing.

  7. Include in the case file the written assurance received from the representative that resolves the conflict of interest.

  8. Don’t request copies of the informed-consent documents that the affected clients have signed or that otherwise function as the clients’ written confirmation described in Circular 230 section 10.29(b).

  9. The Office of Professional Responsibility (OPR) has exclusive authority to enforce the rules governing practice before the IRS and to pursue sanctions against a practitioner for violations of Circular 230. When a representative with a conflict of interest does not resolve the conflict:

    1. Consult your manager and contact OPR for guidance.

    2. You and your manager can consult OPR about other conflict of interest questions and concerns, including:

      • Questions about whether there is a potential conflict of interest.

      • Whether a representative’s written assurance of client consent is adequate.

      • Whether a representative complies with Circular 230, Section 10.29.

Power of Attorney Bypass Procedures: Overview
  1. You may, with your manager's approval, notify the taxpayer directly that you believe a taxpayer's representative is responsible for unreasonable delay or hindrance of an Internal Revenue Service examination or taxpayer investigation. (IRC 7521(c))

  2. The procedures to by-pass the power of attorney (POA) permit you to contact the taxpayer directly and to request any information necessary to complete the exam. See IRM 4.11.55.4.

  3. Under the bypass procedures, the POA continues to represent the taxpayer and you’re required to send copies of all correspondence issued to the taxpayer to the representative. The taxpayer may at his or her discretion forward the requested information/documentation to you through the representative.

Bypass Procedures
  1. Document the case chronology if any of the following issues occur:

    1. The representative impedes or delays an exam by failing to submit the records or information requested by the agent.

    2. The representative impedes or delays an exam by failing to keep scheduled appointments.

    3. The representative impedes or delays an exam by failing to return telephone calls and written correspondence.

  2. If you note a trend and the exam is being hindered because of the representative, notify your manager of the representative's actions.

  3. The manager:

    1. Ensures the agent has taken reasonable efforts to deal directly with the representative and that the case file sufficiently details the facts supporting how the examination has been delayed or hindered.

    2. Advises the senior manager of the issue.

  4. Send all correspondence you sent to the representative to the taxpayer, including IDRs (if you haven’t done so already). In many cases, the taxpayer may not be aware that the representative is procrastinating and may correct the situation when they become aware of the problem.

  5. Prepare and your will issue a Letter 4020–A, Warning Letter for Bypass Procedures for Preparers, covered under Circular 230, advising the representative of their responsibilities in the conduct of examinations. The representative will be advised that if their limited representation is a hindrance to the IRS’ examination or investigation of the taxpayer, the limits of the representation can be communicated to the taxpayer.

    • Attach a brief chronology of events to the letter. If a reason for the bypass is the failure to submit records or information you requested, include copies of prior document requests and a list of outstanding items.

    • Do not send a copy of the Letter 4020-A to the issuer.

    • Forward a copy of the Letter 4020-A, with attachments, to the Field Operations Manager.

  6. If the representative continues to delay or refuses to provide the information requested, notify the FOM. The FOM will issue Letter 4020-C, Final Bypass Letter, to the representative and a copy to the issuer. The FOM sends a copy of the Letter 4020-C you and your manager as authority to bypass the representative on the exam.

  7. The bypass permits you to contact the issuer directly. The representative can continue to represent the issuer, if accompanied by the issuer. As a courtesy, we advise the representative of the time and place for future appointments with the issuer. Continue to send copies of all correspondence that you send to the issuer to the bypassed representative.

  8. Use a summons to secure information if the issuer and the representative are intentionally uncooperative.

  9. Prepare a referral to the Office of Professional Responsibility per the IRM whenever a Letter 4020-C is issued. Send that referral to the ITG/TEB FOM via your manager.

Third Party Contacts

  1. For information on third party contacts, see IRM 25.27.1, Third Party Contacts - Third Party Contact Program. This IRM is intended to serve as a general reference for the Third Party Contact (TPC) Program.

Third Party Contact information specific to Tax Exempt Bonds
  1. TPC Notification Procedures: The Service-wide IRM 25.27.1.3 indicates the Letter 3164 series notifies taxpayers of potential TPCs. Please note that TEB examination Letter 4557 issued with Publication 1 (Pub 1), Your Rights As A Taxpayer, when the exam is initiated includes language necessary to provide the issuer with reasonable notice that third party contacts may be made.

Requesting Information

  1. (1) You have the authority to request and examine a taxpayer's records per IRC 7602. This IRM 4.81.5 provides procedures for agents to request information from issuers and other parties.

IRC 7602 Provisions

  1. IRC 7602 provides that, in determining a return’s correctness or any person’s liability for any internal revenue tax or liability, the Secretary is authorized to:

    1. Examine any books, papers, records, or other data which may be relevant or material to such inquiry.

    2. Summons:

      • The person liable for tax or required to perform the act.

      • Any officer or employee of such person.

      • Any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.

Securing Records

  1. Secure the records necessary to perform a quality examination using a Form 4564, Information Document Request (IDR).

    1. Conduct initial research applicable to the potential issues to identify the information that’s needed.

    2. Consider alternate sources for the information and identify alternate means to obtain the needed records if applicable.

    3. Prepare the IDR:

      • Group the information being requested by issue.

      • Number or letter the items requested.

      • Use clear and concise language.

  2. Initial Contact:

    1. Include the initial IDR with the initial contact letter.

      Note:

      The response date for the initial IDR should be 30 days from the date of mailing and notate note on the IDR that the agent will review the information within 10 days of receipt.

    2. After 10 business days have elapsed, the agent will call the taxpayer or POA if the issuer has not contacted the agent prior to that.

    3. Discuss the issues being examined and the items being requested on the IDR. If after the discussions, the agent believes that clarification to the IDR is needed, the agent will modify the request and reissue it to the taxpayer.

      • Agree on an updated response date – which may also be an appointment date.

      • An updated response date from this initial call is not treated as the first extension but as a modification of the IDR.

  3. Follow-up:

    1. Follow-up with the taxpayer two to three business days prior to the IDR response due date.

    2. Review the response by the agreed upon date noted on the IDR.

    3. If the response is complete, call the taxpayer to advise that the response was complete and note this action in the Case Chronology Record.

    4. If the response was not complete or there was no response, determine within five business days if an extension will be granted.

    5. Discuss missing or incomplete items with the taxpayer to determine if an extension is warranted. If warranted, provide the taxpayer up to 15 business days to provide the incomplete information using Letter 5798, TE/GE Information Document Request 1st and 2nd Extension Notice.

    6. The agent may grant a second extension with managerial approval for an additional 15 business days using Letter 5798.

    7. The agent should review any response provided by the taxpayer within 10 business days and notify the taxpayer. If for some reason the review will be delayed, the agent should note the delay in the Case Chronology Record.

    8. If the information is not received after the second extension, the agent will begin the Enforcement Process.

  4. Enforcement Process

    If after the second extension the request is not complete, the agent notifies the group manager and prepares a Delinquency Notice:

    1. Issue Letter 5077-B, TE/GE IDR Delinquency Notice, for items that cannot be summonsed.

    2. Issue Letter 5077-D, TE/GE IDR Delinquency Notice - Pre-Summons, for items that can be summonsed.

    3. Call the taxpayer to discuss an appropriate due date.

    4. Mail the Delinquency Notice with the due date noted.

    5. Obtain managerial approval if more than 10 business days are needed for the taxpayer to respond.

    6. Agent signs the Delinquency Notice.

    7. If the taxpayer responds to the Delinquency Notice, the agent reviews the response within 10 business days.

    8. If the response is complete, the agent will notify the taxpayer that it is complete and note in the Case Chronology Records (CCR).

    9. If the taxpayer does not respond or if the response is incomplete, the agent will discuss this with the group manager and area counsel. The agent will then advise the taxpayer of the next action: proposed adjustment, summons or proposed revocation.

    10. If a summons is warranted, the agent will prepare and issue the Pre-summons Notice (Letter 5077-A) within 10 business days of the taxpayer not responding to the delinquency notice. The agent will notify the taxpayer and determine a response date. Obtain the group manager’s approval to grant more than 10 business days.

    11. The Pre-Summons Notice is signed by the group manager.

    12. If the taxpayer responds, the agent will review the response within 10 business days. If the response is complete, the agent will notify the taxpayer and note in the CCR.

    13. If the taxpayer does not respond or the response is not complete, the agent will discuss it within 10 business days with the internal IRS team, coordinate the summons with Area Counsel and follow the summons procedures in IRM 25.5, Summons.

  5. If an issuer or conduit borrower is unable or unwilling to provide records necessary to perform a quality exam, you are authorized per IRC 7602 to summons or otherwise secure records relevant to the examination. Discuss the particular circumstances with your manager. Generally, you will secure the records from third parties either using a summons, third party contact, or another type of contact.

  6. For third party contact procedures, see IRM 4.81.5.5.3.

Summons Procedures

  1. The authorized purposes for issuing a summons under IRC 7602 are to:

    • Examine a return.

    • Prepare a return for a non-filer.

    • Determine the tax liability of any person or transferee or fiduciary.

    • Inquire into any matter related to the administration or enforcement of the federal tax laws.

