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Part 4. Examining Process

Chapter 75. Exempt Organizations Examination Procedures

Section 18. Case Reviews

4.75.18  Case Reviews

4.75.18.1  (01-01-2006)
Introduction

  1. This section contains general case review procedures for Exempt Organizations Examination Review Staff.

4.75.18.2  (01-01-2006)
Overview

  1. The centralized Review Staff, currently located in Dallas, is responsible for reviewing the completed work of compliance enforcement activities and providing management with information to aid in evaluating the technical and procedural effectiveness and efficiency of personnel.

  2. Mandatory Review is responsible for performing technical reviews of examination cases specified by the IRM as being subject to mandatory review.

  3. Special Review is primarily responsible for performing a quality sample review of closed examination cases through the Tax Exempt Quality Measurement System (TEQMS).

  4. Communications between the Review Staff and examiners are generally in the form of a reviewer's inquiry or advisory memorandum. Reviewers will prepare a Form 5456, Reviewer's Memorandum-EP/EO, if significant items of information, such as those discussed in this section, need to be brought to the attention of the examiner and the manager.

4.75.18.3  (01-01-2006)
Cases Subject to Review

  1. There are two types of cases which require review. They are:

    1. Tax Exempt Quality Measurement System (TEQMS) cases. These are processed by Special Review and consist of a statistically valid sample of cases; and

    2. Cases involving certain identified issues that are subject to mandatory review. A list of these types of cases and issues requiring mandatory review for EO examinations can be found in IRM 4.75.18.3.1.

      Note:

      A Form 3198-A, TE/GE Special Handling Notice, must be completed and attached to the front of all cases identified for mandatory review.

4.75.18.3.1  (01-01-2006)
Mandatory Review

  1. The following examination cases are subject to Mandatory Review:

    1. Cases involving a proposed revocation of qualification as an organization described in IRC 501(c)(3) or IRC 170(c)(2);

    2. Cases involving proposed modification or revocation of foundation classification of an organization where the issue is subject to IRC 7428(a)(1)(B). This includes IRC 4942(j)(3) private operating foundation classifications and reclassifications from one public charity status to another, e.g., from IRC 509(a)(1)/170(b)(1)(A)(vi) to 509(a)(2) or from IRC 170(b)(1)(A)(ii) to 170(b)(1)(A)(vi);

    3. Cases involving final modification or revocation of qualification for exempt status under sections other than IRC 501(c)(3);

    4. Technical advice cases;

      Note:

      For guidance with regard to Technical Advice cases, refer to IRM 4.75.21.

    5. Cases involving a proposed penalty under IRC 6661, 6700, 6701 or 6702;

    6. Private foundation examination cases for which a determination letter under IRC 4945(g) is to be issued;

    7. Health care organizations that are integrated delivery systems, preferred provider organizations, or physician hospital organizations;

    8. Hospitals where physician practices or physician facilities (e.g., MRI, ambulatory surgery center) are purchased, or compensation is based on net profits or earnings;

    9. Hospital management service organizations;

    10. Health maintenance organizations and managed care purchasing organizations (i.e., established by hospitals, employers, insurance companies, physician groups, community representatives, to fix health care rates and enroll participating employers);

    11. Church cases; however, refer to (2) below for specific criteria;

    12. Unagreed discrepancy adjustment cases;

    13. Cases involving credit counseling organizations;

    14. Unagreed tax change cases; and

    15. Installment agreement cases.

      Note:

      Closing agreement cases are not subject to mandatory review; however, they must be coordinated with the Closing Agreement Coordinator, Mandatory Review, per the procedures set forth in IRM 4.75.25, EO Examinations Closing Agreements.

  2. The following cases involving churches are subject to mandatory review:

    1. Private school cases in which the information obtained under the pre-examination procedures constitutes the sole basis for determining that the school appears to comply with Rev. Rul. 75-231 and Rev. Proc. 75-50;

    2. Determinations that an organization is not a church exempt from tax by reason of IRC 501(a);

    3. Determinations that an organization is not a church described in IRC 170(b)(1)(A)(i);

    4. Notices of deficiency in any tax or failure to file penalties involved in a church tax examination;

    5. Underpayments of tax involved in a church tax examination when subchapter B of Chapter 63 (relating to deficiency procedures) does not apply;

    6. Notices of deficiency in any IRC 4948 tax arising from transactions between a disqualified person and a church; and

    7. Church inquiries and examinations that result in no change.

4.75.18.3.2  (01-01-2006)
Tax Exempt Quality Measurement System (TEQMS)

  1. TEQMS cases are selected based upon a statistically valid sample for each area based on the number of cases projected to be closed during the fiscal year.

  2. The population of cases subject to TEQMS review consists of all cases, including Mandatory Review cases, that contain a Form 990, 990-PF, 990-EZ, or 1120-POL.

