- 4.75.20.1 Introduction
- 4.75.20.2 Quality Control
- 4.75.20.3 Forwarding TEGE Cases to Appeals
- 4.75.20.4 EO Proposed Adverse Examination Letters and Unagreed Examination Cases
- 4.75.20.5 No Response to Proposed Adverse Examination Letter
- 4.75.20.6 Statutory Notice of Deficiency
- 4.75.20.7 Discrepancy Adjustment Processing
- 4.75.20.8 Claims-Issue Not Before Tax Court or Other Courts
- 4.75.20.9 Inadequate Record Notice Case Processing
- Exhibit 4.75.20-1 Review Staff--Return Case Memorandum
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This IRM section contains specific guidance for EO Reviewers regarding the proper case closing processing procedures.
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This IRM section also provides information regarding the quality control procedures established for examination review functions.
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Many of the modification, revocation and final letters have been revised, updated and renumbered.
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Quality control procedures have been established to follow in monitoring and controlling the technical, managerial, and procedural aspects of examination cases. In this regard:
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All completed case files will be sent through the group manager for closing. Groups will use the established procedures in IRM 4.75.16 when forwarding selected cases to the Review Staff.
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If a case requires action by another group or area prior to final closing, the case will be forwarded directly to that area after approval by the group manager and after updating the case to its proper status as provided in IRM 4.75.16, Case Closing Procedures.
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The group manager, prior to forwarding a case to review, should review and initial his/her concurrence with the completed case.
Note:
There is no specific place designated for the location of the manager's signature, but the bottom of the last page of Form 5464, Case chronology Record can be utilized.
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The Mandatory Review Staff will verify computations in " change" cases, before forwarding any case to the closing unit.
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The Examiner's unagreed Revenue Agents Report (RAR) will not be released to an organization before the file has been reviewed by Mandatory Review Staff. (For agreed situations where the RAR can be released, please refer to IRM 4.75.14.2.1.)
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The Reviewer will issue the final examination report before forwarding completed cases to the closing unit . In cases where a referral is necessary, Review will:
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Ensure that Form 5666 (TE/GE Information Report), or Form 5346 (Examination Information Report), has been prepared for forwarding to the appropriate Operating Division (LMSB or SB/SE), where the taxpayer is located.
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Forward copies of any secured taxable return(s) with the Form 5666 or Form 5346. In cases where the examiner was unsuccessful in obtaining the required taxable return(s), copy(ies) of Forms 990, etc. and any other helpful information will be provided to the appropriate Operating Division along with the Form 5666 or Form 5346.
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Review Staff will forward cases requiring Appeals' consideration to the appropriate Appeals office.
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The reviewer will ensure duplicate pages and unneeded reference returns are removed from the file(s) before the case is forwarded to Appeals. Documents other than returns, should be arranged in chronological order starting with the most recent on top.
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All docketed cases must contain the original return. The tax court requiresexactly what the taxpayer filed. If the original return is not available, a copy of the return as well as a "CC ESTAB/ELFREQ PRINT" requesting the original return and a certified transcript is required.
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Review should appropriately notify Appeals of any cases being forwarded with less than 270 days left on the statute. The Review function will be responsible for insuring that these requirements are met.
Note:
Appeals will not accept any case with less than 180 days remaining on the statute.
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Effective January 30, 2003, one national TEGE team comprised of TEGE Appeals Officers from various Appeals Offices were established under SB/SE Appeals. All unagreed cases will be sent directly to Oklahoma City (Area 5) for carding, assignment, control, and closing as follows:
Appeals Record Section
55 N. Robinson
Suite 939, MS: 8000
Oklahoma City, OK. 73102
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Upon completion of the review of a proposed adverse examination case, the Mandatory Review staff will mail the applicable letters by certified mail, return receipt requested to the organization and/or its authorized representative.
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In proposed adverse cases and examination cases involving a change in exempt status or foundation status in the case of a 501(c)(3) organization, the Reviewer will prepare and mail the 30 day letter and the final letter. The 30 day letter and an enclosure will advise the organization of its appeal rights. (For discrepancy adjustment cases see 4.75.20.7 below.) Form and pattern letters used for this purpose include:
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Letter 3621–Letter transmitting the examination report, waiver form and appeal procedures, and advising the taxpayer of a deficiency or over-assessment of tax and identifying an act or a failure to act on which adjustments are based.
