Overall composition of the return. Is the return complete, containing all necessary information and schedules? Who prepared the return?

Data reported on the return compared to the norms and standards of the business or industry of the taxpayer.

Location of the business. This could have a bearing on the volume of business.

Prior examination results as indicated on Form 5546 (Examination Return Charge-Out).

The existence of controlled groups, interests in foreign corporations, deductions for facilities, or convention expenses.

Experience has shown that the following characteristics result in potentially productive features: International features; Copy of a National Office approved Technical Ruling attached, but all conditions as set forth in the Ruling have not been met; New corporation, which incorporated a going business and reflects goodwill, other boot, or accelerated depreciation; Liquidation under IRC 331, 332, 333, or 337 (these generally trigger recapture under the provisions of IRC 47, 1245, and 1250); A consolidated return, especially one that does not contain schedules showing each member’s respective share of income, expense, assets, liabilities, and capital; A short period return; Credits and/or losses that have been carried forward when information on the return indicates the item(s) should have been carried back; A member of a controlled group, claiming the full amount of the surtax exemption, etc., and not including a properly executed election; Last-In, First-Out (LIFO) inventory method being used for the first time; Manufacturing concern not using the Full-Absorption accounting method to value inventory; Substantial passive income which may indicate a Personal Holding Company; A low asset return, reflecting a net operating loss; Returns with Minimum Tax issues; and Foreign Tax Credit claimed on the return.

Large or unusual changes in inventories, or no inventory reflected for nonservice type business.

Sales of assets without a Schedule D or Supplemental Schedule of Gains and Losses (Form 4797) attached.

No amount claimed as amortization on a newly formed corporation.

Amounts claimed as Other Deductions without supporting schedules attached.

Questionable bad debt, either under the Specific Write-off or Reserve Method.

Expenses which may be high or unusual for the type of business.

Cash: Large ending balance—possible IRC 531 issue; and/or negative balance—improper accruals.

Trade Notes and Accounts Receivable: Change in accounting method; premature write-offs; excessive deduction for bad debts; and/or interest income unreported.

Inventories: Change in method of valuation; change in nature of business; and/or possible write-down.

Investments: Interest income and dividend income understated or omitted, expense(s) of tax-free income deducted; unreported sales, erroneous basis, installment election; stockholder loans buried; and/or related issue.

Other current assets—deferred expenses.

Loans to stockholders—dividend issue.

Building and other depreciable assets: Unreported sales; investment credit recapture; and/or incorrect basis.

Intangible assets: Goodwill has been written-off, sale of license or patent; and/or IRC 351.

Loans from stockholders: Thin corporation; and/or interest deduction vs. dividend.

Other liabilities: Improper accruals; deferred income accounts; and/or reserve for contingencies.

Capital accounts: Unreported sale; stock issued for services; and/or thin corporation.

Paid-in surplus: Diversion of earned income; and or IRC 531.

Retained earnings—IRC 531.

Treasury Stock: Potential dividend to stockholders and/or bargain purchase by a stockholder.

Schedules M–1 and M–2: All items should be reviewed for proper tax treatment.

Contributions to capital for possible recognition of gain or loss at the partners’ levels.

Partners with no contributed capital where services may have been performed in exchange for the partnership interest.

Large loss claimed on returns commencing business late in the year.

Large loss claimed in relation to investment.

Loss claimed in excess of investment through nonrecourse financing. Loan and prepaid interest costs should be amortized over the life of the loan.

Large depreciation deduction where property may not have been placed in service during the year.

Pre-opening expense (management fees, license fees, etc.) which should be capitalized.

Additional contributions by a partner which could constitute a sale or exchange.

Disproportionate allocation of losses or specific deductions to partners. Review Schedule K–1 to determine the date of entry of new partners.

Withdrawal by partners may include "phantom gain" through assumption of liabilities by others.

The sale or exchange of partnership assets may result in recapture of ordinary income.

Component or other depreciation method resulting in shorter than guideline lives.

Are likely to result in tax changes, and

Require an examination to achieve voluntary compliance by an identifiable group.

Returns not having international potential are stamped as follows: "International—Accepted as Filed, Referral Not Mandatory" .

Returns having international potential, or meeting mandatory selection criteria, are stamped as follows: "International—Selected" .

Affix AIMS status update labels to Form 5348 (Examination Update).

Place an alpha character based on the following:

Stamp "International—Selected" on the face of the return.

