Audit reports should contain all the information necessary to ensure a clear understanding of the adjustments and document how the tax liability was computed. Examination reports (unlike workpapers) are legally binding documents and, when executed, serve as the basis for assessment and collection action. Based on this importance, examiners should take all necessary steps to ensure report accuracy.

Employee contact information will be provided to the taxpayer when a report is issued. Refer to IRM 4.10.1.6.9, Providing Taxpayers with Employee Contact Information.

Report Generation Software (RGS) is required for generation of all income tax examination reports (with the exception of LMSB agents utilizing BNA Software) and for entry of all data required for the Examination Operational Automation Database (EOAD). See IRM 4.10.16.

EOAD is designed to allow the tracking of examination adjustments by issue and related cause. This data helps identify specific areas of noncompliance based on examination reports. Procedures for use of RGS in report writing can be found in RGS User Guides and training materials. See IRM 4.10.8.18.1.

IRC section 6212requires the Service to include an explanation of the examination and collection process, as well as information about assistance from the Taxpayer Advocate with any first report/notice of proposed deficiency. Publication 3498, The Examination Process, will be used for this purpose. Publication 3498 incorporates Publication 1,Publication 5, and Publication 594into one document.

The following procedures will be followed:

Publication

Agreement forms are considered "executed" when the taxpayer(s) signs the form. Executed agreement forms should also indicate the date received by the IRS (agreement forms should be date stamped upon receipt).

Taxpayers, upon receipt of an audit report, may wish to pay the deficiency immediately. Form 3244,Payment Posting Voucher, should be processed with the funds if payment is received. Attach a copy of the completed Form 3244to the face of the tax return.

Cases may be processed without an executed agreement form if a full paid remittance, not specifically designated as a "6603 deposit " is received in response to a proposed liability.

Generally, cases should be closed from the group within the following time frames:

IRC section 6404(g) provides for the suspension of interest when the Service fails to provide timely and adequate notice of a tax liability. Examination report Form 4549is sufficient notice if it contains an explanation of each item of adjustment. See IRM 4.10.8.13.12, which addresses the requirements and delivery of the notice to the taxpayer.

No-change cases will be closed by issuing a no-change report to the taxpayer upon the completion of the no-change examination. See IRM 4.10.8.2.3.

When an examination results in both change and no-change years, the appropriate basic report should be prepared for all years. The column for the no-change years should have "None" or zero on lines 2, 14 and 19 of RGS Form 4549or Form 4549A,Income Tax Examination Changes , or line 2 of Form 4605or Form 4605A,Examination Changes.

See IRM 4.10.8.6 for procedures for closing cases which contain at least one agreed/no-change year and one unagreed year.

This section includes procedures for an examination which results in adjustments to taxable income but does not change the taxpayer’s liability.

In cases where the years examined result in adjustments to taxable income but no change to the tax liability, it is important to notify the taxpayer of the adjustments and/or or secure an agreement from them so that such adjustment(s) will be properly reflected in subsequent year returns. A report on Form 4549or Form 4605(with any necessary supporting schedules) should be prepared and given to the taxpayer at the conclusion of the examination.

It is not necessary to secure the taxpayer’s agreement since there is no tax liability.

Upon completion of a no-change examination of any return in office or field examination, the examiner will provide Letter 3401,No-Change Report Transmittal Letter, and one copy each of the no-change report to the taxpayer(s) and the taxpayer’s representative (if Form 2848, Power of Attorney and Declaration of Representative, authorizes the representative to receive notices and communications). Letter 3401advises the taxpayer that a no-change is proposed but is subject to review. It does not replace Letter 590which is issued after the case is officially closed. Letter 590(undated) should be prepared by the examiner, signed by the Manager and included in the case file when closed from the group.

An RGS no-change report will be generated or a no-change report will be prepared on Form 4549with the following modifications:

On Form 3198,Special Handling Notice, check the blocks for "No Change Letters " and "Letter 590" in the "Letter Instructions" section. Letter 590is issued by Case Processing and notifies the taxpayer that the no-change report has cleared review and will be closed as a no-change.

Formal re-opening procedures do not apply if subsequent changes are needed before issuance of the formal no-change letter.