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Letter 3602–Letter transmitting report involving cases where a claim is disallowed.
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Letter 3618–Letter transmitting an examination report to an IRC § 501(c)(3) organization, advising the organization of a change in tax exempt status.
Note:
Letter 3618 is always accompanied by Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues and Publication 3498, The Examination Process.
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Letter 3610 (DO)–Letter transmitting an unagreed adjustment of exempt status for other than an IRC § 501(c)(3) organization.
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Enclosures to the preliminary report will not include any part of the transmittal letter or any report of a confidential nature.
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AIMS Status Update (Form 5595) will be provided to the E.O. control clerk for input.
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The Reviewer will keep a file of the 30 day date cases for follow up purposes.
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IRC 7428 provides for the judicial review of certain final adverse EO determinations by the United States Tax Court, The United States Claims Court, and the United States District Court for the District of Columbia.
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Matters subject to court review covered under IRC § 7428(a)(1) include disagreement with respect to initial or continuing qualification of an organization under IRC § 501(c)(3).
Note:
The provisions of IRC § 7428 cover private Foundations under IRC § 509(a), as well as operating foundations under IRC § 4942(j)(3).
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Existing rules of the courts involved provide that the United States must respond to a petition or a complaint when a suit is initiated under IRC § 7428 within a short period of time. However the rules of court permit a motion to dismiss for lack of jurisdiction to be filed before the petition or complaint is answered. Timeliness is therefore of the essence when dealing with declaratory judgments.
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In proposed adverse letter cases only, if the taxpayer has not responded within the time allowed but previously indicated the intent to file a protest:
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Review Staff will issue letter 923(DO) to allow an additional maximum of 15 days within which to file the protest.
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If no response is received within the additional time allowed, a statutory notice of deficiency (90 day letter) will be prepared for issuance by Review Staff.
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If the taxpayer fails to reply to the preliminary letter advising of a proposed over-assessment or disallowance of a claim with no change in tax liability, without any follow-up action, the case file will be processed to the appropriate campus through the Closing unit.
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If the preliminary letter is returned as "undeliverable " to the address on file:
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An attempt should be made to locate a current address.
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If a new address is found, the preliminary letter will be re-mailed to the new address and the period in which the taxpayer may reply will commence with the date the letter was re-mailed.
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In deficiency cases, if the taxpayer fails to respond to the re-mailed letter or a new address cannot be found, a statutory notice of deficiency should be prepared and issued.
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In examination cases notsubject to IRC § 7428 (declaratory judgment), if the organization fails to respond to the proposed revocation letter (Letter 3610 (DO)) within the allotted time, the proposed letter becomes a final adverse determination letter. Additionally, Form 2363-A will be submitted by the reviewer to the appropriate terminal unit for processing the status change.
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For modification cases not subject to IRC § 7428, a final modification letter will be issued if the organization fails to respond to the proposed modification letter within the allotted time. Additionally, Form 2363-A must be submitted to the closing unit for processing the status change.
Note:
Form letters are currently being developed. When released, the reviewer will issue a standard letter.
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In examination cases involving IRC § 501(c)(3) organizations, if the organization fails to respond to the proposed revocation or modification of exempt status within the allotted time, Review Staff will issue the final determination letter containing the required declaratory judgment provisions. In the case of revocations, Form 4194, Revocation of Tax Exempt Status and a photocopy of the final determination letter will be prepared and forwarded to :
TE/GE Business Systems Planning Division
Attn.: T:BSP
1111 Constitutional Avenue, NW
Washington, D.C. 20224 -
In addition, Form 2363-A will be submitted to the appropriate closing unit for processing.
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While IRC § 7428(b)(2) is similarly applicable in these situations, a final letter is issued because of the validation provisions of IRC § 7428(c) and by the need for the Service to firmly solidify the revocation.
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If the adverse determination involves a modification to private foundation or private operating foundation, Review Staff will also forward Form 5060 (Report of Adverse Determination on Private Foundation Status) to :
Technical Services Staff
CC:IND, Room 2579
1111 Constitution Avenue. NW.
Washington, DC, 20224
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If an agreement is received in response to the preliminary letter issued as a result of an examination involving a change, the case will be closed under agreed case closing procedures.