    Note:

    Surveyed cases are not part of the population. However, to be properly excluded, a non-examined disposal code must be used when closing the case.

    Note:

    Team Examination Program (TEP) cases are not part of the population; however, they are subject to their own TEQMS program.

  3. All returns of a taxpayer (related returns and prior/subsequent year returns) will be counted as one unit for sample population purposes.

4.75.18.4  (01-01-2006)
Processing Reviewed Cases

  1. Examination cases in the groups that are subject to mandatory review will be sent to the centralized EO Mandatory Review function in Dallas.

  2. All cases must be accompanied by an EOIC-generated Form 3210, Document Transmittal, and, for those cases forwarded to Mandatory Review, must also be updated on AIMS to the In Transit Between Groups and Review Function Status "52." All cases not meeting these minimum requirements will be returned to the group for correction.

  3. All cases received in Mandatory Review should have a minimum of 270 days on the statute for unagreed cases and 180 days for agreed cases. Any cases with less time on the statute must be communicated to the Mandatory Review Manager, via a telephone call, before forwarding. This will include "No-Change" cases.

  4. Once received in Mandatory or Special Review, the manager will review the case and assign it to a reviewer. The cases will be distributed to the reviewers on the basis of current workload and not on geographical location of the organization. This will provide flexibility in meeting workload demands and facilitate interaction between reviewers and the Area Managers and their employees. Every effort will be made by the review staffs to complete their duties within 60 days.

  5. Once assigned, the Mandatory or Special Reviewer will review the case. If there are no errors or questions regarding the case, the case file will be closed to one of the closing units, which will close and forward the case to the appropriate Campus.

  6. If there is a need to return a case to the group, the reviewer will first forward the case file to the appropriate Review Manager for his/her review, agreement and approval. If the appropriate Review Manager agrees with the reviewer, the case file, along with the Form 5456, Reviewer's Memorandum-EP/EO, will be sent back to the originating group for consideration of the reviewer's concerns. The group should reply within 60 days of receipt.

  7. For additional information on the preparation and processing of Reviewer's Memorandums, refer to IRM 4.75.19, Reviewer's Memorandums.

4.75.18.5  (01-01-2006)
Reviewing Cases

  1. The reviewer should adequately document his/her review of a case to ensure that all items noted are properly addressed before the case is closed. If errors are noted, but a decision is made not to take any action, this should be included in the case notes.

  2. The reviewer must ensure that relevant facts have been developed, and findings are adequately supported by law, regulations, published rulings, and court cases.

  3. The reviewer should be satisfied that the examiner has:

    1. Correctly determined the statute of limitations;

    2. Obtained all pertinent facts regarding technical issues, both favorable and unfavorable;

    3. Explained clearly and concisely the position of the Service when proposed changes were anticipated;

    4. Reviewed the entity for compliance with the package audit requirements;

    5. Computed any tax changes correctly;

    6. Secured and attached to the return any line items or attachments that were not completed by the organization; and

    7. Observed the standard time frames with regard to examination cycles.

  4. It is the aim of the Service to resolve all unagreed cases at the lowest possible level. The reviewer should ascertain that the examiner has made a reasonable effort to effect an agreement. The following questions may be pursued:

    1. Is the position of the organization and the examiner presented in a manner that leaves no doubt as to why there is a difference of opinion; and

    2. To what extent was the group manager involved?

  5. The reviewer will:

    1. Observe examination cycles, i.e., do not consider examining a prior year return unless there are compelling reasons to the contrary;

    2. Observe application processing cycles;

    3. Observe independent pickup practices;

    4. Evaluate time on cases;

    5. Ensure workpapers are fully documented (i.e., identify issues which appear to be questionable); well organized, indexed, and cross-referenced to the pre-examination plan; brief and concise, yet cover all questionable features of the case and reflect the examiner's actions taken to support the conclusions reached;

    6. Ensure adequacy of reports, i.e., agreed and unagreed issues properly developed with both the government's position and the taxpayer's position clearly stated, as well as proper references and citations;

    7. Consider unique issues, i.e., the examiner raised new or unusual issues and used the appropriate examination techniques;

    8. Identify group manager involvement, i.e., in situations which reflect poor case control on the examiner's part, the group manager should become involved and participate to direct and influence the prompt closing of the case; in unagreed cases, the group manager must include a statement in the report that he/she agrees with the examiner's position; and

    9. Adhere to Service policies and procedures.

  6. When evaluating time on cases, the following factors should be considered:

    1. Complexity of the return and related issues;

    2. Grade of case vs. grade of examiner;

    3. Scope of examination - the depth and scope of the examination should be commensurate with the anticipated potential of the return. When a limited scope examination is performed, the reason should be stated in the workpapers; and

    4. Time span of examination - the case should be worked in an expeditious manner. There should not be long periods of time between contacts with the organization or its representative(s). Consider reasonableness of explanation in the workpapers.

