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Report Writing Cont.1

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4.10.8  Report Writing (Cont. 1)

4.10.8.9 
Deficiency Dividends

4.10.8.9.2  (05-14-1999)
Receipt of Claim: Form 976

  1. The date on which Form 976 is filed in accordance with applicable regulations will be the controlling date to determine whether the form has been timely filed. The effective date of an informal agreement on Form 2198, Determination of Liability for Personal Holding Company Tax, will be the date the signed agreement is mailed to the taxpayer.
    1. FORM 976, Filed Timely — the examiner will verify the information on Form 976 to the extent deemed necessary and then prepare a report of the examination showing the general adjustments, the personal holding company income, the reduction due to the allowance of any deficiency dividend deduction, and whether the amount of the claim (Form 976) was allowed in full, allowed in part, or disallowed in full.
    2. FORM 976, Not Filed Timely — a letter will be sent to the taxpayer as notification that the claim was not timely filed. A certified notice of disallowance will be issued unless the taxpayer has signed Form 2297, Waiver of Statutory Notice of Claim Disallowance. See 8.9 for additional information.

     

4.10.8.9.3  (05-14-1999)
Appeals Cases: District Responsibilities

  1. When Appeals accepts a Form 2198, the Appeals Officer solicits the taxpayer’s claim (Form 976) and secures supporting evidence from the taxpayer. The Appeals Officer may:
    1. prepare the report and close the case if there are no unusual circumstances and verification of payment of the deficiency dividends can be made easily.
    2. return the case to the Compliance Examination field group. The case should be assigned to an examiner to verify payment of the deficiency dividends and prepare the report. The report should be prepared as outlined in paragraph 8.9.2. The report should also include adjustments made by Appeals. The report should be returned to Appeals for closing. If the examiner determines that the claim was not timely filed, the case should be returned to Appeals without contacting the taxpayer.

     

4.10.8.9.4  (05-14-1999)
United States Tax Court Cases: District Responsibilities

  1. In cases where the liability for personal holding company tax has been established by a decision of the United States Tax Court, Appeals will assess the gross deficiency. After assessment has been made by the service center, the administrative file will be forwarded to the Area Compliance Examination. The taxpayer will be notified by the Area Director with respect to the filing of a claim, Form 976, to obtain the benefits provided in IRC 547. The case will be held in suspense (location determined by the area) until a Form 976 is filed or until the expiration of the 120 day period for filing Form 976, whichever is earlier.
  2. If a Form 976 is not timely filed, the case will be transferred for collection action, consistent with the Court’s decision.
  3. If a Form 976 is timely filed, the case will be assigned to an examiner.
    1. Upon receipt of a closing agreement from the taxpayer, Form 866 will be prepared and forwarded to Technical Support, Examination for processing. The date of the closing agreement on Form 866 will be the date upon which the closing agreement is signed by the Area Director. The closing agreement, together with the case file, will be transmitted to the Area Director for approval.
    2. Once approved, Technical Support, Examination will determine any need for follow-up action and transmit a copy of the closing agreement to the taxpayer.

     

4.10.8.9.5  (05-14-1999)
Closing Procedures For All Dividend Deficiency Cases

  1. For all cases where a deficiency dividend deduction is allowed, the examiner will prepare Form 3189, Deficiency Dividend Case Transmittal.
    1. The form will include a computation of the tax liability before the reduction for payment of deficiency dividends. This is necessary for computing the interest amount.
    2. The original Form 3198 will be placed on top (outside) of the case file.
    3. A duplicate Form 3198 will be attached to every corporation return for which a deficiency dividend was paid.

     

  2. If a return for which deficiency dividends were paid has not yet been filed, then the examiner should prepare Form 5346, Examination Information Report and attach the duplicate Form 3198 so that it can be associated upon filing.
  3. Form 5346, Examination Information Report, should be completed to report dividends paid to shareholders in the current year.
  4. Form 3198 should identify the case as a restricted interest and claim for deficiency dividends paid case.

4.10.8.10  (05-14-1999)
Unagreed Case Procedures: Preliminary (30-Day) Letters

  1. Preliminary (30-Day) Letters are used to furnish taxpayers a copy of the examination report and advise them of their appeals rights when they do not agree with the results of an examination. Refer to Regulation 601.105(d) for legal authority and additional explanation.
  2. Preliminary (30-Day) Letter procedures are applicable to income, estate, and gift, excise, and employment tax cases.
  3. Letters are issued in change cases and in no-change cases involving the disallowance in full of claims for refund. Exceptions:
    1. Fraud cases involving criminal prosecution and frivolous filers/nonfilers — Appeals does not have jurisdiction for these cases.
    2. Transferee/Transferor cases.

     

  4. If an examination of a return results in a deficiency or overassessment but, because of net operating loss carryback, no deficiency or overassessment results, a computation of restricted interest may be required. If the taxpayer disagrees with the examination results, they will be afforded the same opportunity to request an Appeals hearing, as if a deficiency/overassessment were involved.