  2. For general summons information, procedures and examples, refer to IRM 25.5, Summons.

  3. Consult the following sections of the Code when preparing and issuing a summons.

    IRC Provision Applicability
    7521 Procedures involving taxpayer interviews. Section (c) mentions bypassing an uncooperative representative. All types of summonses.
    7602 Examination of books and witnesses All types of summonses. IRC 7602(c) applies to third-party summonses only.
    7603 Service of summons All types of summonses
    7604 Enforcement of summons All types of summonses
    7605 Time and place of examination All types of summonses
    7609 Special procedures for third-party summonses Third-party summons only
    7609(f),(h) Special procedures for John Doe summonses John Doe summons. (Third-party summons)
    7610 Fees and costs for witnesses All types of summonses
    7612 Special procedures for summonses for computer software All types of summonses
    7622 Authority to administer oaths and certify All types of summonses
  4. The IRS sends a summons using Form 2039. There are certain lines on the first page of Form 2039 requiring specific instructions related to ITG/TEB. Prepare these line items as follows:

    1. a. "In the Matter Of..." Identify the Form 8038 series return filed for the bonds under consideration for example, Form 8038, Form 8038-G, Form 8038-GC).

      Provide a complete description of the bond issue including amount, issuer name, issue name, series, and CUSIP.

      Example:

      $5,000,000 County of X Housing Authority Bonds (BBB Project), Series 2003 A, CUSIP 123456789.

      If the complete bond description does not fit on the "In the Matter of" line, enter "See below" ; and then in the "description of records" section, enter "In the Matter Of" followed by the bond description, followed by the requested records. Do not place this information on an attachment. It should always be on page 1.

    2. "Internal Revenue Service (Division)." Enter "Tax Exempt and Government Entities" .

    3. "Industry/Area. " Enter "Tax Exempt Bonds" .

    4. "Periods." The period is identified as the "Date of Issue" followed by the issue date of the bonds in an alphabetical Month-Day-Year format.

      Example:

      Date of Issue: June 30, 2012

      .

      For examinations of tax returns covering specific calendar years, fiscal years, quarterly or monthly periods, specifically state the period the tax return covers.

      Example:

      Indicate "Quarterly Period Ended June 30, 2014" or "January 1, 2014 through June 30, 2014 inclusive."

      Note:

      When conducting an IRC 6700 examination, the period should begin with the year in which the earliest related bond was issued and end with the current year.

    5. "To:" If no specific individual is required to provide the information, enter the entity’s name only.

      When seeking testimony or records that a specific person holds in his or her capacity as trustee, receiver, custodian, corporate or public official, add the person’s title or official status.

      Example:

      Use "John Smith, as President of X Authority and X Authority" .

      If the summons is to obtain testimony from a person only in his or her capacity as trustee, receiver, custodian, corporate, or public official, but the name of the person is unknown, identify the summoned party as "Custodian of Records, X Authority."

      When seeking testimony or records held by a specific person who is an employee (but not an officer), direct the summons to the specific person. Include his or her job title, if known. The summons must be served personally on the individual named on the "To" line.

      Example:

      Agent issues a summons to Authority X. Agent’s contact during the examination has been Mr. W, Executive Director. The summons is directed to "Authority X." It can be served on Mr. W, if he’s authorized to accept service on behalf of the Authority. However, if agent is summoning Mr. W to provide testimony, the summons should be issued to "Mr. W, as Executive Director of Authority X." It doesn’t matter that Mr. W can accept the summons on behalf of the Authority because in this case, he was named personally.

      Example:

      Agent issues a summons to the trustee for specific records. The summons is issued to "Trustee Bank." To confirm that the summons is directed to the appropriate person, however, agent mails it to a specific person or position description, such as "Ms. W, Custodian of Records" or "Legal Department."

      Note:

      Never enter the name of the authorized representative unless the summons is directed to the authorized representative personally.

    6. "At." Insert the correct address (per IDRS) of the person summoned. If the summoned party is a municipality or other entity, insert the current address of the municipality.

      If the summoned party is an individual summoned in his capacity as an officer or employee of the municipality or entity, and the individual is still employed by the entity, use the individual’s business address. If the summoned party is no longer employed by the entity, use the individual’s residence.

Interviews

  1. A quality examination might require the agent to conduct interviews. This section discusses the purpose of the interview, types of interviews and various techniques to be used in conducting an effective interview.

Introduction

  1. Interviews should be scheduled to obtain information needed to make informed judgments. Interviews provide information that might not be available from other documents.

  2. Interview the person who has sufficient knowledge and ability to answer questions in a factual context for the area(s) of interest. You may interview issuers, designated representatives, conduit borrowers and other third parties.

  3. Ask about available books and records during the interview. Use interviews to understand the taxpayer’s operations and help to reach informed judgments about the scope and depth of the examination.

  4. Use interviews to get information on unusual or questionable items. Ask follow-up questions to clarify questionable areas.

Record of Interviews

  1. Interviews may be recorded in several ways:

    • Informal notes

    • Memoranda

    • Affidavits

    • Questions and answers

    • Depositions (verbatim recordings).

  2. Informal Notes: Informal note-taking is a commonly used way to record an interview. It may consist of notes you made during or immediately after an in-person or telephone interview or conversation.

    1. The notes should contain enough detail to refresh your memory about the interview.

    2. The format of the notes should sufficiently identify the date, place, persons present and describe the events and content of the interview.

    3. The contemporaneous notes should be kept, even after you prepare formal notes.

  3. Memoranda: A memorandum of interview is an informal statement of the facts obtained during an interview.

    1. The memorandum should show the date, time, place, and persons present, and describe the interview events and content.

    2. When possible or necessary, record the interviewee's exact words. Do not assume or interpret meanings; request clarification when needed.

    3. Promptly prepare, sign, and date the memorandum.

  4. Affidavits: An affidavit is a written statement of facts, made voluntarily and confirmed by oath.

    1. You may take an affidavit when an affiant (taxpayer, representative, or informant) presents information (written or oral) relating to a tax matter. While the IRS provides Form 2311 for this purpose, affidavits may also be taken on plain paper. Either you or the affiant can type or handwrite the affidavit. Verify that all words in the affidavit are spelled correctly.

    2. Ideally, two IRS representatives should be present, although it is permissible for one representative to conduct an interview and create an affidavit.

    3. At a minimum, an affidavit should contain the following information about the affiant:

      1. Name: This should be the current full name as well as any current or prior alias.

      2. Address: The most current.

      3. Occupation: The present occupation of the person giving the affidavit. If the information relates to a prior occupation, add that occupation as well.

      4. The identity of documents submitted as part of the affidavit. Note the date on which each document was prepared, the person who prepared it and the source from which it was prepared.

      5. After the affidavit is filled out, swear the affiant by asking the following:

        • "Do you swear or affirm that the foregoing facts are true to the best of your knowledge?"

        • The affiant must have his/her right hand raised at the time of reply to this statement.

  5. Questions and Answers: A question and answer statement is a transcript of questions and the participant’s answers and statements at an interview. This form of recording an interview can become an affidavit if it is confirmed by an oath. This form has the advantage of following the exact sequence of the questions asked in the interview.

    1. The interview transcript is considered an affidavit once it is signed under oath.

    2. At the bottom of the interview, add the statement, "Under penalties of perjury, I declare that I have reviewed the above interview information, and to the best of my knowledge and belief, it is true, correct, and complete."

    3. Provide two lines at the bottom underneath the perjury statement for the individual’s signature and a typed or printed name and title.

    4. After signing, the individual should also date their signature.

  6. Deposition (Verbatim Recordings). Depositions are formal interviews primarily recorded during criminal investigations, at which the agent, any counsel, and a stenographer are present. For further information, see IRM 9.4.5, Investigative Techniques, Interviews.

    1. We ordinarily allow a taxpayer’s or their representative’s request to make a tape, stenographic or other verbatim recording of examination proceedings except when the taxpayer’s or representative’s behavior is clearly disruptive of the normal exam process or investigative proceeding. We do not grant requests to videotape or otherwise film exam proceedings.

    2. If a taxpayer or his or her representatives asks to make a tape, stenographic or other verbatim recordings of an exam, the agent will generally comply subject to the following provisions:

      1. Secure your manager’s approval prior to the recording.

      2. The taxpayer and/or representative furnishes his/her own recording equipment.

      3. The recording takes place in a suitable location, ordinarily in IRS offices.

      4. If the taxpayer or representative records the proceedings, you/your manager should strongly consider recording them as well to prevent future disputes over the verbiage or tone used in the interview.

    3. Immediately refer any request to make a tape, stenographic or other verbatim recording to your manager for approval. If granted, the manager will arrange an appropriate time and suitable location in an IRS office where equipment is available to make the IRS’s recording.

    4. If a taxpayer, legal representative, or witness appears in an examination proceeding and asks to make a verbatim recording without the IRS’s prior knowledge of this intent, you, with your manager’s approval t, may attempt to arrange for space and recording equipment so the proceedings can continue.

    5. At the outset of the recording, identify yourself, the date, time, place, and purpose of the proceeding. Each participant in the proceeding also must:

      • Identify himself or herself.

      • Identify his or her role in the proceeding.

      • Acknowledge and consent to the making of a verbatim recording.

      Note:

      If an additional participant arrives or a participant leaves the proceeding, note these facts on the recording.