  7. The reviewers will ensure that the file contains, but is not limited to, the following:

    1. All necessary returns;

    2. Properly executed Forms 872, 872A or 872C (consents to extend statute), when appropriate;

    3. Properly assembled workpapers and report(s);

    4. Properly signed and completed Form 870 or 870E, Waiver of Restriction on Assessment and Collection of Deficiency in Tax & Acceptance of Overassessment, where applicable;

    5. Form 3198-A, TE/GE Special Handling Notice, containing special processing instructions, where applicable;

    6. Pertinent and complete EO AIMS documents; and

    7. Properly completed Form 5666, TEGE Referral Information Report, or Form 5346, Examination Information Report, if applicable.

4.75.18.5.1  (01-01-2006)
Mandatory Case Reviewer Responsibility

  1. The Mandatory Review staff is charged with the responsibility for reviewing the completed work of examination activities and to provide management with sufficient information to aid in evaluating the technical and procedural effectiveness and efficiency of Service personnel.

  2. Case reviews will be performed on all Mandatory Review cases. For a complete listing of cases subject to Mandatory Review, refer to IRM 4.75.18.3.1 above.

  3. For Mandatory Review cases also selected for the TEQMS sample, the reviewer needs to complete the UFILL disk and return it to Dallas to be uploaded. The checksheet should be completed based on the information in the original file as received. Subsequent information obtained from an examiner's response to a reviewer's memorandum should not be considered.

4.75.18.5.1.1  (01-01-2006)
Mandatory Reviewer - Case Return Criteria

  1. If errors are found in an examiner's report, it should generally be returned for correction to the group manager with appropriate instructions. However, group managers may be advised of minor errors by advisory memorandum without returning the case for correction. The reviewer will make the needed corrections if the case is not returned to the group.

  2. An agreed issue should not be reopened and neither should a new issue be raised by the reviewer unless the grounds for such action is a substantial one, or the potential effect upon the tax liability is material. The prohibition against raising issues for trading purposes should be clearly understood, as well as the prohibition against nuisance-value settlements.

  3. Agreed cases involving deficiencies of $10,000 or more will be given priority, with special priority to those cases containing deficiencies of $50,000 or more. However, in some instances, it may not be possible to close certain cases to the Campus within the specified period, e.g., cases returned by the Technical/Review staff for correction, or cases requiring specialized review because of complex or controversial issues. Nevertheless, such cases must be expedited so they will be closed to the Campus at the earliest possible date.

  4. At the end of each month, the total number of cases on hand must be carefully appraised and appropriate action taken to avert continuing backlogs. Review staff inventories should not exceed a 15-day average workload of cases. Cases in suspense or in 90-day status will not be included in computing such workload.

4.75.18.5.2  (01-01-2006)
TEQMS Case Reviewer Responsibilities

  1. Special Review is charged primarily with the responsibility for reviewing examination cases selected for the TEQMS sample.

  2. These cases are closed on AIMS and the closing letter has been mailed. The exception to this would be those cases also subject to Mandatory Review.

  3. The training text for TEQMS is Catalog Number 86727A. This publication should be used to provide guidance for reviewers in applying the quality standards.

  4. Reviewers must complete a case review input form for each case reviewed. For Fiscal Year 2001, and subsequent years, the TEQMS input form has been converted to electronic format (UFILL disks).

  5. New forms are made available at the beginning of each fiscal year. It is important that the correct input form is used. The group closing date determines in which fiscal year sample the case should be included.

  6. The group closing date is also a very important item in the UFILL disk record. This field is used to generate TEQMS management reports.

  7. TEQMS measures the quality of group closures; therefore, the date the case is reviewed is not the key date:

    1. The date the group closes the case to Examination Support Section (ESS) is the one that should be used; and

    2. The case chronology and AMDISA prints should not be used to determine the group closing date.

  8. Completed cases should be returned to Dallas, via an EOIC-generated Form 3210, Document Transmittal, where the disks will be uploaded. If there are rejects or errors when the upload is attempted, the reviewer will be asked to make the necessary corrections. For this purpose, it is helpful to maintain a copy of the files until the case has been uploaded.

    Note:

    The file can be saved to the hard drive of the reviewer rather than on a disk.

  9. The TEQMS program requires consistency reviews to be conducted on a periodic basis. One case will be selected and reviewed by each reviewer. The results will be tabulated and discussed at a group meeting or by teleconference. Group managers and revenue agents will be invited to attend. The goal is to achieve greater consistency in the way reviewers apply the standards.