4.10.8.10.1  (05-14-1999)
Reports

  1. Report forms used to present the audit findings for an unagreed case are similar to those used for agreed cases and the instructions for completing agreed case reports generally apply. However, these unagreed report forms do not include a signature line for the taxpayer’s consent to assessment and collection. Unagreed cases are "excepted" agreed cases. See 8.4.2 above for instructions for preparing waivers. Also, there is no statement regarding the Area Director’s acceptance of the report.
  2. The following report forms unagreed cases.
    Type of Taxpayer Report Form Agreement Form
    Individual (1040) 4549–A 870
    Corporations (1120) 4549–A 870
    Non-TEFRA Partnerships (1065) 4605–A
    and
    886–S     		875
    Non-TEFRA S-Corporations 4605–A,
    886–X     		870
    Fiduciary 4605–A
    886–W     		875
    Domestic International Sales Corporations 4605–A
    886–Y     		870

     

4.10.8.10.2  (05-14-1999)
Explanation of Items: Form 886–A

  1. Form 886–A, Explanation of Items, will be prepared and attached to the report form to explain the adjusted items. A separate Form 886–A should be used for each adjustment. If the adjustment is applicable to more than one year, the adjustments should be shown on one combined Form 886–A.
  2. The following format should be used for Field Examination cases:
    1. Title — Each explanation should be numbered and titled to correspond with the adjustment on the audit report. For added clarity, include the amount per return, the amount per audit, and the resulting adjustment.
    2. Facts — Each explanation will include a statement of the facts upon which the adjustment is based. The statement should be in narrative form. The facts must be relevant to the issue and should be stated accurately and objectively. Facts favorable to both the Service’s and taxpayer’s position must be included.
    3. Applicable Law — The applicable authority should be correctly cited and explained (if necessary) . Rulings, opinions, and decisions relied upon are to be clearly stated and identified in the explanation. Citations are not required when the adjustment is predicated entirely on facts, or when they serve no useful purpose. However, reports should be informative for the taxpayer.
    4. Taxpayer’s Position — The taxpayer’s position should be stated (in narrative form) if known. The legal authority, if any, that the taxpayer is using as the basis of their argument should also be cited. If the taxpayer has provided a written position statement include the entire statement in this section or summarize the statement and include the entire document in the report as an exhibit.
    5. Argument — Relate the facts, as previously stated, to the cited authority through a narrative discussion to support the Service’s position. Also include the Service’s refutation of the taxpayer’s position.
    6. Conclusion — Briefly state a conclusion of the Service’s position.
    7. Office Audit cases may be prepared using the standardized explanations used for Statutory Notices of Deficiency.

     

4.10.8.10.3  (05-14-1999)
Form Letters

  1. Generally, Preliminary (30-Day) Letters allow the taxpayer 30 days to request Appeals consideration of their case. The following form letters, specific to the type of case, are used for this purpose:
    1. Letter 950(DO) — for straight deficiency, straight overassessment, or mixed deficiency and overassessment cases.
    2. Letter 915(DO) — for straight deficiency, straight overassessment, or mixed deficiency and overassessment Office Audit cases.
    3. Letter 569(DO) — for claim disallowance cases.
    4. Letter 953(DO) — for reconsideration of disallowed claims when no modification of prior determination is warranted.
    5. Letter 962(DO) — for straight deficiency, straight overassessment, or mixed deficiency and overassessment fiduciary cases.
    6. Letter 921(DO) — for flow-through entities (partnerships, fiduciaries, S-corporations, etc.)
    7. Restricted Interest Cases — a special letter, patterned after the form letters listed in a–f, should be prepared to address the restricted interest issue, rather than a deficiency or overassessment of tax. No form letter is available due to limited need.

     

4.10.8.10.4  (05-14-1999)
Report Transmittal: Form 4665

  1. This form is used to summarize unagreed issues and present information of a confidential nature for Appeals. The information should supplement, not duplicate or replace, information in the case file.
  2. Confidential information included on the report transmittal includes:
    1. Statements and facts involving allegations of fraud;
    2. Remarks regarding the integrity, motives, or abilities of the taxpayer;
    3. Ability to pay;
    4. Potentially dangerous taxpayers;
    5. Procrastination by the taxpayer or representative;
    6. Other confidential information which should not be made available to the taxpayer.

     

  3. Items which need safeguarding from disclosure with Document 6441 should not be included or referenced on the report transmittal. Examples include fraud referrals and identification of informants.
  4. The form should also note the group manager’s involvement in the case; including contacts with the taxpayer to resolve the issues and concurrence with the audit results as reflected in the report and case file.

4.10.8.10.5  (05-14-1999)
Contents of Preliminary (30-Day) Letters

  1. Preliminary (30-Day) Letters will include the following documents:
    1. Appropriate form letter,
    2. Examination report and waiver
    3. Publication 5, Appeal Rights and Preparation of Protests for Unagreed Cases (Income, Estate, Gift, Excise and Employment Taxes)
    4. Publication 1, Your Rights as a Taxpayer
    5. Publication 594, Understanding the Collection Process.