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If the organization files a protest and requests a conference in response to a proposed adverse letter, Review Staff will review the protest to determine whether:
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the protest specifically identifies and addresses the areas of controversy; and /or
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the case requires further development or consideration by the specialist. When the protest does not meet the criteria in (a) above, it will be returned to the organization for perfecting via letter 3615. It is Review Staff's responsibility to fill in the Appeals information on Form 5599 (EO Examined Closing Record), prior to sending the case to Dallas where it can then be forwarded to the appropriate Appeals office.
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If the protest indicates the need for further development or consideration by the specialist, the case will be returned to the group on a Form 9925. See Exhibit 4.75.20-1, for further consideration.
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If the protest is complete, the case file (including the protest and administrative record ) will be forwarded to Mandatory Review for forwarding to the appropriate Appeals office.
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A notice of deficiency, also called a "Statutory Notice of Deficiency" or "90 day letter" , is the Commissioner's determination of a taxpayer's income, estate or gift tax deficiency sent to the taxpayer by certified or registered mail.
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The Commissioner is authorized to send this notice per IRC § 6212(a). The issuance of a Statutory Notice of Deficiency begins the litigation process.
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A Statutory Notice of Deficiency is issued when the:
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Taxpayer does not file a valid protest in response to a 30-day letter or fails to respond to a 30-day letter for unrelated business income deficiencies and discrepancy adjustments;
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Case involves a final revocation and there is a potential tax on the converted Form 1120 or 1041;
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Expiration of the statute of limitations is imminent and no extension can be obtained; or
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Taxpayer requests the issuance of the notice in order to plead the case in the US Tax Court.
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The notice of deficiency is a legal determination that is presumptively correct. The notice of deficiency will consist of:
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A letter explaining the purpose of the notice, the amount of the deficiency and the taxpayer's options. Letter 531(DO), Notice of Deficiency is the letter most used in most straight income tax cases.
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Form 4089, Notice of Deficiency - Waiver if the taxpayer should decide to agree to the additional tax liability.
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A report showing how the deficiency was computed , and an explanation of all the adjustments.
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An explanation of the Taxpayer Advocate Office along with the address of the closest office to the taxpayer must now appear in the body of the notice. The notice must be accompanied by Publication 594 and a return envelope. The Taxpayers copy must be sent by certified mail on the same day as the date shown on Letter 531.
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Overassessments and no change years should not be included in a notice of deficiency.
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It is extremely important that the taxpayer is correctly identified as even minor typographical errors in the name or address can invalidate a notice of deficiency.
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The mailing address should be the taxpayer's last known address. Rev. Proc. 90-18 defines this as the address on the most recently filed and properly processed tax return unless the taxpayer has clearly and concisely notified the Service of a change of address.
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After the statutory notice of deficiency is mailed, Form 5595 should be prepared to update the statute of limitations to include the time remaining on the statute plus 150 days.
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The case file should be annotated for follow-up in 92 days from the date the statutory notice of deficiency was mailed. The case file will be forwarded to and controlled in the Mandatory Review Staff in Dallas during the 90 day period.
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If the organization does not respond to the statutory notice of deficiency within 92 days and the case is not docketed, it is closed by Mandatory Review to the Closing Unit IMMEDIATELY.
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A special handling notice, Form 3198 should be attached with the following instructions "STATUTORY NOTICE OF DEFICIENCY DEFAULTED - ASSESS TAX IMMEDIATELY."
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Before closing, Dallas Review will verify that the case has not been docketed. If the case is docketed for Tax Court, it must be updated and forwarded to the closing unit for transfer to Appeals.
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The notice of deficiency mailed to the taxpayer can be rescinded, but only with the consent of the taxpayer. If the organization responds to the statutory notice of deficiency by signing Form 872, a Form 8626 will be prepared to secure an agreement between the taxpayer and the government.
Note:
The consent must be in hand and signed for the Commissioner before the normal or previously extended statute is updated or the Form 8626 is mailed.
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If the organization agrees to the deficiency by signing Form 4089 the case should be closed following agreed case closing procedures.
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Review Staff may use letters such as Letter 556(DO), Acknowledgement of Protests, Correspondence and Requests for Interviews, to acknowledge receipt of protests, correspondence, and requests for appeals received by Review Staff after the issuance of statutory notices.
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Following acknowledgement, the protest, correspondence, or request will be transmitted by Review Staff with the administrative file (or a statement of the pertinent facts if the files are extremely bulky) to the Appeals Office which serves the applicable Area making the determination of tax liability.