Affix AIMS status update label to Form 5351 (Nonexamined Closing).

Place a red "B" in the lower left-hand corner of labels if returns have a Form 5713 attached.

Stamp returns: "International—Accepted as Filed, Referral Not Mandatory" .

Copies of Forms 5348 and 5351 are forwarded to Key Area Program Managers.

All returns selected for possible examination, or those to be associated with returns already under examination, are identified as "International" .

All selected returns are assigned the applicable project code from the table below, before sending them to the area:

Form 3210 (Document Transmittal) sent to the PSP Support Mnager, states that the returns were selected for "International" , and includes special instructions. For example, Form 1120–DISC should be associated with the related return of another area or a return that is part of a national or area coordinated examination.

The FSC is a taxable foreign corporation that files Form 1120–FSC (U.S. Income Tax Return of a Foreign Sales Corporation) at the PSC.

The PSC will transfer Form 1120–FSC returns to the appropriate service center for screening and/or classification by an international classifier.

A copy of a valid Form 8279 (Election to be treated as an FSC or a small FSC) must accompany each transferred Form 1120–FSC return. A Form 1120–FSC return that does not have a valid election to be treated as an FSC, should not be transmitted to a service center for classification and should be treated as an ineligible filer.

A small DISC may still exist as an Interest Charge—Domestic International Sales Corporation (IC-DISC). Generally, this domestic corporation will be non-taxable and file Form 1120–IC–DISC.

Form that applies to person filing the return, identified by the TIN (of the filer) on Form 3520, line 1b.

Form 3520–A (Annual Information Return of Foreign Trust with a U.S. Owner) identified by TIN on Form 3520.

Form 706, if check box describing U.S. person filing return is identified as "Executor" ’.

TDF 90–22.1 Foreign Bank and Financial Accounts (FBAR)

Cash Transaction Report (CTR)

Suspicious Activity Report (SAR)

Forms 926 with a transferee that is an exempt organization (Reg. 1492–1(a)(1)). A copy of the Commissioner’s determination letter must be attached.

Transfer plans approved by the Commissioner (Reg. 1492–1(a)(2)). A copy of the Commissioner’s approval letter must be attached.

The PSP Support Manager, PSC will sort the FIRP documents, and forward them to the payee’s service centers, Attention: Chief Classification. FIRP documents with incomplete taxpayer information will be forwarded to the Director, Compliance, Attn: Chief, Tax Treaty, for return to the submitting country.

The Chief, Classification, at each service center will receive FIRP documents for payees within that service center, perfect those documents without TINs, perform a cross-reference search for spouses’ TIN, and forward the FIRP documents (after TIN perfection) to the PSP Support Manager in the payee’s areas, or per other area instructions.

The area PSP Support Manager will follow the following procedures:

Personnel screening FIRP documents to decide whether to secure related returns, should consider the following factors: the impact of Foreign Tax Credits (FTC) which may be available to the taxpayer; the source and type of the foreign income; and the underlying asset and the method of acquisition.

The PSP Support Manager will place returns selected for examination into the appropriate program (Tax Auditor or Revenue Agent). If a return is surveyed, the FIRP document should be attached to the return.

FIRP documents with TINs for which no TC150 has posted on the taxpayer’s account.

Undeliverable documents will not be sent to the collection branch.

A cross reference on the spouses’s TIN must be done before forwarding any FIRP document to Collection. All other research done on the FIRP document should be forwarded with the referral.

Completes page 2 of Form 5074.

Forwards a copy of the completed Form 5074 to the Service Center Accounting Branch.

Classifies the return.

No minimum cutoff scores are applicable to Director, Compliance individual DIF returns. All individual returns except Specials are maintained on the DIF computer inventory file.

Returns with APO/FPO addresses are also selected under the DIF System. Military personnel stationed overseas or on ships generally file these returns. They fall under the jurisdiction of the Director, Compliance. Taxpayers should file all APO/FPO returns at PSC.

The same audit codes used for all individual returns apply when identifying individual returns as Special Returns. Many codes will not apply to Forms 1040NR, 1040PR, and 1040SS, since the criteria for identifying these special features will not be present on these returns.

Computer report 1040–2 contains the number of returns filed which have a Form 2555 or 2555EZ attached.

The individual returns Post-of-Duty (POD) report 1040–1 is generated for DOs 66 and 98 by country or countries.

Separate PODs are used for APO/FPO returns.

All Forms 1040NR, except Specials, are assigned to DO 98 and POD 81.