     

4.10.8.10.6  (05-14-1999)
Mailing Preliminary (30-Day) Letters

  1. Preliminary letters will be sent by ordinary mail unless it is considered necessary to document the mailing and delivery. In such cases, certified or registered mail should be used and a return receipt requested.
  2. If, in the case of a joint return, the taxpayer(s) have established separate residences, complete original Preliminary Letters will be sent to both taxpayers at the addresses indicated.
  3. A copy of the Preliminary Letter, with all enclosures, should be sent to the taxpayer’s representative if authorized to receive such communication.
  4. A copy of the Preliminary Letter will be maintained in the case file.
  5. After mailing the Preliminary Letter, the case will be held in the group’s suspense files. Managers will ensure adequate controls for cases in 30-Day status.

4.10.8.10.7  (05-14-1999)
Extension of Time to Respond

  1. In general, 26 CFR 601.105(d)1 does not provide for any extension of time to reply to Preliminary (30-Day) Letters. However, as a matter of practice, extensions may be granted under reasonable circumstances.
  2. Reasonable circumstances include:
    1. the taxpayer retains a representative and demonstrates a need for more time to prepare a meaningful protest.
    2. the taxpayer retains a new representative.
    3. sickness or injury of the taxpayer or representative.
    4. issues are complex and require extensive research.

     

  3. Requests for extensions should be in writing and should state the reason(s) why additional time is needed. Since many requests are made by telephone, the extension may be granted verbally and confirmed in writing upon receipt of the written request.
  4. Extensions should not be granted if the statute of limitations will expire within 150 days and the granting of an extension will not leave sufficient time to process the case. Granting an extension to respond to a Preliminary Letter will be contingent upon securing an extension of the statute of limitations.
  5. Extensions are granted by the group manager or a designated management official. The taxpayer should be notified in writing of the extension and the specific extended response date. Extensions are normally granted for no more than 30 days unless a specific reason supports additional time.

4.10.8.10.8  (05-14-1999)
Response to Preliminary (30-Day) Letters

  1. If a signed agreement form is received in response to the Preliminary Letter, the case will be closed using agreed case closing procedures.
  2. The taxpayer may respond by requesting an appeal.
  3. Appeal Requests — Field/Office Examinations
    1. For any case where the total amount of proposed additional tax, additions to tax and penalties, proposed overassessment, or claimed refund, credit, or abatement for any tax period, does not exceed $25,000, a request for an Appeal is made using small case procedures. These procedures require a written request asking for Appeals consideration, indicating the changes the taxpayer does not agree with and any reasons for disagreement.
    2. A case with a deficiency exceeding $25,000 requires a formal written protest.

     

  4. If the taxpayer submits a formal written protest it will be reviewed at the group level, as designated by management, within seven days of receipt to determine whether:
    1. The protest is adequate;
    2. The case requires further development by the examiner;
    3. The examiner’s report should be modified;
    4. The taxpayer’s written protest includes the required documents.

     

  5. A taxpayer’s formal written protest must include the following:
    1. A statement that the taxpayer wants to appeal the examiner’s findings to the Appeals Office;
    2. The taxpayer’s name and address and daytime telephone number;
    3. A copy of the letter showing the proposed changes and findings being protested or the date and symbols from the letter;
    4. The tax periods or years involved;
    5. An itemized schedule of the adjustments with which the taxpayer does not agree;
    6. A statement of facts supporting the taxpayer’s position on any contested factual issue;
    7. A statement outlining the law or other authority, if any, upon which the taxpayer is relying;
    8. A declaration of truth for item f above under penalties of perjury. This may be done by adding the following signed declaration to the protest document:
      "Under penalties of perjury, I declare that I have examined the statement of facts stated in this protest, including any accompanying docouments and, to the best of my knowledge and belief, they are true, correct, and complete."

     

  6. If the taxpayer’s representative submits the protest for the taxpayer, the representative may include a substitute for the taxpayer’s declaration described in paragraph (6)h above. The declaration will state:
    1. that the representative prepared the protest and accompanying documents; and
    2. whether the representative knows personally that the facts contained in the protest and accompanying documents are true and correct.

     

  7. The protest should be returned to the taxpayer if incomplete and additional time granted to perfect the document.
  8. The case should be returned to the examiner for further development if the protest contains information warranting consideration. Cases returned for additional development should be considered priority work and given expedited consideration. If the examiner or group manager feel that there is something in the protest that does not change the determination, but requires further comment or explanation and is not confidential in nature, a rebuttal can be prepared and included in the case file before it is sent to Appeals. If a rebuttal is prepared, a copy should also be provided to the taxpayer.
     

    (Note: The need for any type of rebuttal for Office Examination cases should be infrequent.)

     

  9. The group manager, at their discretion and on a priority basis, may discuss the disputed issues with the taxpayer in an attempt to resolve the issues, obtain agreement, and limit taxpayer burden. If agreement cannot be reached, the case will be forwarded to Appeals.
  10. If the taxpayer verbally requests a transfer of jurisdiction for the Appeal, and the written protest is complete, the case file will be sent promptly to the local Appeals office serving the transferor area. This procedure applies even if the taxpayer has requested a hearing in an Appeals office other than the one servicing the transferor area.
  11. The fact that a Statutory Notice of Deficiency has been issued to the taxpayer does not preclude transfer of protested cases to Appeals for:
    1. Other taxable periods of the same taxpayer;
    2. Other types of tax for the same taxable periods for the same taxpayer; or
    3. An offer in compromise covering the same type of tax and the same taxable periods of the taxpayer.