    6. When written records are presented during the proceeding, the submitter must describe them in sufficient detail to make the verbatim recording a meaningful record when matched with the other documentation in the case file.

    7. State that the proceeding is complete and the recording is ending.

    8. Immediately review the IRS-produced recording for clarity and substance and, if needed, immediately prepare a complete written report of the conference.

Types of Interviews

  1. Initial Interviews: Initial interviews should be held as soon as possible after opening a case. Prepare for the interview by conducting a pre-audit analysis, which should include a thorough review of the case file, review of internal and external data, and preliminary research.

  2. Subsequent Interviews: Hold subsequent interviews with the taxpayer if:

    1. The taxpayer does not provide all the information requested.

    2. You need more detailed explanations.

Conducting the Interview

  1. Plan and Research. Planning the interview is an integral part of the interview process. Prior to any interview, review all the information and data relating to the case.

  2. Prepare an Outline. Determine the purpose for conducting the interview and prepare an outline to facilitate obtaining the required information. The outline should contain only relevant and material information and list topics in their proper sequence. Open ended questions are preferred; keep specific questions to a minimum, since they tend to reduce an interviewer's flexibility.

  3. Location of the Interview.IRC 7605(a) and the corresponding Reg. 301.7605-1 allow the Secretary to set the time and place of interviews as long as they are reasonable. In general, the IRS will determine if the interview is more appropriately conducted at an IRS office, a taxpayer or representative's location, or by telephone. Agents should consider conducting interviews in conjunction with facility tours when appropriate.

  4. Interview Techniques. It’s important to create an environment in which the taxpayer feels comfortable. Maintain a friendly and professional demeanor. Agents should consider the following suggestions in establishing rapport:

    1. Introduce themselves.

    2. Explain the exam process.

    3. Be prepared to explain return selection procedures, rights to representation, and appeal rights, and verify that the taxpayer has received Pub 1.

    4. Recognize that an IRS audit is often a rare experience for the taxpayer and therefore the taxpayer may be tense or nervous.

    5. Exhibit openness, honesty, and integrity. Remain calm and objective.

    6. Listen carefully to all details, be receptive to all information volunteered, regardless of its nature, and be patient and persistent in extracting the facts necessary to achieve the interview goals.

    7. If the taxpayer indicates he or she wants to obtain representation during the interview or at any other phase of the examination process, suspend exam activity, and give the taxpayer reasonable time to secure representation.

Tour of the Facility

  1. Generally, TEB agents do not conduct a tour of bond financed facilities when the facility’s use is clearly governmental or there is sufficient information available from other sources to conclude that the potential for a violation is minimal. If you do not conduct a tour, use alternative information to document the facility’s use or existence.

    Example:

    Information from a company’s web site clearly describing how the facility is used, along with documents such as site plans and blue prints. This information can replace the need to conduct a tour. See IRM 4.81.4.7 for factors to consider in determining whether an on-site visit is warranted.

Purpose

  1. An on-site visit is often an important part of a quality examination. During a site visit, you have an opportunity to tour the bond-financed facility, interview key personnel, and review books and records related to the transaction. Generally, a tour of the facilities is intended to help you determine whether the proceeds of the bonds were used for qualifying purposes.

Authority

  1. Authority to conduct tours of bond-financed facilities comes from 26 CFR 301.7605–1(d)(3)(iii), which states "regardless of where an examination takes place, the IRS may visit the taxpayer’s place of business or residence to establish facts that can only be established by direct visit, such as inventory or asset verification. The IRS generally will visit for these purposes on a normal workday of the IRS during the IRS’s normal tour of duty hours."

Conducting the Tour

  1. Your physical observation of the bond-financed facilities allows you the opportunity to:

    1. Acquire an overview of the issuer’s or conduit borrower’s business operations.

    2. Clarify information obtained previously through interviews or a review of the records.

    3. Verify the existence of the assets financed with bond proceeds.

    4. Verify whether the cost of the assets is commensurate with the type of facility financed.

    5. Determine if there is any potential for nonqualified private business use by observing how and by whom the facility is used.

    6. Determine whether the facility is being used for any other nonqualifying purpose. Examples of nonqualifying purposes could include: exempt facilities not used for the stated exempt purpose, facilities for which there has been a change in use, a sale or disposition of bond financed assets, and failure to rehabilitate facilities when required.

    7. Observe capital expenditures of the conduit borrower for use when reviewing compliance with qualified small issue bonds.

    8. Determine if the issuer or conduit borrower has sufficient internal controls by observing how post-issuance compliance procedures are implemented and noting any weaknesses in the procedures.

  2. Conduct the facility tour after determining which assets were financed with bond proceeds. Adjust the scope and depth of the exam based on your findings during the tour.

  3. Conduct tours with knowledgeable individuals. Taxpayers, or their representatives, can often explain business practices that appear unusual to you.

Documenting the Tour

  1. Document a completed tour or inspection. Indicate:

    • Those present during the tour

    • The facilities inspected and the result

    • Observations

    • Answers to questions

    t

Evaluating the Facts

  1. Gather facts to correctly determine a taxpayer’s tax liability. This determination must be made based on all available facts, including facts supporting the taxpayer’s position. For this reason, you should analyze all the facts supporting both sides of an issue.

  2. Pursue an exam to the point where a reasonable determination of the correct tax liability can be made. In the daily application of this responsibility, you must deal with problems of substantiation and its evaluation.

Purpose

  1. As part of the exam, document the facts necessary to reach conclusions during the examination. Documentation of the facts may take several forms, including observations, documents and oral testimony.

Types of Methods

  1. There are many methods available for an agent to consider in gathering facts, including observations, documents and oral testimony.

  2. Observations. An observation is the act of recognizing and noting a fact or occurrence. Observations are generally obtained in an exam during a facility tour or an interview.

    Note:

    Visual confirmation of assets and functional processes are common observations. Body language, tone, openness, and other nonverbal clues are important observations you can make as well. It’s extremely important to document the observations to allow them to be used to support a conclusion.

  3. Documentation. A taxpayer’s books and records, or records of third parties, are forms of documentation. Writings made contemporaneously with an event are more likely to reflect the actual facts and demonstrate the parties' intent. Likewise, original documents are generally given greater weight than copies or summaries. While documentation has great value, don’t solely rely on it and exclude other facts and oral testimony.

  4. Oral Testimony. Oral testimony can also establish facts and there are instances in which courts have given greater weight to it than to documentation. Oral testimony is the verbal testimony provided in support of a fact. Do not use oral testimony in lieu of available documentation when:

    • If the issue involves specific recordkeeping required by law or regulations. Oral testimony alone cannot substitute for necessary written documentation.

    • Oral testimony need not be accepted without further inquiry. If in doubt, attempt to establish other sources of documentation to support the facts.

Reporting Compliance Case Management System (RCCMS)

  1. RCCMS supports the current exam process by replacing manual with electronic processes. The system:

    1. Is an inventory control and case management system.

    2. Stores documentation and research supporting case conclusions and automatically backs up all stored data files when synchronized with the central database server.

    3. Is used to create, control, and assign compliance activities.

  2. Workpapers are prepared, developed and stored within the system.

  3. It uses Microsoft Office software and Adobe pdf files, along with the forms, letters and templates in the RCCMS repository.

  4. Review staff:

    1. Receive case files electronically and use the system to review the case file to complete a quality review of the case within the system.

    2. Use RCCMS to capture their TEQMS results and update checksheets accordingly.

  5. Closing Unit employees also receive cases electronically through RCCMS. They review the case file and related documents and files, including the closing documents and process case closings accordingly.

  6. RCCMS is used to create appropriate ad-hoc or pre-formatted accomplishment reports. Management uses these reports to evaluate in-process and completed activities.

  7. To ensure that data is as accurate and up to date as possible, it is suggested that users maintain all in-process and completed workpapers in RCCMS and synchronize with the central database regularly. The synchronization serves as an automatic backup of stored data files in the central database server and protects data from unforeseen events (for example, hard drive failures).

  8. An RCCMS electronic case file should include all workpapers and pertinent source documents used to decide whether there are any issues or changes to discuss or resolve prior to closing the case.

Workpaper and Case File Documentation

  1. Workpapers developed by subject matter experts to establish the general scope and depth of examinations should be used if available. This section provides guidelines for developing or modifying workpapers to document TEB exams.

Purpose

  1. This section provides guidance on developing workpaper content, format, organization, and case file documentation. These guidelines are meant to promote quality and consistency in agents’ workpapers.

  2. Workpapers are the written records that provide the principal support for the agent’s determination. Workpapers document the scope, procedures applied, tests performed, information obtained, tax law considered and applied, and the conclusions reached in the examination. They should include or reference all the information that was necessary to conduct the examination and support the examination results. Well-prepared workpapers quickly communicate the case status. Poorly prepared and disorganized workpapers leave others uncertain as to the status of the case or the questions raised. Workpapers reflect on the quality of the examination.

  3. Workpapers serve four basic purposes:

    1. Assist in exam planning, including the analysis of internal and external documents and other sources of information, and setting the exam’s scope.

    2. Record and provide evidence of the documents and information secured and reviewed, audit procedures and tests performed, and analyses conducted during the examination process.