Various PODs within DO 66 will be assigned Forms 1040PR and 1040SS

POD 99 will be primarily assigned DO 66 returns and APO/FPO returns without valid ZIP codes.

On orders for individual returns for DO 98, specify if the orders are to include the related Forms 2555 or 2555EZ.

Use indicator code F to order returns with Form 2555 or 2555EZ attached.

Use indicator code G to order returns without Form 2555 or 2555EZ attached.

Forms 1040NR, 1040PR, or 1040SS may be deleted from DO 98 or 66 return orders by excluding the applicable POD(s) to which these returns are assigned from the individual return order.

Forms 1040NR, 1040PR, or 1040SS may be separately ordered for Director, Compliance by placing a POD Supplemental Order for individual returns.

Forms 1040NR are delivered only when the indicator code is either blank or a "J" .

Forms 1040PR and 1040SS are delivered only when the indicator code is blank.

Forms 1040 with Form 2555 or 2555EZ attached

Forms 1040 with foreign addresses

Forms 1040PR

Forms 1040SS

APO/FPO returns

U.S. source income not effectively connected with a U.S trade or business (IRC 881).

Gross income effectively connected with a U.S. trade or business regardless of the source (IRC 882).

Review questions "A" through "L" on page 1, "M" through "U" on page 2. and "V" through "X" on page 5. Pay particular attention to location of books and records, type of business, and foreign country.

Foreign-sourced business profits are taxable in the United States, if they are attributed (effectively connected) to the U.S. business.

Check to see if interest, dividend, or other passive type income is being reported as effectively connected income (Section II of Form 1120F) as opposed to not effectively connected income (Section I of Form 1120F) and, therefore, subject to tax at a flat rate with no deduction allowed, particularly if the return is showing a loss in Section II. Check the balance sheet to see if there are investments that should be paying interest or dividends.

Check foreign-sourced income that is being excluded on Schedule M–1 Are deductions being allocated to U.S. sourced and foreign sourced income? Are the allocated deductions being excluded in Schedule M–1?

Review IRC 864(c)(4) for the definition of other types of income from sources outside the United States.

Review question "A" through "F" on page 1, "M" through "U" on page 2, and "V" through "X" on page 5. Does the taxpayer meet the treaty definition of a trade or business?

Indications of a U.S. place of business are: the return address; rents being paid and deducted on page 3; property taxes paid and depreciation schedule deductions; salaried employees; and/or location of books and records.

Check tax rates on income reported on page 2, which is not effectively connected income.

If a treaty country is involved, rates could be different.

If foreign sourced income or tax-exempt income is excluded for tax purposes, are there corresponding adjustments to deductions? Is income excluded reasonable in relation to the type of business?

Are there any distributions that may be subject to 1042 withholding?

Check Schedule M–2 for any distributions that may be subject to withholding.

Is the taxpayer paying interest, rent, royalties, or contract labor to foreign sources that could be subject to withholding? Besides Schedule II deductions, consider excluded deductions on Schedule M–1, or expenses used in the computation of a foreign tax credit.

Review the method of allocating home office expense to the U.S. operation.

Is the allocation made among U.S. source, foreign source, and tax exempt income?

Check treaty provisions if income is excluded on the return.

If income is excluded under the treaty, or is tax exempt, check for allocation of expenses to the excluded income.

Check for computation of interest expense under Reg. 1.882–5.

Check allocation of home office expenses to U.S. trade or business including allocation to excluded income.

Computation of Reserves for Bad Debts—if the percentage method is used, verify: allowable percentage of eligible loans; eligible loans at year end (Reg. 1.585 (b) (4)); loans applicable to foreign sourced income for purposes of minimum tax preference items; and write-offs.

Is the income from all foreign sources reported on the U.S. income tax return?

Has the taxpayer used the proper exchange rate for converting the foreign income?

Is there a Form 1116 (Computation of Foreign Tax Credit—Individual, Fiduciary, or Non-Resident Alien Individual) attached to the return?

If Form 1116 is attached to the return, determine if the credit claimed is at the treaty rate or at the foreign country’s statutory rate. A citizen or resident claiming the treaty benefit from a foreign country is limited to the treaty rate as a foreign tax credit or deduction on the tax return. Rev. Rul. 57–116 states in part that the allowance of a credit for taxes paid to a foreign country is limited to the tax that is a legal and actual liability. Tax withheld at the source is merely an advance collection of what may or may not be an actual tax liability.