4.75.18.5.2.1  (01-01-2006)
TEQMS Case Reviewer Return Criteria

  1. When errors are noted during TEQMS reviews, the cases will generally not be returned to the group. However, cases meeting the criteria below will be returned to the group via a reviewer's memorandum:

    1. There is clear evidence an incorrect determination has been reached with regard to the exemption of an organization. An underdeveloped case will not be returned unless it is evident in the case file that the organization is not qualified;

    2. There is a clearly defined substantial error based on an established Service position existing at the time of the examination. Any proposed change must involve net additional tax of $10,000 to be considered substantial. "Substantial" refers to the dollar amount of tax that would not be assessed if the case were not returned (regardless of the number of years involved). Penalties and interest are not a factor in making this determination."Clearly defined" means the error is clearly apparent as opposed to being vague or uncertain;

    3. There is evidence of fraud, malfeasance, collusion, concealment, or misrepresentation by the taxpayer or representative;

    4. The case cannot be processed, e.g., case requires new agreements, AIMS establishment, a mandatory examination checksheet to be completed, etc.;

    5. The adjustment is favorable to the taxpayer and the Review staff cannot readily correct the report; and

    6. Other circumstances exist that indicate failure to return the case would be a serious administrative omission.

      Example:

      The action would: (1) result in serious criticism of the Service's administration of the tax laws; (2) establish precedent that would seriously hamper subsequent attempts by the Service to take corrective action; or (3) result in inconsistent treatment of similarly situated taxpayers.

  2. Inaccuracies that have been corrected by the Examination Support Section (ESS) for the applicable standard (i.e., report writing, closing letters, etc.) will be considered as errors during a TEQMS review if the file contains clear evidence of correction.

4.75.18.5.3  (01-01-2006)
Reviewing Employment Tax Reports

  1. Only individuals who have received specialized training in employment taxes will generally review employment tax reports.

  2. Employment tax reports will be reviewed to determine whether applicable law, regulations, and private letter rulings have been correctly applied, as well as ensuring that the report writing procedures have been followed.

  3. It is important that correct and clear entries are made on Form 4668, Employment Tax Examination Changes Report, since the form is used in transmitting wage information by the Campus to the Social Security Administration.

  4. Where Federal Unemployment Tax Administration (FUTA) adjustments have been agreed to by the taxpayer, a credit for State taxes will be allowed only if the tax was paid to the State.

  5. In income tax withholding cases, taxpayers should be advised of the relief of payment provisions under IRC 3402 (d). The examiner should also furnish Forms 4669, Statement of Payments Received, and 4670, Request For Relief From Payment of Income Tax Withholding, to the taxpayer and inform him/her to wait until receipt of a notice of assessment before submitting Forms 4669 and 4670. The examiner is authorized to accept the Forms 4669/4670 for withholding tax abatement before the examination is closed.

  6. Where the examiner has recommended assertion of penalties (IRC 6651(a)(1) or (a)(2), 6653(b), 6656), determine that the penalty is correctly computed. Use Form 2769, Computation of Deposit Penalty, to compute the depository receipt penalty.

  7. The 100% penalty provided by IRC § 6672 is to be used only as a collection device when asserted against collecting agencies or responsible officers or employees of collecting agencies.

  8. Employment tax examinations involving delinquent returns, whether agreed or unagreed, should specify, in red ink, " Delinquent Return Prepared By TE/GE," not just "Delinquent Return."

  9. Where a claim for refund of employer and employee FICA tax is being allowed, ensure that the employer has paid the employee's portion of the tax to the employee, or the employer has received permission from the employee to file a claim on his/her behalf.

  10. Determine that the proper rates and wage base are applied in FICA and FUTA cases in view of the changes being made from year to year.

4.75.18.6  (01-01-2006)
Cases Requiring Area Counsel Assistance

  1. Cases requiring Area Counsel approval (i.e., proposed adverse letters, proposed revocation letters, and proposed deficiency notices) should be sent to the Area Counsel office where the case would be tried should it go to trial. This generally would be the Area Counsel office where the taxpayer/organization or their representative resides.

  2. Reviewers may contact Area Counsel at any time for advice. A directory of the Area Counsel attorneys with their area of expertise is compiled and distributed annually.

  3. The proper Counsel offices to receive these cases are as follows:

    Area: Located In:
    Great Lakes CC:TEGE:GLGC:CHI Chicago, IL
    Gulf Coast
    CC:TEGE:GLGC:DAL     		Dallas, TX
    Pacific Coast
    CC:TEGE:PCCM:LA     		Los Angeles, CA
    Mid-Atlantic
    CC:TEGE:NEMA:BAL     		Baltimore, MD
    Northeast
    CC:TEGE:NEMA:LI     		Long Island, NY


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