    3. Support technical conclusions.

    4. Provide the basis for review by management and others. They should tell the examination story and support the ultimate case disposition. Quality workpapers enable others to review the case file effectively. Occasions when others might review your file include:

      • Noncompliance is disputed and the case is submitted to the Office of Appeals.

      • Noncompliance is disputed and the case file is used to support a position in court.

      • Questions are raised requiring technical advice.

      • The case is selected for quality review.

      • The case is transferred to another agent.

      • The case is referred to Criminal Investigation.

Workpaper Preparation and Format

  1. Workpapers should be:

    • Clear, concise, legible, grammatically correct, organized, labeled, dated, indexed and cross-referenced.

    • Prepared contemporaneously with audit steps.

    • Completed in an electronic format when practical.

  2. Workpapers prepared electronically are generally prepared in Microsoft Word (Word), Excel, or Adobe.

    • Word is generally used when preparing workpapers that will mostly contain text.

    • Excel is used when preparing workpapers that include calculations.

    • Adobe is used when pro-forma forms are being used or when other electronic files are to be attached as a comment to the workpaper.

  3. To facilitate preparing electronic workpapers, ask that the taxpayer provide, whenever possible, all documents and information in electronic format. Taxpayer records commonly available in an electronic format are the Official Statement, Bond Transcript, trustee account statements, and rebate reports. Appropriate MITS procedures should be followed to scan any electronic data for viruses, prior to reviewing. You should submit a MITS help ticket to increase the allowable upload file size when the workpaper file cannot be loaded onto RCCMS due to file size limitations. Large PDF documents obtained from a taxpayer should be loaded under Case File Documents to keep from exceeding size limitations. Workpapers should be loaded under Office Documents.

  4. If possible, transfer documents to a digital format using a scanner, any key documents, or portions thereof, secured in a non-digital format that are vital to supporting examination conclusions.

  5. During the exam, electronic workpapers should be maintained on your computer’s hard drive. To minimize the risk of losing data, during the exam, workpapers should also be posted to the RCCMS case file as a back up procedure. As workpapers are completed, attach them as a comment to your workpaper summary file in RCCMS and the backup working file previously posted to the RCCMS case file may be removed.

Tax Exempt Bond Workpaper Summary

  1. The Tax Exempt Bond Workpaper Summary ("TWS" ) serves as the organizing case file document for TEB examination cases.

    1. The TWS is an Adobe portable document file (PDF) template used to organize electronic case file documents.

    2. You may attach electronic documents to the TWS file, such as Work Excel or other PDF files. Attach them by using a pushpin or paperclip icon.

    3. Using these icons on the TWS template allows electronic case file documents to be organized within five basic sections: Case Identification; Return Information; Case History; Examination Conclusion; and Examination Documentation.

    4. While the TWS and all attached files are organized into a single PDF electronic file, the individual documents and workpaper files retain their original file characteristics.

  2. The TWS is designed as a working tool for:

    1. Pre-examination planning

    2. Setting the scope of the exam

    3. Using as an audit plan during the examination.

    4. Presenting supporting workpaper materials in order.

  3. A single TWS may include 100 or more attached files including:

    • a PDF copy of the return

    • Form 2848

    • the Case Chronology Record

    • correspondence

    • Information Document Requests

    • closing letter

    • closing agreement

    • Form 5701-TEB

    • the proposed adverse letter

    • referrals

    • the examination workpapers describing: the exam scope, procedures, work performed, documentation obtained and conclusions reached.

Issue Lead Sheets and Content

  1. The TWS should include an "Issue Lead Sheet" with supporting papers that:

    1. Summarize the issue or compliance area being addressed.

    2. Explain the scope of the exam.

    3. Document the facts.

    4. Describe the procedures and audit techniques used.

    5. Reference the records and other information reviewed.

    6. Discuss the applicable law.

    7. Document conclusions reached.

  2. Include these elements in an Issue Lead Sheet:

    Issue Lead Sheet Element Description of Element
    Header Name of the issuer, name of the bond issue, the date the bonds were issued, the agent’s name or initials, and the date the workpapers were prepared.
    Issue Identification Question or compliance area being addressed. Include any pre-audit comments as to why the issue was selected, the audit plan development, and the depth of the examination related to that question.
    Facts Explain all facts relevant to the question or noncompliance.
    Procedures and Audit Techniques Procedures and audit techniques you used during the examination. A list of the source documents reviewed and other evidence and information gathered, and how the agent used them to develop the question or noncompliance. When a lead sheet has check boxes, checking these boxes is generally, by itself, inadequate supporting documentation.
    Applicable Law Law you relied on to resolve all questions (both accepted and otherwise).
    Taxpayer’s Position If a question is raised and the taxpayer disagrees with your determination, you should include the taxpayer’s position.
    Conclusion A conclusion summarizing the disposition of all questions.
    Indexing The workpaper number should correspond to the TWS section it supports unless the file has been attached as a comment in electronic format.
  3. Not all the TWS template exam sections will apply to all bond examinations. In some exams, the scope may be limited. The TWS contains fillable fields that may be used to indicate a section is not applicable or the scope has been limited.

Other Supporting Workpapers and Documents

  1. In addition to the Issue Lead Sheets, include other relevant supporting workpapers and documents in the case file. Workpapers and documents:

    1. Support the procedures and testing described or referenced on the Issue Lead Sheets.

    2. Should be filed behind the appropriate Issue Lead Sheet.

    3. Should be attached electronically to the appropriate TWS template section for supporting workpapers.

  2. These workpapers include documents you generated or secured from the issuer, conduit borrower or other third party, if they are relevant or add value to the case. Typical examples include:

    • Copies of relevant documents provided in responses to Information Document Requests (IDRs).

    • Workpapers documenting audit procedures and testing performed.

    • Arbitrage spreadsheets used for testing bond yield, investment yield and rebate calculations.

    • Expenditure lists and/or requisitions related to bond proceeds.

    • Documentation showing the allocation of bond proceeds.

    • Trustee account statements.

    • Agreements related to the investment of bond proceeds.

    • Contracts related to the construction or use of bond-financed facilities.

    • Documents such as floor plans, architect or engineering reports and project cost documentation related to exempt facility projects.

    • Tax depreciation schedules.

    • Tax law research supporting the legal authority for conclusions reached.

    • Appropriate IDRS research related to the issue under examination.

    • Internet research related to the issuer or conduit borrower.

    • Correspondence related to the examination.

  3. Use caution to include only pertinent information supporting the conclusions reached. Extraneous information not supporting the conclusions should not be included in the file. Extraneous documents the issuer or a third party provided should be returned when the exam is concluded.

  4. Your documentation on the Issue Lead Sheets should describe the question/noncompliance, facts, exam procedures, applicable tax law, application and analysis of law, and conclusions in a format that can be readily copied to a Form 886-A, Explanation of Items, when an issue warrants issuing Form 5701-B, Notice of Proposed Issue.

Case Chronology Records

  1. Use Form 5464, Case Chronology Record (CCR) to record actions taken on the case, contacts made, follow-up dates, and time expended. The form is a historical record and essential part of the exam case file. Update it when you act on the case.

  2. A clear, concise CCR is particularly important in sensitive or high-profile cases, and when the case involves uncooperative issuers or representatives, or will be the subject of litigation.

  3. The CCR should indicate a follow-up or response date when appropriate and any approved extensions with the new response date. If the taxpayer misses a deadline, document the CCR to indicate what follow-up actions you took to address the missed deadline.

  4. RCCMS has an automated version of Form 5464 embedded in the compliance activity information tabs of each electronic case. The RCCMS chronology:

    1. Allows you to create new chronology records for each activity, review existing activity records, establish follow-up dates, and print the record.

    2. Captures system activities, such as case establishment, transfers, status updates, and so forth.

    3. Provides easy access for managers, reviewers, and other users with access to the RCCMS case file to document their activities involving the case.

  5. Because the RCCMS chronology is a system feature, you are not required to post the file to the RCCMS Office Documents folder and check the electronic file out/in when you use it.

  6. The CCR should clearly reflect the status of the case. The time reflected in the chronology should agree with the time charged to the case on WebETS.

  7. The CCR should contain the following information:

    1. Date the agent receives the case.

    2. Any work performed before, during and after taxpayer contact.

    3. The date the case is put in status 12 on AIMS.

    4. Dates when IDRS and AIMS research are requested, received, and reviewed.

    5. Dates and explanations of conversations with the taxpayer's contact person(s) and/or representatives and their phone numbers.

    6. The date the opening letter, initial IDR, and other enclosures are mailed, and any subsequent IDRs.

    7. Appointments scheduled including the date, place, time and contacts. Dates of contacts with taxpayers, representatives, and third parties, whether in person or by phone.

    8. Receipt and processing date for Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization.

    9. Dates when examination-related correspondence is received from, or sent to, the issuer, any representative or other parties.

    10. Dates of work performed, time charges and follow-up dates.

    11. Description of audit work performed, including review of taxpayer’s records, research activities, facility tours or interviews, and other meetings.

    12. Deadlines, response dates and follow-up actions.

    13. Document issuer and/or representative delays or lack of cooperation.

    14. Document and explain any time periods when there was no examination activity for at least 30 days, or when there were other unusual delays in the examination. The reason for the delay should be explained, specifying whether the delay was caused by the taxpayer or the IRS.