The "no-change" report may be acceptable documentation for repetitive audit verification in lieu of Letter 590if the transaction code on the transcript collaborates the taxpayer’s no-change report. You may research IDRS using command code IMFOLZ which will display the last two audit results. This command code will show the no change issue codes, disposal codes and any deficiency amount.

The following form letters are issued as no-change notification letters:

No Change issue codes should be entered on the appropriate line of Form 5344,Examination Closing Record . For IMF returns, Publication 1102, Uniform Issue List, provides a list of the necessary codes. The codes may also be found on the AIMS website at " http://sbse.web.irs.gov/AIMS/docs/IMFissuecode.xls" .

Enter the disposal code on the appropriate line of Form 5344as:

A Combat Zone (CZ) is an area designated in an Executive Order by the President of the United States. Certain taxpayers in a combat zone are provided tax relief and require special processing. Generally, once it is determined that an examination is being conducted on a taxpayer in a combat zone, the case should be no-changed.

Combat Zone information can be found in various locations in the IRM as well as Publication 3, Armed Forces' Tax Guide. Examiners may refer to IRM 25.6.16,Combat Zone for Statute Processing, and IRM Exhibit 4.4.1–14, Combat Zone Procedures, for additional information and references.

Form 4549,Income Tax Examination Changes, is the basic report form for regular agreed individual and corporate cases.

Instructions for preparing Form 4549are outlined below. Sections of the form not discussed are self-explanatory.

Name and Address — enter the correct name and address of the taxpayer. When your case involves a deceased taxpayer, please ensure you have properly entered the name. See IRM 4.10.8.2.4.

Taxpayer Identification Number — use Social Security Number (SSN) if individual also has an Employer Identification Number (EIN). On joint returns, check master file to determine which SSN was used as the primary number for the year(s) examined.

Person with Whom Examination Changes Were Discussed — enter individual with whom changes were discussed. If a power of attorney or corporate officer, also enter title.

Tax Period — enter the taxable year for which the column applies. For calendar, fiscal, and 52–53 week year, show the year ending date (mm/dd/yyyy). For a short period, show the beginning and ending date.

Adjustments to Income — list adjustments. Place a bracket around the dollar amount if an adjustment is in the taxpayer’s favor. If there are more than sixteen adjustments write, "See page __" on line 1(a) and use Form 4549–B, Income Tax Examination Changes — Adjustment to Income, for listing the adjustments.

Taxable Income Per Return or as Previously Adjusted — enter the final figure computed by the taxpayer on the last processed return or as computed on a prior processed examiner’s report if applicable.

Corrected Tax Liability — identify how the tax was computed (tax table, tax rate schedule, etc.), the taxpayer’s filing status (complete for individual returns only) and the amount of tax. If additional tax such as Parent’s Election to Report Child’s Interest and Dividends, Tax on Accumulation Distribution of Trusts, Tax on Lump-Sum Distributions, maximum tax, etc., applies, indicate on this line and attach schedule showing the computation of corrected tax figure. Likewise, if the alternative minimum tax (AMT) applies, attach a schedule showing the computation of the AMT.

Less Credits — this line should include only non-refundable credits. Do not include credits such as earned income credits or withholding tax and excess FICA credits.

Other Taxes — include recapture taxes, self-employment tax, etc. Attach the appropriate forms detailing the computations. Do not include alternative minimum tax on this line.

Total Tax Shown on Return or as Previously Adjusted — include tax per return plus any additional tax assessed/abated as reflected on a transcript.

Adjustments — Any changes to special fuels or prepayment credits should be reflected on this line. The calculation of any changes should be attached to the agreed report.

Penalties — IRC Section 6751(a) requires that penalties be identified by the name of the penalty, the IRC section under which the penalty is imposed, and include a computation of each penalty on every notice (report) imposing the penalty. Standard Explanations contained in RGS are required to be used by all examiners imposing a penalty after December 31, 2000. See IRM 4.10.10 - Exhibit 1 and IRM 4.10.10 - Exhibit 2 for a listing of Standard Explanations. If the penalty cannot be currently computed, place an asterisk in the line amount field and describe the process of the calculation in "Other Information Section" of Form 4549.

Other Information Section - Office Examiners (Tax Compliance Officers, Tax Auditors, and Tax Resolution Representatives) should no longer add the 45 day waiver language to their reports. This language is no longer required.