     

  12. Appeals may also request jurisdiction of cases related to the cases described in 11 above.
  13. A case can be transferred to Appeals with a copy of the taxpayer’s return if:
    1. A transcript of account is attached to the duplicate return, and
    2. The case does not involve fraud, a jeopardy assessment, a joint committee case, or a Statutory Notice of Deficiency issued as a basis for closing.

     

  14. Requests from Appeals for additional information or further verification of facts in a protested case will be completed expeditiously.
  15. OFFICE EXAMINATION — Letter 2280(DO) must be sent to the taxpayer by the group manager on the date that the case is released by the group for processing to Appeals. The case must clear Technical Support, Examination and Case Processing Support within 30 days after leaving the group. The case file should document the date the case left the group and the letter was sent.
    1. If the case is returned by Technical Support, Examination, the taxpayer must be notified (Letter 1020 (DO) ) . When the case is returned to Technical Support, Examination, Letter 2280(DO) must be sent to the taxpayer. Type the following on the bottom of the letter: "Your case is being transferred to Appeals on (date). This is a revised notification."

     

4.10.8.10.9  (05-14-1999)
Follow-Up to Preliminary (30-Day) Letters

  1. FIELD EXAMINATION — If the taxpayer has not filed a protest within the time allowed, but indicated their intent to do so, Letter 923 will be sent to the taxpayer to allow an additional 15 days to file a protest. Letter 923 should be issued no later than seven calendar days after expiration of the original Preliminary Letter.
  2. OFFICE AUDIT — If the taxpayer does not respond to the preliminary letter, Letter 2304(DO) should be sent as a follow-up. Letter 2304 should be sent 15 days after Letter 915 (DO).
  3. If the Preliminary Letter is returned as undeliverable to the address on file, then an attempt will be made to obtain the correct address.
    1. If the taxpayer’s correct address is determined, the Preliminary Letter will be remailed to the new address. The period in which the taxpayer may reply starts with the date the letter was remailed.
    2. If the taxpayer’s correct address cannot be determined, then the case will be processed as outlined in 8.10.10 below.

     

  4. If the Preliminary Letter proposes an overassessment or disallowance of a claim with no change in tax liability, no follow-up action should be taken. The case should be closed as outlined in 8.10.10 below.
  5. If no response to a follow-up letter is received, the case will be process as outlined in 8.10.10 below.

4.10.8.10.10  (05-14-1999)
No Response to Preliminary (30-Day) Letter

  1. Cases will be closed promptly within seven days after the expiration of the time (including extensions) allowed to file a protest.
  2. DEFICIENCY CASES — A Statutory Notice of Deficiency will be issued, subject to the following conditions:
    1. if it appears reasonable that the taxpayer or authorized representative received the Preliminary (30-Day) Letter or, if not received, the Service exercised due diligence in determining the taxpayer’s last known address.
    2. the taxpayer is temporarily away and is not expected to return within a reasonable period of time, or has not returned after a reasonable extension has been granted.
    3. follow-up action was taken without success.
    4. the notification required by IRC 534(b), cases involving alleged unreasonable accumulation of earning and profits, has been issued.

     

  3. Regardless of the conditions outlined in paragraph (2) above, a statutory notice of deficiency will be issued within the time fixed by law if the statute of limitations will expire within 150 days and the taxpayer will not execute a consent to extend the statute of limitations period.
  4. OVERASSESSMENT PROPOSED OR DISALLOWANCE OF CLAIM WITH NO-CHANGE IN TAX LIABILITY — If the taxpayer fails to reply to a Preliminary Letter advising them of a proposed overassessment, or disallowance of a claim with no change to the tax liability, then the case should be processed under regular procedures subject to the conditions in paragraph (2)a and b above.
  5. A Preliminary (30-Day) letter will be issued in employment tax cases to advise taxpayers of all unagreed proposed adjustments to their tax liabilities and of conclusions reached in no-change cases involving the disallowance in full of claims for refund.
  6. RESTRICTED INTEREST CASES — If the taxpayer fails to reply to the special letter within the time allowed, the tax liability will be adjusted as proposed in the examination report. Procedures in IRM 4.4 AIMS/Processing and other related sections will be followed to assess the restricted interest.

4.10.8.10.11  (05-14-1999)
Time Reporting for Preliminary (30-Day) Letters

  1. Time spent by examiners to prepare the unagreed report and accompanying explanations of items is charged to the case under Direct Examination Time (DET).
  2. Time spent by examiners on 30 day letter activities (including preparation of the 30-day cover letter, protest reviews, and follow-up letter) will be reported using nonexamnation code 646. Preparation of the report (including RAR, facts, Law (IFRAC) is not reported under activity code 646. When 30 day activity begins, the case will be removed from the direct examination time portion of the examiner’s time reporting document.
  3. The case should be updated to Status Code 13 on AIMS when the Preliminary Letter is sent to the taxpayer from the group. If the Preliminary Letter is sent from Technical Support, the case will be updated to Status Code 22.
    1. AIMS Statute Table 4.1, at the group level, will include cases in status codes 9–18.
    2. AIMS Table 4.0, for Technical Support Staffs, will include cases in Status Code 22.