    15. Document managerial involvement in the case.

    16. Actions taken with respect to the statute of limitations.

    17. Date the case was closed to the group manager and then closed by the group manager.

Workpapers: Disclosure

  1. Safeguard confidential information related to the case file from unauthorized disclosure. If you determine that information contained in a file is sensitive, place it in a confidential envelope inside the case file. If a Freedom of Information Act (FOIA) request is received on a case that contains sensitive information, a Disclosure Officer will determine if any information should be redacted. See IRM 11.3.13.7, Disclosure of Official Information, Freedom of Information Act, Review and Redacting, for additional information.

  2. When a case file contains sensitive or confidential information, it will normally be in a paper format. If you receive the documents electronically, do not place them into RCCMS or keep them in the same folders in your hard drive.

    Example:

    Whistleblower claims and fraud referrals

  3. Protect these documents from disclosure. Place Document TD-F15-05.11 on the outside of the case jacket. This will alert users that the file contains sensitive information requiring protection.

Resolution of Noncompliance

  1. During an exam, it might be determined that the bonds are not in compliance with applicable tax laws. When this occurs, try to resolve the issue.

Communicating Identified Noncompliance

  1. When you identify potential noncompliance, discuss it with the taxpayer or the taxpayer’s representative as soon as possible. Discussing potential noncompliance can lead to an early resolution of the case.

  2. If the taxpayer concurs with your position on the identified noncompliance, notify your manager and determine an appropriate resolution.

  3. Depending on the violation, the appropriate resolution may require you to:

    1. Secure and process a delinquent or amended return.

    2. Assess penalties.

    3. Issue a written advisory.

    4. Enter into a closing agreement which may require full or partial redemption of the bonds and a closing agreement payment. If a closing agreement is appropriate, initiate the closing agreement per IRM 4.81.6, Tax Exempt Bonds, Closing Agreements.

    5. Adjust related income tax returns.

    s

  4. If the taxpayer doesn’t agree, discuss the noncompliance with your manager. With your manager’s concurrence, give the taxpayer or the taxpayer’s representative a written summary of potential noncompliance on Form 5701-B, Notice of Proposed Issue. The Form 5701-B should include the issues, facts, law, and agent’s position. The taxpayer has 30 days to respond to the Form 5701-B. If the taxpayer does not respond, proceed as if the taxpayer does not concur with your conclusions.

  5. If at any time the taxpayer requests technical advice on potential noncompliance, follow the appropriate revenue procedure, which is updated annually as the second revenue procedure of the year. See IRM 4.80.1, Indian Tribal Governments (ITG) and Tax Exempt Bonds (TEB) Examination Program and Procedures, Technical Assistance and Technical Advice Requests, for additional procedures.

  6. The agent or manager should not initiate closing agreement discussions with an issuer/POA. Closing agreement discussions are initiated solely at the request of the issuer/POA. It is permissible to inform an issuer or POA that closing agreements may be used to resolve tax matters.

No Change Examinations

  1. As a result of the examination, you may conclude that the bonds are in compliance. Obtain your manager’s concurrence with this conclusion.

  2. Prepare the closing letter (Letter 4411, No Change Letter), close the case in accordance with IRM 4.81.5.19.1 and forward it to the manager.

  3. The manager reviews the case file and issues the closing letter. She/he documents these actions won the Case Chronology Record.

  4. Close exams when you issue Letter 4411 with the appropriate RCCMS disposal code (107 - No Change).

Examinations Resulting in the Issuance of an Advisory

  1. You may conclude from the examination that the bonds are currently in compliance. However, you may identify potential future noncompliance.

  2. Examples of potential noncompliance are:

    1. You currently determine that a facility financed with a governmental bond has private use in excess of the permissible amount. If the level of private use continues throughout the remainder of the measurement period, the bonds will be private activity bonds. However, the taxpayer expects the percentage of private use during that period to reduce, or blend down, to a permissible amount because of more qualified use. Use Letter Form 4410, No Change Advisory Letter, to advise the issuer that a failure to blend down future private use might cause the bonds to lose their tax-advantaged status.

    2. You determine the bonds do not qualify for any spending exceptions and there is a potential rebate liability. However, the first computation date for computing the rebate liability has not occurred. Use Letter 4410 to advise the issuer that it does not qualify for any spending exceptions and, therefore, might have a future rebate liability.

  3. Discuss future noncompliance with the manager to determine whether a referral or information notice for a future year examination should be recommended. If so, prepare and forward the referral Form 5666, TE/GE Referral/information Report, requesting a subsequent examination to:

    Internal Revenue Service

    ATTN” Referrals Group Manager, MS 4910 DAL

    1100 Commerce Street

    Dallas, TX 75242-1027

  4. Prepare Letter 4410 with the appropriate advisory language for review and issuance by the manager.

  5. Close exams with the Letter 4410 using the RCCMS disposal code 213 if a referral was warranted or disposal code 216 if no referral is warranted.

Rebate or Yield Reduction Payment Due

  1. If you identify a failure to pay rebate or a yield reduction payment, then the bonds are arbitrage bonds under IRC 148. However, it might be appropriate to resolve the noncompliance by securing delinquent or amended Form 8038-Ts. If so, solicit the returns, place the returns under examination through RCCMS and assert the appropriate penalties. See IRM 4.81.5.17 for instructions on processing these returns.

Annual Certification of a Residential Rental Project (Form 8703)

  1. If you determine that the operator of a facility failed to file the Form 8703, Annual Certification of a Residential Rental Project, when required, solicit the certification for the delinquent periods and forward the delinquent forms for processing IRM 4.81.5.17.1, Procedures for Processing Delinquent Returns. Consider assessing the penalty provided under IRC 6652(j). Discuss assertion of appropriate penalties with your manager before proposing any penalty to the operator of a facility. See the penalty handbook, IRM 20.1.10.

Closing Agreement

  1. If the issuer agrees with the proposed resolution of noncompliance determined during the exam, then with your manager’s agreement, begin the closing agreement process outlined in IRM 4.81.6.

Unagreed Potential Noncompliance

  1. If the identified noncompliance determined during the examination is unresolved, with your manager’s concurrence, follow the procedures for unagreed issues in IRM 4.81.14.

Fraud and IRC 6700 Procedures

  1. In every exam, consider whether there are elements of fraud or whether the imposition of the 6700 penalty is warranted.

Fraud Procedures

  1. IRM 25.1, Fraud Handbook, contains specific guidance on all aspects of both criminal and civil fraud. IRM 25.1.9.7 provides guidance and specific procedures for developing fraud related to a tax-exempt bond examination.

  2. Fraud activities generally arise from examinations and requests from Criminal Investigation (CI) for cooperating agents. Requests for a cooperating agent are generally submitted via Form 6544 The TE/GE Fraud Specialist processed these requests.

    • An examination-driven fraud case occurs when an agent identifies indications of fraud during an examination and pursues a criminal referral or a civil fraud penalty.

    • CI may request an agent’s technical assistance with a criminal investigation that is related to an exam referral or they may ask for assistance with an investigation that is unrelated to an examination or exam referral.

  3. There are different types of criminal investigations:

    1. Administrative Investigations:

      • Administrative investigations are non-grand jury criminal investigations. CI investigations initiated from exam referrals often begin as administrative investigations. CI also initiates administrative investigations unrelated to an exam referral.

      • Once CI notifies TE/GE that there is an administrative investigation, CI may request an administrative cooperating agent. Once notification of the investigation is received from CI, the exam group must suspend examination activity on the related cases. The group retains examination jurisdiction but cannot contact the taxpayer or representative and remains responsible for the civil statutes of limitation.

      • The cooperating agent cannot issue a statute extension or statutory notice of deficiency to protect the statute unless CI has approved the action on a Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute.

      • The cooperating agent cannot expand the years of the examination unless CI approves the action on a Form 10498-A, Joint Investigations Intent to Commence Civil Action.

      • Consult with the TE/GE Fraud Specialist before soliciting CI’s approval to issue a statute extension or statutory notice of deficiency and before soliciting CI’s approval to open additional examinations.

      • Typically, if the criminal investigation is the result of an exam referral, the agent has AIMS controls for the returns that gave rise to the fraud referral. After CI forwards its administrative investigation for prosecution approval, the compliance function loses its examination jurisdiction and all related civil examinations must be promptly closed to TE/GE Fraud Suspense. Consult with the TE/GE Fraud Specialist or TE/GE Fraud Suspense Coordinator for procedures to close the case to fraud suspense.

    2. Grand Jury Investigations:

      • CI investigations initiated from exam referrals often begin as administrative investigations but become grand jury investigations. An agent may be asked to assist with a grand jury investigation that arose from an exam referral or with a grand jury investigation that is unrelated to an examination.

      • Because of confidentiality requirements for grand jury material, a cooperating agent must be approved to become a grand jury cooperating agent.

      • Once a grand jury has been approved for a criminal investigation, the Compliance function loses its examination jurisdiction and all related civil examinations must be promptly closed to TE/GE Fraud Suspense. Consult with the TE/GE Fraud Specialist or TE/GE Fraud Suspense Coordinator about how to close the case to fraud suspense.

      • The grand jury cooperating agent must not continue to work or be assigned any civil examinations related to the grand jury matter.

      • The grand jury cooperating agents must not control any related civil returns on AIMS.