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Appeals will only consider cases during the 90 day period if there are extenuating circumstances. After reviewing a case, Appeals will either notify Dallas Review that it will consider the case or it will return the file to Dallas Review.
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If during the 90 day period the taxpayer waives the restrictions upon assessment and collection of the deficiency in whole, the case will be transmitted immediately by Dallas Review to the appropriate campus for assessment of the deficiency.
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If during the 90 day period the taxpayer waives the restrictions upon the assessment and collection of the deficiency in part, the waiver and the return or returns will be transmitted by Dallas Review to the appropriate campus for assessment of the agreed upon portion of the deficiency.
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After necessary action in the latter case, the waiver and the return or returns will be returned for restoration to the file of the case. If the file in the meantime has been transmitted to Appeals, the waiver and the return or returns should, of course, be transmitted there.
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In order that each Area Office may have information necessary to determine whether petitions have been filed within the prescribed time in cases in which notices of deficiency have been issued by that Office, Chief Counsel's Office furnishes an electronic list of newly docketed tax court petitions daily to the Area offices. These lists reflect the following information:
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Docket number
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Name and address of taxpayer
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TIN (if known)
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Name of office issuing Notice of deficiency; and
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Date of notice of deficiency
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It is the responsibility of Review Staff, by reference to the lists furnished, to take necessary action to ensure assessment of the deficiency on any defaulted statutory notice within the statutory period.
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Dallas Review will forward the case to the closing unit for closing and assessment. In any such case where an organization has timely petitioned the court, the petition will be forwarded to Dallas Review where it will be merged with the case and updated to the closing Unit who will then forward the case on to Appeals. Appeals is then responsible for forwarding the case on to Counsel.
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Provisions enacted under the IRS Restructuring and Reform Act of 1998 (RRA) affect the Review Staff procedures under these sections. These include provisions relating to:
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RRA 6015, Relief from joint and several liability for innocent spouses under IRC § 6013;
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RRA 3463, Changes to Statutory Notice of Deficiency; and
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RRA 3202(h), Suspension of statute of limitations on claims.
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All unagreed discrepancy adjustment cases are subject to Mandatory Review.
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Except for the unagreed cases described in paragraph (7) of this section, discrepancy adjustments will be closed and processed separately from the related EO. return cases.
Note:
Under IRC § 6013, husband and wife are jointly and severally liable for income tax with respect to a jointly filed income tax return. Each spouse needs to sign the return and execute any subsequent documents with respect to that return, such as a waiver, with respect to assessment. Any waiver then is valid if signed by only one spouse, but it is valid with respect to only that person who signed.
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The general case review criteria are applicable to discrepancy adjustments. (Refer to IRM 4.75.28);
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Ensure that the discrepancy adjustment case workpapers include copies of all materials from the related EO case file necessary to document the discrepancy and resulting adjustment.
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Issue and process review memorandums in accordance with Review Staff procedures.
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If issuing a memorandum requiring a specialist to recontact a taxpayer who has agreed to a discrepancy adjustment, see IRM 4.75.17. (Review Procedures).
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Upon acceptance by Review Staff, "no change" and "agreed" cases will be forwarded to the EO closing unit for processing;
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If the total agreed deficiency or overassessment for one taxpayer is $50,000 or more, see IRM 4.75.28.3.2 for special processing instructions.
Note:
In the situation where only the husband has signed the waiver on assessment, the Service can assess the tax on the husband only. As the wife has not signed the waiver, should the Service need to subsequently collect from the wife, she cannot be assessed until the 90 day period for filing a petition expires. (Assuming she does not petition the Tax Court.)
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Unagreed cases which have been accompanied by a protest will be forwarded by Review Staff to Appeals. A cover memorandum will briefly summarize the protested issue(s);
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If the original return is not available, the case should be closed to appeals with CFOL prints as well as a copy of the return with a CCESTAB/ELFREQ PRINT requesting the original return in the case file.
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Review staff is responsible for obtaining the original return as the tax court requires exactly what the taxpayer filed. If obtained, associate the original with the case file in Appeals.
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If a case is unagreed because the taxpayer has not responded to Form 4549-E, prepare and issue a Notice of Deficiency with Pattern Letter 5601, as required by the LMSB Operating Division.
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If a discrepancy adjustment is unagreed as a result of an unagreed EO issue (e.g. revocation), issue all 30 day and 90 day letters on the related income tax and qualification issues simultaneously. Send all such related cases to Appeals as a single unit.