     

  4. If further development is required after the Preliminary Letter activities have begun, the case will be returned to the examiner and reactivated under Direct Examination Time, status code 12.

4.10.8.11  (05-14-1999)
Corrected Reports

  1. This section includes instructions for correcting reports which include errors.
  2. A corrected report should be prepared if a report with the taxpayer’s signature is found to be in error (cases closed over 45 days must be reopened).
    1. Across the top of the corrected report write "Corrected Report" .
    2. In the other information or remarks section write, "This report supersedes report dated (date)" .
    3. The taxpayer’s signature is only required on the corrected report if the change is in the government’s favor, i.e., more tax or less refund. If the taxpayer disagrees with the corrected report, unagreed case processing procedures are applicable.

     

  3. The original report will be voided by drawing a diagonal line across the report and writing "This report superseded by report dated (date)" .
  4. Both the original and corrected reports are included in the case file.
  5. If the correction of an error results in additional tax due or less refund, the case may be processed for the amount of the deficiency, overassessment, or penalty shown incorrectly on the original waiver or report under the following circumstances:
    1. the difference does not exceed $50.00. No approval is needed.
    2. an error over $50.00 may be processed when approved by the Technical Support Manager; the Field Territory Manager; or the Area Director, as established by local procedures. The dollar amount of the error in relation to the total corrected deficiency should be considered when determining if the error should be waived.

     

4.10.8.12  (05-14-1999)
Issues Requiring Special Reports and Forms

  1. This section includes examination issues which require computations on a standard form. When an adjustment is proposed in any of these areas, the applicable form should be completed and attached to the examination report to clarify how the adjustment was determined.

4.10.8.12.1  (05-14-1999)
Depreciation

  1. Use Form 1914, Computation of Allowable Depreciation Deduction to compute allowable depreciation expenses.

4.10.8.12.2  (05-14-1999)
Adjustments to Net Operating Loss

  1. Any adjustment to a net operating loss deduction should be completely explained in the report.

4.10.8.12.2.1  (05-14-1999)
Computation of the Net Operating Loss

  1. A report which proposes an adjustment to a net operating loss deduction should include all computations necessary to fully explain the source year and amount of any new operating losses.
  2. The computation will include the modifications required by IRC 172(d).
  3. Form 3621, Net Operating Loss Computation, may be used for this computation.

4.10.8.12.2.2  (05-14-1999)
Computation of the Net Operating Deduction

  1. The report should include a computation of the amount of the net operating loss allowable in any year.
  2. The computation will include the Loss modifications required by IRC 172(b)(92).
  3. Form 3621–A, Computation of a Net Operating Loss Deduction for Intervening Years Modifications, may be used for this computation.

4.10.8.12.2.3  (05-14-1999)
Reports After a Tentative Refund or Credit

  1. IRC 6411 allows the taxpayer to apply for refund or credit using Form 1045 (for individuals) or Form 1139 (for corporations) The adjustment to the tax is not a claim. The examination report reflecting a tentative allowance of a refund or credit is explained below.
  2. ADJUSTMENT OF THE NET OPERATING LOSS DEDUCTION (NOLD) — The report should show the correct NOLD amount. If the NOLD is allowed in full, the entire NOLD would be shown as an adjustment. If the NOLD is not allowed, the adjustment on the report would be zero.
  3. TAXABLE INCOME AS SHOWN ON THE REPORT — The taxable income per return (or as previously adjusted) is the amount prior to the processing of the tentative allowance.
  4. TAX PREVIOUSLY ADJUSTED — The tax as previously adjusted should include any tax decrease allowed in processing of the tentative allowance. The report should include a schedule showing the computation of the tax as previously adjusted.
  5. EXAMPLES OF A REPORT AFTER A TENTATIVE ALLOWANCE — Facts: Corporation X files their 1992 Form 1120 timely. The taxable income is $888,888 and the tax is $302,222. In 1995 there is a net operating loss of $30,000. On 4/30/96, a Form 1139 is filed and the corporation receives a refund of $10,200. The 1992 and 1995 returns are examined.
    1. Example 1: The examination results in no change to 1995. Therefore the NOLD is allowed in full in 1992. There is no change in tax because the corporation has already received the tentative refund.
    2. Example 2: The examination results in additional income in 1995 of $17,000. This reduces the NOLD to $13,000. There is a deficiency in 1992 of $5,780 because the corporation received a tentative refund based on a NOLD of $30,000.
    3. Example 3: The examination results in income in 1995 of $50,000. This the NOLD. There is a deficiency $10,200 because the corporation tentative refund of $10,200.