Form 9984should properly document actions related to report delivery. When reports are issued be sure to include:

An information only report is a completed Form 4549that does not propose a tax liability. It furnishes information about a taxpayer to the taxpayer or others who need this information. The report should be labeled "FOR INFORMATION ONLY." Information reports are usually submitted in connection with offers in compromise and requests for information from Headquarters and other Area offices.

Statements should be included in the "Other Information " section of the report as needed. Below are examples of statements which should be used to clarify the examination results:

Form 4605, Examination Changes Partnerships, Fiduciaries, S Corporations and Interest Charge Domestic International Sales Corporations, is the basic report form for use in these cases. The computer generated version of this report is Form 4605–CGand is prepared using the RGS program.

Form 886–S,Partners’ Shares of Income, Deductions and Credits, and Form 886–X, Shareholders’ Shares of Income, Deductions and Credits, are forms used to identify partner and shareholder level adjustments for each year in which a change is recommended.

Form 886-Z, Partner’s or S Corporation Shareholder’s Shares of Income, should be printed for the case file only. It reflects the percentages of ownership that are not on the Form 886-S or Form 886-X. See IRM 4.31.2, TEFRA Examinations - Field Procedures and IRM 4.31.5, Non-TEFRA Examinations - Field Office Procedures, for procedures in working a TEFRA or non-TEFRA key case and related investors. See IRM 4.31, Flow-Through Entity Handbook for procedures.

Form 886–S, Form 886–X,and Form 886–Zshould clearly reflect corrected items of income, separately stated items, and other items to be adjusted at the investor level. See Exhibit 4.10.8-1 for a sample non-TEFRA report. See Exhibit 4.10.8-2 for a sample TEFRA report.

Letter 920,Notification for Agreed Partnership, Fiduciary and S Corporation (Non TEFRA) Cases, is a report transmittal letter for agreed partnership, fiduciary, and S corporation cases not involving TEFRA procedures.

Form 4605is the basic report form for "regular agreed" Interest Charge Domestic International Sales Corporation ( Form 1120–ICDISCcases.

Form 886–Y,Examination Changes—Shareholder’s Share of Deemed and Actual Domestic International Sales Corporation’s Distributions, is prepared in conjunction with Form 4605for each year in which a change is recommended to show the corrected Schedule of Distributions.

The basic reports used for fiduciary cases are as follows:

Inform taxpayers that the agreed case is subject to review and once it is accepted, they will receive a Letter 987, Notification Letter - Agreed Income Tax Change Cases, stating the case is closed. Examiners will prepare Letter 987,which is signed by the group manager, and leave it undated and in the case file (with a copy for the file).

Letter 987 contact information can be completed with either the examiner's name or the group manager's name.

Annotate Form 3198,"Issue Letter 987" and Case Processing will be responsible for mailing the letter.

Partially agreed corporate and individual cases;

Claims allowed in full or part in a partially agreed case if there are agreed adjustments in addition to the claim;

When an overassessment on one return and a deficiency proposed on a related return is the result of the shifting of income or expenses (whipsaw issues);

"Excepted agreed" fiduciary cases;

Form 1120S,U.S. Income Tax Return, for an S corporation case where small business corporation provisions of the Internal Revenue Code (Subchapter S) are not applicable;

Cases involving personal holding company deficiency dividends;

Joint Committee Cases;

Transferor—transferee cases;

Unagreed cases requiring a Preliminary (30-day) Letter.

Forms in the 870 series are used to indicate that the taxpayer is waiving the statutory restriction upon assessment and collection of the deficiency of tax.

FORM 870 — Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, is generally used instead of Form 4549.

FORM 875 — Form 875, Acceptance of Examiner's Findings By a Partnership, Fiduciary, S Corporation, or Interest Charge Domestic International Sales Corporation, may be signed by any principal or general fiduciary or corporate officer authorized to sign binding agreements.

FORM 870–PT/S/LT — TEFRA agreement forms used instead of Form 4605,Examination Changes Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations.

Instructions for agreement forms in the 870 series:

Stamp or otherwise note on the waiver the date it was received. The date the signed agreement is received should be stamped or otherwise noted on the report as a signed agreement stops the running of interest 30 days from the date of receipt for income tax returns.