    3. Other CI investigations:

      • These include assignments to assist as an expert witness or with a Joint Terrorism Task Force case.

    4. If the criminal investigation involves Title 26 matters, CI will usually place TC 914 controls or "-Z" freezes on the Master File modules.

  4. If you identify indications of potential fraud in an examination, you will work with your group manager, the TE/GE Fraud Specialist, the TEB Fraud Subject Matter Expert, and the SBSE Fraud Technical Advisor to develop the potential fraud issue. If warranted, prepare and submit a criminal referral to CI.

    Note:

    Fraud cases are priority cases.

  5. If you identify indications of potential fraud in an examination, discuss the indications with your manager and the TE/GE Fraud Specialist. When it is determined by all parties that the fraud issue should be developed, you should prepare a Form 11661, Fraud Development Recommendation – Examination, for review by the SB/SE Fraud Technical Advisor. Once the Form 11661 is approved, the case becomes a fraud case and you must update the case to status 17 (fraud development). A case moves into status 18 (accepted by Criminal Investigation) only after a Form 2797, Referral Report of Potential Criminal Fraud Cases, is prepared, approved, and accepted by CI.

  6. Use Activity code 155, Fraud/Fraud Related Activities, for all TE/GE fraud cases and fraud-related activities, along with appropriate project codes. This activity code is used for approved fraud development of exam cases and assistance to CI. The TE/GE Fraud Specialist issues a naming convention code when an exam case is approved to move into status 17 or when a cooperating agent is assigned.

    1. Obtain a naming convention code from the TE/GE Fraud Specialist.

      • Examination-Developed Cases: When a return is placed in AIMS status 17 (civil or criminal fraud development) or status 18 (accepted by Criminal Investigation), contact the TE/GE Fraud Specialist and obtain a naming convention code for the fraud case if you haven’t previously received a code. If more than one taxpayer is involved in a fraud case, a single naming convention code is assigned for the entire package of related exams. Use the naming convention code for time charges by the cooperating agent and the group manager.

      • Non-Examination Developed Cases - Once a case is assigned in response to Form 6544, the TE/GE Fraud Specialist issues a naming convention code that is used for time charges by the cooperating agent and group manager.

    2. Do not use taxpayer names on WebETS for fraud cases. Instead, use the naming convention code provided to you by the TE/GE Fraud Specialist consisting of the following:

      Part # Brief Description Example, if applicable
      Part 1 FRD This notifies us that it is a fraud case.
      Part II function specific TEB, EPE, EOE, GEE, ITG
      Part III naming convention code (assigned by TE/GE Fraud Specialist)  
      Part IV Identifier
      • GJ (Grand Jury)

      • JTTF (Joint Terrorism Task Force)

      • CA (Cooperating Agent)

      • EW (Expert Witness)

      Part V Identifier for ease of tracking State or location
    3. Add a new case in WebETS for each naming convention code received from the TE/GE Fraud Specialist:

      • Case Type: Operational

      • Activity: Case identifier using the naming convention code described above

      • Activity Code: Select "155"

      • Project Code: Select the appropriate project code from the drop-down menu.

    4. Record all time related to fraud development/activities on the new line item. If the exam case was controlled with time charged prior to when the case moved into a fraud status code, keep the case on WebETS as a separate exam case or return(s) until the return(s) are closed. Keep the original case or returns on WebETS without additional time charges. Charge your new time to the naming convention code line item.

  7. The agent should keep the manager and TE/GE Fraud Specialist apprised of the following:

    1. The progress of the development of the potential fraud issues.

    2. Identification of firm indicators of fraud.

    3. Expansion of the examination to additional entities or statute concerns while the criminal investigation is still an administrative investigation. No additional exams can be opened once the criminal case has been approved for a grand jury.

    4. Approval of a grand jury for an administrative investigation.

    5. Final outcome of the criminal investigation related to a cooperating agent assignment.

    6. Any other status changes regarding fraud or fraud related cases.

  8. The group manager:

    1. Advises the TE/GE Fraud Specialist of any Forms 6544 received and forwards a copy of the unapproved form for processing. The manager also ensures that the TE/GE Fraud Specialist receives a copy of the final TEB-approved form that includes the assigned agent information.

    2. Keeps the TE/GE Fraud Specialist apprised of any status changes regarding any fraud or fraud-related cases.

IRC 6700 Penalty Procedures

  1. When you become aware that one or more of the individuals involved in the TEB transaction may be subject to the promoter penalty described in IRC 6700, consult with your manager to determine if the IRC 6700 penalty referral should be made to the Lead Development Coordinator (LDC). Notify the TE/GE Fraud Specialist if the IRC 6700 issue will be developed. The TE/GE Fraud Specialist is TE/GE’s liaison with the LDC and Office of Tax Shelter Analysis (OTSA).

  2. Refer to IRM 20.1, Penalty Handbook and specifically to IRM 20.1.6.13, Penalty for Promoting Abusive Tax Shelters - IRC 6700, for guidance on developing IRC 6700 penalties.

  3. If it is determined that a IRC 6700 penalty referral should be made, consult:

    • IRM 4.32, Abusive Transactions, regarding referring and conducting approved IRC 6700 penalty examinations

    • IRM 4.70.3, TE/GE Examinations, Promoter Investigations, which provides guidance to TE/GE employees investigating promoters.

  4. Complete Form 14242, Report Suspected Abusive Tax Promotions for Preparers, and submit to the LDC and the Fraud Specialist.

Technical Assistance Requests

  1. ITG/TEB recognizes the benefits to its examination program in resolving issues early in the exam process and sharing emerging issues with others in ITG/TEB. ITG/TEB supports knowledge-sharing through its various training opportunities.

    • Other agents

    • Designated rebate computation specialists

    • Group managers

    • Tax Law Specialists (TLSs)

    • ITG/TEB’s Knowledge Management Team (K-Net)

  2. See IRM 4.80.1, ITG and TEB Examination Program and Procedures, Technical Assistance and Technical Advice Requests, for information pertaining to requests for technical assistance.

Referrals for Specialists

  1. Specialists are available to help develop and resolve significant complex tax issues. Refer to a specialist as soon as you need help.

  2. When determining whether a referral is appropriate, the group manager may direct questions to the specialized program group manager.

  3. You may ask for Informal advice when questions don’t appear to warrant a referral but you need help.

Specialist Referral System (SRS) – Online Referrals

  1. 1) Request specialist assistance, including questions and informal requests, through the Specialist Referral System (SRS) unless you cannot access the specialist group through that system. See Manual Referrals below.

  2. The SRS is an on-line automated system that allows agents to submit a request for specialist assistance. It automates the referral request process for LB&I, SB/SE, W&I and TE/GE field specialists. Access it from the Intranet at https://srs.web.irs.gov/.

  3. Use the SRS for referrals (including questions and informal requests for assistance) to the following specialist groups:

    1. Computer Audit Specialists (CAS). See IRM 4.47, Computer Audit Specialists.

    2. Economists. See IRM 4.49, Overview - Economist Program.

    3. Employee Plan Specialists. See IRM 4.71, Employee Plans Examination of Returns.

    4. Employment Tax Specialists (LB&I, SB/SE, and TE/GE). See IRM 4.23, Employment Tax.

    5. Engineers. See IRM 4.48, Engineering Program Handbooks.

    6. Excise Tax Specialists. See IRM 4.24, Excise Tax.

    7. Exempt Organizations Specialists. See IRM 4.75, Exempt Organizations Examination Procedures.

    8. Federal, State, and Local Government Specialists. See IRM 4.90, Federal, State and Local Governments.

    9. Financial Products and Transactions Specialists. See IRM 4.37, Financial Products and Transactions Program.

    10. Indian Tribal Government Specialists. See IRM 4.86, Indian Tribal Governments Administrative Guidance.

    11. International Examiners. See IRM 4.60.6, International Referral Criteria and Procedures.

  4. When you submit an online request, SRS automatically notifies the specialist’s manager. The system is electronic and web-enabled to provide management with necessary information reports.

  5. Use a manual request only when you cannot access a specialist group through SRS. See IRM 4.81.5.15.2.

  6. The SRS maintains an archive of all referrals.

Manual Referrals

  1. Make a manual referral to request specialist services or other support not available via SRS.

Specialist’s Role in Examination

  1. When a specialist is involved in a case, the agent maintains control of the examined return.

  2. Specialists assigned to exams should meet with the agent and the taxpayer (if appropriate) to discuss:

    1. The issues that the specialist is considering

    2. Information required

    3. Estimate of when the specialist's report is expected to be completed

  3. Coordinating with the specialist ensures issues are material to the return and the time charged is commensurate with the issues.

  4. Elevate disagreements between the agent and specialist to their respective managers for resolution.

Subsequent Referrals

  1. You may refer cases not originally accepted for specialist’s assistance again if substantial information is developed during the exam. If the case was rejected due to workload priorities, a specialist may be made available to consult for significant issues. For those specialist groups available through SRS, submit informal questions using SRS. For specialist groups not available through SRS, arrange for consultations with the approval of both managers.

LB&I Practice Networks

  1. LB&I Practice Networks (PNs) are part of LB&I’s knowledge management process. Each PN consists of teams of Subject Matter Experts (SMEs) who share knowledge, develop and maintain technical expertise and enhance collaboration on specific issue areas. PNs are a resource available to TEB agents through the LB&I K-Net and may be helpful in the development of their case.