     

4.10.8.12.3  (05-14-1999)
Filing Status: Joint Return Converted to Separate Returns

  1. Generally, Income Tax Regulation 1.6013–1(a)(1) does not allow a husband and wife to change from a joint return to a separate return. Below are listed some situations where an examiner may be required to change a joint return to separate returns.
    1. SEPARATE RETURN FILED BEFORE DUE DATE OF RETURN — If a person files more than one return prior to the due date of a return, the last return filed is considered the valid return. Therefore, if a person files a joint return and prior to the due date of that return subsequently files a separate return, the separate return is the valid return (Income Tax Regulation 1.6013–1(a)(1)).
    2. SEPARATE RETURN FILED BY AN EXECUTOR — Under certain circumstances, an executor for a deceased person may disaffirm a joint return filed by the surviving spouse. See Income Tax Regulation 1.6013–1(d)(5).
    3. INVALID "JOINT RETURNS" — Sometimes, after a joint return is processed, it is determined that the return was not a valid joint return. The reasons a joint return may not be valid include the taxpayers were not married, the return is not signed (this may be corrected by obtaining valid signatures using Letter 2348(DO) — See Policy Statement P–2–11 and United States Tax Court case, Peter Vaira v. Commissioner, 52 TC 986), and one spouse’s signature is forged.

      Note:

      A forged signature is a badge of fraud and a fraud referral or civil fraud penalty should be considered.

       

     

4.10.8.12.3.1  (05-14-1999)
Closing the Return of the Primary Taxpayer

  1. When closing the return of the person whose Social Security number is listed first (the primary taxpayer) on the "joint return" , the following actions should be taken:
    1. Prepare a report using the correct filing status and only the income, deductions and credits of the primary taxpayer.
    2. Solicit agreement.
    3. Follow normal agreed/unagreed procedures.
    4. Show only one name on Form 5344.
    5. Note on Form 3198 in the "Other Special Handling Instructions" that there is a name change and filing status change ( "Filing Status changed from joint to - - - -" ).
    6. Note on Form 3198 in the "Name Change" section: "Form 2362 was submitted on (date) to remove (name) from this account" or if Form 2362 was not previously submitted, state "Remove (name of appropriate spouse) from this account" .

     

4.10.8.12.3.2  (05-14-1999)
Closing the Return of the Person Whose Name was Removed from the Joint Return

  1. If the file does not already contain the separate return for the person removed from the joint return, the return should be solicited (if a return is required). That return should be closed together with the invalid "joint return" with instructions to the Case Processing Support function to process the return as an original return.
  2. If a return is required and is not filed, follow substitute for return procedures to make an assessment against the person whose name was removed from the "joint return" .

4.10.8.12.4  (05-14-1999)
Filing Status: Separate Returns Converted to Amended Joint Return

  1. A husband and wife who originally filed returns on a separate basis may find it to their advantage to use a joint tax computation. To change from separate to joint return status taxpayers may (a) file a joint return, or (b) execute an examination report reflecting joint status (see 8.12.4.2 below for returns filed before July 31, 1996).

4.10.8.12.4.1  (05-14-1999)
Statute Considerations

  1. IRC section 6013(b)(2)(B) requires that taxpayers make this election within three years of the original due date of the tax return. In addition, it may be necessary to update the statute if one of the conditions of IRC sections 6013(b)(3) or 6013(b)(4) is met.

4.10.8.12.4.2  (05-14-1999)
Requirement to Pay Tax

  1. For certain tax periods the taxpayers are required to pay the tax due pursuant to section 6013(b)(2)(A).
  2. For tax years beginning before July 31, 1996 the entire amount of tax shown on the joint return must be paid in full. An exception to this rule exists if an assessment has been made against one taxpayer separately, under Substitute for Return Procedures (SFR). The SFR does not preclude the taxpayers from obtaining the benefit of joint rates under section 6013. This exception will not apply to taxpayers who have filed a petition in Tax Court (the IRS does not have jurisdiction over the return) or when one or both spouses have previously filed a separate return.
  3. For tax years beginning on or after July 31, 1996 (e.g., calendar year 1997) it is not necessary for taxpayers to pay the tax shown on the joint return in full, as a condition to electing joint status.

4.10.8.12.4.3  (05-14-1999)
Examination of Return

  1. If a joint amended return is received during an examination, examiners generally will examine the joint amended return to determine whether the tax reported is correct. The examination will be made as soon as possible after the return is received and to the extent deemed necessary. A joint amended return received from a taxpayer during an examination, with or without remittance, will remain with the case file.
  2. Separate files should be set up for each spouse as each file will be closed under its own Document Locator Number (DLN) . Generally, the primary file will be the first SSN shown on the joint return and the secondary file will be the second SSN shown on the joint return.
    1. The primary file will include the original or copy of the joint amended return. The primary’s original separate return and a copy of the secondary’s separate return should be attached.
    2. The secondary file will include the secondary’s original separate return. A copy of the first page of the joint amended return should be attached.