Reports/waivers of assessment for joint returns will require the signature of both spouses (or authorized power-of-attorney(s), if applicable), unless the deficiency is paid in full. We will continue to follow current procedures where full payment by the taxpayer, other than payment designated as a "6603 deposit", will be considered an agreement to the deficiency. See IRM 4.10.8.1.3.

When full payment is not received, and only one spouse signs the waiver, unagreed procedures should be followed for the non-signing spouse. Additionally, the account of the agreeing spouse will need to be assessed using MFT 31 procedures. See IRM 4.10.8.11.1.1.

The reports and forms required to close a partially agreed individual or corporate case are as follows:

Form 4665,Report Transmittal , is used to summarize unagreed report issues and present information of a confidential nature to Appeals. See IRM 4.10.8.11.5.

Form 4549–Ashould be prepared using only the agreed adjustments. The additional tax computed will be reflected on Form 870.Indicate "Agreed Issues" on the top of the Form 4549–Areport. The Form 4549–Areflecting the agreed issues should be included in the case file as a workpaper to document the calculation of the tax shown on Form 870.

Form 870is used to secure agreements where no S-corporations or TEFRA issues are involved.

A second Form 4549–Ashould be prepared to show both agreed and unagreed adjustments.

Lead sheets for all remaining unagreed issues should be attached and procedures for unagreed cases should be followed. See IRM 4.10.8.11.2.

Form 3198,Special Handling Notice, should be on the outside of the case file specifying "Partial Agreement." Form 870must be processed prior to the issuance of the 30-day letter for the unagreed issues.

The procedures for processing a partially agreed Non-TEFRA partnership case are the same as the procedures for individual and corporation cases outlined in See IRM 4.10.8.5.1 with the following exceptions for different forms:

See IRM 4.31.5, Non-TEFRA Examinations-Field Office Procedures, for detailed information.

The procedures for processing a partially agreed Non-TEFRA S corporation case are the same as the procedures for individual and corporation cases outlined in IRM 4.10.8.5.1, with the following exceptions for different forms.

Form 4605–Ais the basic report for partially agreed S corporation and fiduciary cases. See IRM 4.10.8.3.4.1 above for instructions for Form 4605which also apply to Form 4605–A.

Form 886–X,Shareholders’ Shares of Income, Deductions, and Credits, or Form 886–W,Beneficiary’s Shares of Income, Deductions, Credits, is prepared for each change year.

Form 4549–Ais used in partially agreed S corporation or fiduciary cases when a deficiency or overassessment is recommended against the corporation or trust, or if a claim is involved. The tax computation should be shown in the "Other Information " section of Form 4549–Aor on an attached lead sheet.

Form 870and Form 875are used to secure agreements in partially agreed S corporation and Fiduciary cases that are not involved in TEFRA proceedings.

Forms required to process partially agreed Interest Charge Domestic International Sales Corporation cases are as follows:

Cases excluded from partial assessments are as follows:

The allowance of partial overassessments should not be made routinely but only if the facts and circumstances warrant such action. Whether a partial overassessment should be allowed must be a matter of sound judgment and discretion. Group manager approval will be obtained prior to the allowance of a partial overassessment. Group manager concurrence will be documented on Form 9984.

A partial overassessment will be made only if there has been an agreement on the issue(s) resulting in the partial overassessment. These cases generally fall into the following categories:

The following are examples of partial overassessments that could be made for the situations listed above:

A Statutory Notice Audit Reconsideration case is one in which the taxpayer received a notice of deficiency (determination) and requests reconsideration of the deficiency (determination). It is a priority case and must be closed back through Technical Services. It does not suspend or extend the 90 or 150 day time period to petition Tax Court.

Because of the time constraints, the taxpayer should be advised that the Statutory Notice period cannot be extended by submitting information or by an audit reconsideration. The taxpayer is solely responsible for filing a petition before the Statutory Notice period expires if he/she does not agree with the adjustments or results of the audit reconsideration. All communication to the taxpayer should include the following statement: "The reconsideration of your case will in no way serve to suspend or extend the 90-Day period in which a petition for a redetermination of the proposed deficiency may be filed with the Tax Court."

Audit reports should be prepared based upon the transcript taxable income and tax per return or as previously adjusted before the statutory notice.