  2. PNs provide:

    1. a vehicle to coordinate technical issues for LB&I and other operating divisions.

    2. a network for sharing knowledge and collaboration.

    3. help with development and resolution of tax issues.

  3. LB&I has established 15 different PNs that are organized by practice areas and can be focused on a technical issue or procedural issues.

    Practice Network Practice Area/Section
    Inventory & 263A ENT Corp/Credits
    Compensation & Benefits ENT Corp/Credits
    Corporate Income & Losses ENT Corp/Credits
    Deductible & Capital Expenditures ENT Corp/Credits
    Energy & Investment Tax Credits ENT Corp/Credits
    Financial Instruments ENT/Financial Institutions & Products
    General Business Credits ENT Corp/Credits
    RICs, REITs,, REMICs & Banking ENT/Financial Institutions & Products
    Corporate Distributions & Adjustments ENT Corp/Credits
    Life Insurance EN /Financial Institutions & Products
    Methods of Accounting & Timing ENT Corp/Credits
    Non-Life Insurance ENT/Financial Institutions & Products
    Partnerships & TEFRA PTE/Pass Through Entities
    Penalties ENT Corp/Credits
    S Corporations & Cooperatives PTE/Pass Through Entities
  4. The PNs provide resources for agents on complex tax issues and develop resources to enable agents to address issues.

    Example:

    An agent investigating the capital expenditure limitation associated with a qualified small-issue bond has a question concerning expenditures associated with a large repair that the issuer has treated as a period expense instead of a capitalized item. The Deductible & Capital Expenditure PN should be considered a resource option for providing guidance in resolving questions concerning capitalized expenditures.

Suspense Procedures

  1. There are situations in which a case should be placed in a suspense status to remove it from cycle time. Generally, cases are placed in suspense when a significant delay is expected due to actions over which ITG/TEB has no control. For example, when the case is held pending formal or informal guidance (in other words, regulations or a technical advice memorandum), examinations interrupted by federally declared disasters, or when the taxpayer needs significant time to respond and it is in the IRS’ best interest to provide that time.

    Note:

    While requests for assistance within ITG/TEB are not likely to be a reason to suspend a case, there may be instances when suspense is appropriate.

Procedures Required Prior to Placing a Case in Suspense

  1. When a situation arises that may delay completion of an examination, the agent is to complete the exam with regard to all other issues and required actions that can be continued prior to placing the case in suspense. In considering which issues can be continued, the agent should watch for actions that could violate a federally declared disaster relief provision.

  2. Before placing any case in suspense, notify the group manager via email. Describe the circumstances that requiring that the exam be suspended and describe the open items remaining in the case.

  3. When the group manager concurs with an agent’s request to place the case in suspense, the agent’s request as well as any manager-initiated requests will be submitted to the FOM for approval. Upon approval, the group manager will notify the agent to suspend examination activity on the case.

  4. Send Letter 4563, Suspense Letter, notifying the issuer that the case was placed in suspense and that you will make contact as needed or when you resume case activity.

  5. Update the case to reflect the appropriate suspense status on RCCMS and AIMS.

  6. Suspended cases are maintained at the group level and monitored by the group manager.

  7. When the matter is resolved, update the case via RCCMS and AIMS to reflect that the exam is no longer in suspense (in other words, status code 12 to continue exam activity).

  8. Prior to closing cases that were previously suspended, make a notation indicating the case was previously in suspense. (Notate RCCMS electronic and any paper files.) When submitting the case in RCCMS to the group manager for closing, provide comments in the RCCMS dialogue box indicating the case was previously in suspense.

  9. Upon closure, the manager notes the prior suspense status, including notations in the RCCMS dialogue box. This alerts the closing unit that the case was previously in suspense. Upon transfer from the group to the closing unit, update the case to status 55.

Secured Delinquent and Late Filed Returns and Forms

  1. During the course of an examination, an agent may secure a delinquent or late filed return or form, including forms from the Form 8038 series and Form 8703 (a "Delinquent Return" ). Processing secured Delinquent Returns in accordance with the applicable procedures helps to ensure the accuracy of reported exam results.

Procedures for Processing Delinquent Returns

  1. Process secured Delinquent Returns using the procedures in this section.:

    Obtain BMFOLI for the taxpayer identification number and the tax period to which the secured Delinquent Return relates. Delinquent Returns can include:

  2. Obtain BMFOLI for the taxpayer identification number (TIN) and the tax period to which the secured Delinquent Return relates. Delinquent Returns can include:

    MFT RETURN or FORM
    46 Form 8038, Information Return for Tax Exempt Private Activity Bond Issues


     
    46 Form 8038-G, Information Return for Tax Exempt Governmental Obligations
    46 Form 8038-GC, Information Return for Small Tax Exempt Governmental Bond Issues, Leases, and Installment Sales
    46 Form 8038-R, Request for Recovery of Overpayments Under Arbitrage Rebate Provisions
    46 Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage
    46 Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds
    46 Form 8703, Annual Certification of a Residential Rental Project
    85 Form 8038-B, Information Return for Build America Bonds and Recovery Zone Economic Development Bonds
    86 Form 8038-TC, Information Return for Tax Credit and Specified Tax Credit Bonds
  3. Select a report number to use to process a Delinquent Return. The report number should be a three- digit number within the appropriate range (see IRM 3.11.26.2.1(2) for an explanation of the report numbering system) which has not already been used for the applicable tax period. Review BMFOLI and verify that the report number selected does not duplicate any account module listed on the Master File for such period.

    Note:

    Form 8038-T is filed using the same tax period as the bond issuance to which it relates.

  4. Complete these procedures for processing of the Delinquent Return:

    1. Verify the return is complete.

    2. Date stamp the return indicating the received date.

    3. Underline in red the four letters in the name block representing the Name Control on IDRS.

    4. Write in red on the top margin of the secured return "DELINQUENT RETURN SECURED BY TE/GE" .

    5. Write in red, in the report number box, the number selected based on IDRS research.

  5. Prepare Form 3210 to accompany the Delinquent Return package to the Service Center. Include information on the Form 3210, Document Transmittal, to alert the Service Center of the submission of an original return and payment, if any. Include the taxpayer’s name, EIN, tax form, MFT, tax period, and for submissions with payment, the amount of the payment, check number and any required Form 3244-A on Form 3210. Include the originator’s complete name, address, and mail stop to ensure timely acknowledgement of the Form 3210.

  6. Include all required documents relating to each Delinquent Return. Multiple Delinquent Returns may be submitted on the same Form 3210. Include these items in the package, in the order listed:

    • Form 3210, Document Transmittal.

    • Original check, if applicable.

    • Form 3244-A, if applicable.

    • Original delinquent return.

      Note:

      You don’t have to prepare Form 3244-A when the payment and return are sent together to Ogden Campus for processing. Anytime you send a payment without a return, you must prepare Form 3244-A, using normal payment processing procedures.

  7. For large payments of $100,000 or more, mail the Delinquent Return package overnight to:

    Internal Revenue Service
    Attention: Field Office Remittance Liaison
    Stop 2003 - Ogden Submission Processing
    1973 North Rulon White Blvd
    Ogden, UT 84404

  8. An e-mail notification is required when submitting payments of $100,000 or more. Notify the teller unit at: ODN OGDEN TELLERS and include the following information in the e-mail:

    • Mailing date of payment.

    • Name and address of submitter.

    • Amount of each check.

    • UPS tracking number for the large remittance.

  9. For payments less than $100,000, the Delinquent Return package is to be mailed overnight to:

    Internal Revenue Service
    Attention: Field Office Remittance Liaison
    Stop 1999 - Ogden Submission Processing
    1973 North Rulon White Blvd
    Ogden, UT 84404
    Phone number: (801) 620-3972

  10. When there is no remittance with the submission, the Delinquent Return package should be mailed to:

    Internal Revenue Service
    Attention: Mail Room Supervisor
    Stop 6061 - Ogden Submission Processing
    1973 North Rulon White Blvd
    Ogden, UT 84404
    Phone number: (801) 620-3738

  11. The payment threshold is determined for each individual return submitted and not collectively.

  12. Follow-up on any Form 3210 not acknowledged within 10 days of submission. Fax the Service Center to request acknowledgement of the submission and provide a copy of each transmittal requiring acknowledgement. See IRM 5.1.2.4.5.1. Fax requests to (855) 318-9148, ATTN: Field Office Clerks.

  13. Late filing and other errors involving Form 8328 cannot be corrected through a late or amended filing. Determine whether a closing agreement or adverse determination is appropriate.

Monitoring Posting

  1. The exam group monitors the Master File to ensure the payment (evidenced by a transaction code (TC) 610) and the assessment (TC 150) post to the same module.

    1. These postings typically occur within six to eight weeks.

    2. Ensure that the related payment and assessment are posted to the correct report number.

    3. If the TC 610 and TC 150 do not post to the same report number, the payment must be transferred to the TC report number.