     

4.10.8.12.4.4  (05-14-1999)
Preparation of Reports

  1. Two reports will be prepared when separate are converted to a joint return.
  2. PRIMARY FILE — prepare a report starting with the primary account and include as adjustments the items appearing on the secondary separate return. At the conclusion of the examination, the examiner will solicit an agreement covering the proposed changes. If a deficiency is unagreed, normal appeals procedures apply.
  3. SECONDARY FILE — prepare a second report to adjust all tax and penalties previously assessed on the secondary account to zero.
  4. Examiners should also consider whether the delinquency penalty under IRC 6013(b)(3)(A) is applicable.

4.10.8.12.4.5  (05-14-1999)
Closing Procedures

  1. The primary and secondary files should be closed to the Case Processing Support Unit together as one case file.
  2. Prepare a Form 5344 for each file and include the name of the secondary taxpayer on the Form 5344 for the primary file.
  3. Prepare Form 3198, to be transmitted with the case file, and include the following comments:
    1. "Separate Return(s) Converted to Joint" ,
    2. "Add secondary taxpayer to primary account" ,
    3. Indicate any estimated tax payments to be transferred from the secondary account to the primary account, and
    4. Indicate whether or not the tax has been paid.

     

4.10.8.12.5  (05-14-1999)
Adjustments to the Investment Credit

  1. A report including adjustments to investment credits (including the recapture of investment credit) should include a computation showing the correct investment credit.
  2. IRC 46 defines the credits which are considered investment credits. Form 3468 may be used to show the computation of the corrected investment credit.
  3. Section 38 of the IRC limits the amount of general business credits (including investment credit) which may be used in any year. Form 3800, General Business Credit, may be used to show the limitations of the investment credit when the taxpayer is eligible for more than one type of General Business Credit. The report should clearly show the amount and year of origin of any adjustments to investment credit carrybacks or carryforwards.
  4. Section 50(c) of the IRC requires the recapture of all or part of the investment credit in the case of an early disposition of the property which generated the credit. Form 4255, Recapture of Investment Credit, may be used to show the computation of the tax due to the recapture of the investment credit.

4.10.8.12.6  (05-14-1999)
Self-Employment Tax Adjustments

  1. When an audit results in an adjustment to self-employment tax, the information is forwarded electronically to the Social Security Administration via the Form 5344, Examination Closing Record.
  2. Indicate on Form 3198, Special Handling Notice, that there is a "Self-Employment Income/Tax Adjustment."
  3. Include the following information as applicable on the Form 5344:
    1. REFERENCE NUMBER 878: a net increase or decrease to the self-employment income of the primary taxpayer
    2. REFERENCE NUMBER 879: a net increase or decrease to the self-employment income of the secondary taxpayer.
    3. For 1990 and subsequent tax years, enter the self-employment income adjustments multiplied by .9235. The net increase or decrease to the self-employment tax reference number 889. Changes to both primary and secondary self-employment tax should be combined for one adjustment to reference number 889.

     

4.10.8.12.7  (05-14-1999)
Adjustment to FICA Tax on Tip Income Not Reported to Employer

  1. When, as part of an examination it is discovered that tip income has been underreported by the employee to the employer, the following procedures should be followed to adjust FICA tax.
  2. Prepare Form 885–T to adjust FICA tax on tip income. The original and one copy should be prepared. The original or a good carbon copy of the Schedule T–A will be attached to the front of the case file. Photocopies will not be used for this purpose. The top portion of the form will constitute the employment tax report going to the taxpayer.
    1. Schedule T–A, Section A — Include increase or decrease in tip income not reported to the employer. Decreases should be shown in brackets. The total adjustment should be distributed equally to the four quarters unless the taxpayer submits information which establishes that the tips were not earned every month.
    2. Schedule T–A, Section B — Enter the taxpayer’s occupation that accounts for the tip income. Enter the Social Security number of the taxpayer whose tip income is being adjusted.
    3. Schedule T–A, Section C — The taxpayer’s name and address must be correct. This information and the Social Security number should be verified by the taxpayer.
    4. Schedule T–A, Section D — This block must always be filled in. The Social Security Administration needs this information to determine the proper adjustment to the taxpayer’s earning records.
    5. Schedule T–A, Section E — Refile number will be entered by the service center.

     

  3. Form 2504, Agreement to Assessment of Collection of Additional Tax and Acceptance of Overassessment, should be used to reflect the FICA tax adjustment and the 50% penalty for failure to report tips. The 50% penalty is calculated based on the FICA tax adjustment. Form 2504 is used to secure agreement from the employee since the adjustment for employee FICA tax is not an income tax adjustment.
  4. Form 3198, Special Handling Notice, should contain a notation in the other section stating, "Form 885–T enclosed."
  5. Form SS–10, Consent to Extend the Time to Assess Employment Taxes, must be secured if it is necessary to extend the statute date for assessment of this tax and penalty.