In the Other information of the RAR, make the following remarks: "This report is only a supplement to the Notice of Deficiency. It does not supersede the previous report nor does it serve to extend the 90-Day period for filing a petition to the United States Tax Court. If you do not agree to these adjustments, we may be required to assess the tax shown on the statutory Notice of Deficiency." Also, the "45 day " or the "subject to the Area Director" clauses should be removed on supplemental reports.

Clearly label the top of the revised report as a "Supplement to the Notice of Deficiency (Determination)" . Date the Supplemental RAR with the current date.
The examiner can obtain signatures on an audit report from the taxpayer at the time of the audit reconsideration interview but should not issue a cover letter. The 90-Day Coordinator/Reviewer is responsible for checking the audit report for accuracy before the Supplemental Notice and appropriate closing letters are mailed to the taxpayer.

Before preparing a report on a case involving a claim, examiners must have a current transcript of the taxpayer’s account.

If the claim is the result of a prior audit or assessment, TC 300 or TC 290 with a dollar amount will be posted. The "as adjusted " figures shown on the original report will be used as the starting point.

If the claim has already been allowed by the service center, TC 291 with a dollar amount will be posted.

If the claim is allowed in full, Letter 570 (DO/SC/IN/PR) will be prepared to notify the taxpayer of the findings. Since receipt of Letter 570by the taxpayer constitutes a closed case (subject to the case reopening criteria), the letter generally should not be furnished to the taxpayer until the entire case is ready to close.

If the amount claimed has already been refunded to the taxpayer by the campus, the examiner will close the case as a regular no change case.

Even though the issues stated in a claim are allowed in full, if offsetting adjustments are proposed which reduce the amount refundable, the claim will be treated as a partially or wholly disallowed claim. The procedures for claims disallowed in full or in part will be followed.

When a claim is disallowed in full or in part the examiner will prepare the following:

An examination report, Form 4549will be prepared if additional tax is due or if there is a partial disallowance.

Form 2297,Waiver of Statutory Notice of Claim Disallowance, is applicable in all cases where there is a complete or partial disallowance of a formal claim.

IRC section 532(a)(3) provides that a taxpayer may file a written waiver of the requirement that a notice of disallowance of a claim in whole or in part be sent by certified or registered mail. The effect of such waiver is to start the running of the two year period for filing suit on the claim from the date the waiver is filed. Thus, Form 2297accomplishes the same purpose as a notice of the disallowance of a claim by certified or registered mail, except that it does not affect the six month waiting period required by IRC section 6532(a) before filing a refund suit [Treas. Reg. 301.6532–1(c) - Periods of limitation on suits by taxpayers].

Since Form 2297constitutes a waiver of only the statutory notice being sent by certified or registered mail, a waiver form (Form 870, 4549, or 3363) is required in addition to Form 2297,if there is a partial overassessment or if additional tax is assessed.

Form 2297should be enclosed in the case folder in the same manner as other waiver and acceptance forms. Where claims for multiple years are disallowed, Form 2297 covering all years should be associated with the claim or amended return covering the most recent year.

Since Form 1045,Application for Tentative Refund, and Form 1139,Corporation Application for Tentative Refund, are not considered "Claims," it is not necessary to use Form 2297where the tax previously refunded is recouped.

Form 2297should not be secured in cases that require review by the Joint Committee. See IRM 4.36.3.2.9.

Form 3363is to be used in " agreed cases" where a Form 843or an amended return is disallowed in full or part and no other adjustments to the tax liability are necessary.

In an agreed case where the claim is being disallowed in full or part with additional adjustments to the tax liability, both Form 3363and an examination report should be secured. See IRM 4.10.8.9.6.1 for information to be included in the remarks section of the report.

Forms 1045 and 1139 are not considered claims. Form 3363is not used to reflect any recoupment of the tax previously refunded.

When a claim is disallowed in full or in part in an " unagreed" case and there are no other adjustments, complete the top portion of the report for unagreed cases. See IRM 4.10.8.11. An appropriate statement regarding the disallowance of the claim is to be included in the "Other Information" section. See IRM 4.10.8.9.6.1.

When a claim is allowed in full or in part in a partially agreed case with other adjustments, complete Form 4549–A. A statement, regarding the disposition of the claim, is to be included in the "Other Information" section.

When a claim is allowed in full in an unagreed case with proposed deficiencies, complete Form 4549–AA statement, regarding the allowance of the claim, is to be included in the "Other Information" section.