    4. To execute this transfer, submit a request to the designated analyst and provide the following information:

    • Employer Identification Number (EIN)

    • Tax Period

    • Report number to which the payment posted

    • Report number to which the return assessment posted

    • The date the return was received

    • The amount of the payment

Establishment on RCCMS and AIMS

  1. The assigned agent is responsible for establishing the delinquent return on AIMS through RCCMS, whether the filing of the delinquent return occurs per the procedures of IRM 4.81.5.17 (the original filing secured by the agent) or the issuer’s direct filing with the Service Center as a result of the exam. Following the TC 150 posting, information necessary to establish the delinquent return on RCCMS is available and the case should be established in status 12. After establishing the case on RCCMS and AIMS, request closure of the case using disposal code 208, Delinquent Return Secured.

  2. When an issuer files a delinquent return, whether under the procedures of IRM 4.81.5.17.1 or directly with the Service Center, consider applying penalties under IRC 148(f)(7).

Request for Waiver of Penalty on Failure to Pay Rebate on Time

  1. If a delinquent Form 8038-T includes a request for the waiver of penalty under Reg. 1.148-3(h)(3), the agent securing the return must make an appropriate determination.

    1. If the bonds to which the delinquent Form 8038-T pertains are currently under examination, the penalty will only be waived in unusual circumstances.

    2. Send Form Letter 4561, Penalty Waiver, under the signature of the Field Operations Manager, ITG/TEB to inform the issuer of the denial of the waiver request.

    3. Issuers are not entitled to appeal a denial of the request for a waiver.

  2. For cases in which the agent proposes to waive all or a part of the penalty in lieu of loss of tax exemption, submit the recommendation through the group manager and outline the basis for the proposed waiver.

    The case file will be documented to support the penalty treatment determined.

  3. If all penalty amounts required under the provisions of IRC 148 (f)(7) and the applicable regulations thereunder were not paid at the time the delinquent return was secured, and no administrative relief is otherwise provided, the issuer must pay the required amounts or you should proceed with proposing that the bonds are arbitrage bonds.

Resequencing Non-Established Returns - Background

  1. During an exam, you may determine that the EIN or name associated with the examined return is incorrect on the Master File. If this happens, the return must be resequenced to correct the erroneous information.

Resequencing - Procedures

  1. When you determine that a return must be resequenced to correct erroneous Master File information for an examined return, notify appropriate tax analyst via the group manager. The agent and the tax analyst will take the following steps:

    1. Close the original case Survey after Assignment, Disposal Code 908, and document the case chronology explaining the reason for the closure. The group manager notes approval for the closure on the CCR, updates the case to Status 51, and transfers it to the GE Closing Unit via RCCMS.

    2. Send an INOLE print with the correct EIN and the return to the tax analyst. The return will then be sent to Ogden Service Center to be re-sequenced, which generally requires four to eight weeks to process. The tax analyst monitors the status of the return.

    3. Once the return has been resequenced, the tax analyst establishes the case on RCCMS and AIMS. After it’s established, the tax analyst assigns the return to the appropriate group with an update to status 10.

    4. When assigned, update the case to Status 12. When you complete the exam, close the case per IRM 4.81.5.19.

Case Closing Procedures

  1. Agents and managers are responsible for ensuring that case closing procedures are completed.

Case Closing Procedures for Agents

  1. When you complete the exam:

    1. Prepare the closing letter conforming to the conclusions reached during the exam and any necessary transmittal letters to the designated representatives.

    2. Upon your manager notifies you that the case is closed, identify and return to the issuer appropriate documents received in response to IDRs that are not necessary to support audit conclusions.

    3. Properly assemble the exam case file. (See IRM 4.81.5.20.)

    4. Correctly completing closing tabs on RCCMS.

    5. Verify that workpapers that support the conclusions reached are properly organized or indexed per IRM 4.81.5.20. Include and organize any workpapers and other case file documents that cannot be included in the RCCMS electronic case file due to system size limits with the paper files referenced in the electronic case file.

    6. Ensure that all electronic workpapers are checked in on RCCMS.

    7. Prepare Form 3210, Document Transmittal, for any case in which there is an associated paper file.

      Note:

      Form 3210 is no longer required for cases that are determined to be paperless. The terms "paperless" , "100 percent paperless" , "100 percent electronic" and "totally electronic" are synonymous.

      Note:

      You may use the following paper documents with a 100 percent electronic case without affecting its status as an electronic case.
      • Form 2848, Power of Attorney and Declaration of Representative.
      • Form 8821, Tax Information Authorization.
      • Form 56, Notice Concerning Fiduciary Relationship.
      • Executed statute extension on Form 872 series or Form 22-10 Consent to Extend the Time to Assess Employment Taxes.
      • Closing agreements.
      • Any correspondence from a taxpayer signed under penalties of perjury.

       

      Field groups will notify the closing group that the case is a 100 percent electronic case, by:

      • Clicking on the “Electronic Indicator” box.

      • Including in the RCCMS comment section: 100 percent Paperless Case, Short Statute and SOL date, if applicable.

      • Forms 2848, 8821, 56, 872, SS-10, and/or closing agreements sent by UPS Services.

  2. Unagreed exam with protest to Appeals:

    1. The TE/GE Closing Unit will not accept any protested case to Appeals with less than 425 days remaining on the statute (330 days for cases previously returned to the group by Appeals).

    2. The field group manager will:

      1. Review the case for accuracy and completeness.

      2. Confirm that the case file contains Letter 4413, Notice of Proposed Adverse Determination, valid protest, Letter 5918, Protest Received Rebuttal/ Transfer to Appeals, and printed copies of all electronic RCCMS case documents in the Office Documents Folder. If a rebuttal was not prepared, the Case Chronology Record should explain the reasons.

      3. Ensure that a Form 3198-A, TE/GE Special Handling Notice, has the check box “Forward to Appeals” selected.

      4. Notify the ITG/TEB Technical II Manager that the case requires review.

      5. On RCCMS, update the status to 20 and transfer the case to Technical Group II (440-20011-7271) with disposal code 601.

      6. Ship the paper file via Form 3210 to the reviewer identified by the ITG/TEB Technical II Manager.

    3. Request timely closure through RCCMS and immediately mail any paper case file to the manager using Form 3210, Document Transmittal.

Case Closing Procedures for Managers

  1. Group managers must:

    1. Timely review the case file for concurrence with the conclusions reached and procedural accuracy.

    2. Promptly return the case to the agent if, upon review of the case file, the manager determines that additional audit or procedural work must be completed.

    3. See that the appropriate closing letters are mailed to the issuers and any designated representatives.

    4. Update the case file to reflect the date when the closing letters were mailed.

    5. Notify the agent that the manager has concluded the case review so the agent can return records to the issuer or conduit borrower.

    6. Mail any paper file to the GE Closing Unit.

Case File Assembly

  1. Because further technical, administrative and procedural action is sometimes required on a case after you close it, it’s important that the case file be properly organized.

  2. Proper assembly of the examination case file is the responsibility of the agent.

  3. Assemble the workpapers using the workpaper summary or other formats that your manager approves. Post documents not attached to Adobe workpaper documents as comments (commonly referred to as the push pin method) should be posted to the Office Documents folder of the RCCMS case file using the appropriate naming conventions.

  4. If the agent closes a case containing a paper case file, she or he should use the procedures outlined in IRM 4.81.5.20.1 for case file assembly and closing.

Paper Case File Assembly

  1. A paper case file is required for those documents that cannot be included in the RCCMS case file or are otherwise required by management directive.

  2. Identify the paper case file folder must be identified with the taxpayer name, TIN, MFT, tax period, and report number on the folder tab.

  3. Staple Form 3198-A, Special Handling Notice, to the outside front of all paper case files. On the Form 3198-A should identify the taxpayer’s name, tax period, and any special handling instruction. The Form 3198-A should also note the date the RCCMS case was closed to the agent’s manager.

  4. Enclose confidential informant documents in a confidential envelope, and put the Sensitive But Unclassified (SBU) Cover Sheet, Catalog Number 56033J, on the outside of the envelope. Attach the envelope to the inside left of the paper case file. Confidential informant documents include:

    • Form 211, Application for Reward for Original Information

    • Form 11369, Confidential Report on Claims for Reward

    • Form 3949, Information Report Referral

  5. All paper workpapers that are not in electronic format should be numbered and referenced to correspond with the workpapers in the related electronic case file.

  6. Agents and managers: ensure that you close the case to comply with any applicable closing procedures of IRM 25.2, Information and Whistleblower Awards.

Paper Case File Assembly for Unagreed Cases

  1. The Office of Appeals requires a hardcopy file for cases transferred to that office. For the Appeals case file, follow the procedures in IRM 4.81.5.20.1 above and include the following:

    1. a) A separate folder containing a copy of the return, authorizations (Form 2848 and/or Form 8821) and statute extensions.

    2. A separate folder containing the following:

      1. Proposed adverse letter (loose)

      2. The issuer’s protest (loose)

      3. The rebuttal to the protest w/ copy of the transmittal letter to the issuer (indicating the rebuttal has been shared with the issuer (loose)).

      4. Printed copy of all electronic RCCMS case file Office Documents Folder including the workpaper summary and all files attached as comments (bound to right side of case folder)

      5. All documents described in IRM 4.81.5.20.1 (4) and IRM 4.81.5.20.1 (5) (bound to the right side of case folder).

  2. Send the exam case file (the return folder and workpaper folder) to the Office of Appeals per instructions in IRM 4.81.14, Unagreed Cases.