4.10.8.12.8  (05-14-1999)
Adjustment For Employee FICA Tax

  1. The following procedures should be followed when an examination results in an adjustment to employees share of FICA tax where the employer is not liable due to Section 530 of the Revenue Act of 1978.
  2. Form 885–E will be prepared.
  3. The examiner’s report will contain the computation and explanation of the adjustment. The following statement can be used:
    "Your correct liability for FICA is $XXX.XX. ($___ of wages x __%). In connection with the examination of your income tax return, Form 1040, for the year(s) ____ , an adjustment has been made for the employee share of the FICA tax imposed by Section 31.3102–2(c) of the Employment Tax Regulations in the amount of $ ____."
  4. The adjustment for the employee share of FICA will be reflected on Form 2504 since the adjustment for employee FICA tax is not an income tax adjustment.
  5. To ensure proper processing, Form 3198 must be prepared and attached to the case file. In the "other" section, include the statement, "Form 885–E enclosed."
  6. If an adjustment for SECA tax is also involved, include in the "other" section of Form 3198 include the statement, "Form 885–E and Form 885–F enclosed."
  7. Preparation of Form 885–E, Part A: Enter the amounts received during the respective periods indicated. If unable to accurately determine amounts per period, the amount of reclassified wages should be deemed to be earned equally over the periods the worker performed the services. The remaining parts are self-explanatory.

4.10.8.12.9  (05-14-1999)
Adjustment to Schedule H — Household Employment Taxes

  1. Beginning in 1995, an individual who employs domestic workers is able to report employment tax payments annually on Schedule H, "Household Employment Taxes" (which is attached to form 1040) instead of filing quarterly 942 Forms.
  2. The use of Schedule H to report and collect these taxes does not change the nature of the tax.
    1. Changes are employment tax changes.
    2. Changes cannot be included in the income tax report.
    3. Changes must be made on Form 4668, "Employment Tax Examination Changes Report" .
    4. Changes are not subject to statutory procedures and should not be included on a Statutory Notice of Deficiency.
    5. No portion of the employment tax reported on Schedule H is ever available for refund based on changes to a taxpayer’s income tax liability.

     

  3. For purposes of Schedule H the employer is:
    1. The taxpayer who applied for the EIN, which is required.
    2. For joint returns, only one taxpayer can be the employer and this would be the spouse who obtained the EIN.

     

  4. Adjustments to Schedule H require the preparation of Forms 4667, 4668, and 2504. The adjustment should be made to the fourth quarter of these forms, where applicable.
  5. When Schedule H adjustments are made, Form 3198 must be attached to the case file.
    1. The Other Instruction section should contain the following notation:
      "Schedule H Adjustment — Forms 4667, 4668 and 2504 enclosed for the primary or secondary (whichever applies) taxpayer."
    2. For joint filers, it is critical that the primary/secondary designation be made to allow for accurate completion of Form 5344.

     

  6. As with any other employment tax change involving wages, corrected or delinquent W–2’s should be secured as necessary.

4.10.8.12.10  (05-14-1999)
Tax Motivated Transactions

  1. This section includes procedures for preparing reports when a tax motivated transaction is involved. These procedures apply to all report forms.
  2. If any adjustment constitutes a "tax motivated transaction" under IRC Section 6621(c), the report should contain a specific item in the adjustments section with a suggested title of "Tax Motivated Transaction(s)" .
    1. The column which contains the dollar amounts should contain a hyphen for this item.
    2. An asterisk should be placed by the adjustments on which the tax motivated transaction interest is being charged.
    3. In the "Other Information" or remarks section write, "Increased Rate of Interest under IRC 6621(c) will be applied on Tax Motivated Transactions."

     

4.10.8.12.11  (05-14-1999)
Specialists Report

  1. ENGINEER’S MEMORANDUM REPORT, FORM 3212 — This report will be attached to Form 4665, Reports Transmittal. (Form 3213 is for internal use only and is not to be shared with the taxpayer.)
    1. When accepted, the engineer’s findings will be included in the examiner’s report.
    2. Only Form 3212, Part III will be provided to the taxpayer as part of the report.

     

  2. INTERNATIONAL EXAMINER’S REPORT, FORM 3963 — Part I with continuous pages will be attached to Form 4665, Report.
    1. When accepted, the International Examiner’s findings will be included in the examiner’s report.
    2. Form 3963, Part II will be provided to the taxpayer as part of the report.

     

4.10.8.13  (05-14-1999)
Examination Information Reports — Form 5346

  1. When, during an examination, an examiner develops an issue or receives information of sufficient compliance value to warrant enforcement action, Form 5346 will be prepared.
  2. For entities and years directly related to an ongoing examination, Form 5346, Examination Information Report, should be prepared when:
    1. the taxpayer has not yet filed the return in question. If the taxpayer has filed the return, the scope of the examination should be expanded to include the additional return.
    2. the return in question was (or will be) filed in another area.
    3. the information received does not effect the taxpayer under examination or a return related to the taxpayer.

     

  3. Information discovered not related to an ongoing examination (i.e. newspaper articles etc.) must always be submitted on Form 5346 to the PSP for evaluation and follow-up. Examiners and group managers are not authorized to initiate examinations based on this type of information, even if the taxpayer is located in their POD/area.
  4. The instructions for preparing Form 5346 are included on the reverse of the form. Examiners should include sufficient information to allow evaluation of the audit potential. If necessary, documentation may be attached to the form.
  5. Form 3198, attached to the case file, should include the statement, "Form 5346 enclosed" . Case Procesing Support will forward the form to PSP for evaluation and follow-up.

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