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If the taxpayer does not respond to the Statutory Notice of Deficiency within 92 days and the case is not docketed, it is forwarded to the EO closing unit. A special handling notice, Form 3198 should be attached with the following instructions: "STATUTORY NOTICE OF DEFICIENCY DEFAULTED – ASSESS TAX IMMEDIATELY"
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If a taxpayer invokes the jurisdiction of the Tax Court in redetermining the amount of the deficiency, he/she is precluded from instituting suit at a later date in the courts on a claim for refund filed for the same kind of tax for the same taxable year.
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Therefore, if a taxpayer has filed a claim for refund (for the same kind of tax for the same taxable year with respect to which a deficiency in tax is shown in the statutory notice of deficiency) raising an issue which cannot be conceded, he/she should be advised that, if he/she files a petition with the Tax Court for a redetermination of the deficiency and intends to prosecute the issue in the claim, he/she should include the issue in his /her petition.
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If the issue raised in the claim for refund is not being litigated before the Tax Court or the other courts, either by the taxpayer for another year or by another taxpayer for any year, the following paragraph should be used in the statutory notice statement: "If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with IRC § 6532(a)(1) of the Internal Revenue Code"
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While the taxpayer may be advised in a notice of deficiency that there is an overassessment of income tax for another year or years, the Tax Court has no authority to review and redetermine such overassessments. Therefore, if the overassessment of tax shown in a deficiency notice is not protected by a claim for refund based on the issues producing the overassessment, the taxpayer should be advised of his/her right to file a claim for refund based on the issues producing the overassessment and of his/her right to file a claim for refund within the time provided by law.
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In the case of the situation described in the previous paragraph, the notice of deficiency should contain the following statement. " When final determination is made as to the deficiencies proposed in this letter, the overassessment will be scheduled for adjustment to the extent allowable and applied as set forth in IRC § 6402 provided that you protect yourself against the expiration of the statutory period of limitations by filing a timely claim for refund with your appropriate IRS Campus." If, however, the allowance of the refund has been protected by a claim for refund, the portion of the paragraph starting with the word "provided" should be omitted.
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In some cases, the deficiency in tax will be attributable to many adjustments. The taxpayer may be in accord with some of the adjustments and would be willing to consent to the immediate assessment and collection of that part of the deficiency if he/she could be assured that such action would not deprive him/her of his/her right to file a petition with the Tax Court.
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If two or more adjustments have been made and it appears possible that the taxpayer will agree to that part of the deficiency attributable to one or more of the adjustments, the taxpayer should be so advised as follows:
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"If you do not acquiesce in all the adjustments making up the deficiency indicated, but desire to stop the accumulation of interest on that part of the deficiency resulting from adjustments to which you agree, please fill out the enclosed Form 4089, Notice of Deficiency - Waiver, inserting therein the amount of the deficiency you desire to have assessed at once. The execution of this form for the agreed portion of the deficiency will not deprive you of your right to petition the United States Tax Court for a redetermination of the deficiency."
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The space for inserting the amount of the deficiency in the waiver should be left blank so that the taxpayer may insert the amount of the partial deficiency which he/she consents to have assessed immediately.
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The standard paragraph should not, however, be used in offset cases (i.e., if there is a deficiency for 1 year and an overassessment for another year) because ordinarily the scheduling of the overassessment is deferred until the deficiency has been assessed.
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Withholding the scheduling of the overassessment is also necessary in many cases for the reason that a change in the adjustments for the deficiency year may affect the tax determination for the overassessment year.
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A short form statutory notice may be issued in an unagreed tax case if the deficiency for each year involved does not exceed $5,000.
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Short form statutory notices sent to taxpayers consists of Letter 902(DO), two copies of Form 4089 (Statutory Notice Statement-Waiver) and a copy of the examiners report of adjustments.
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Prior to forwarding the inadequate record notice case to Review Staff, Form 2807 (Agreement to Maintain Adequate Books and Records), would be prepared and an attempt to secure an agreement would be made. If the taxpayer does not sign Form 2807, the specialist would note the attempt made in the workpapers and discuss the situation with their manager. The case is then closed with or without an officer's signature.
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If signed by a taxpayer, Review Staff will send Form 2807, which was secured by the examiner along with Letter 978. (Letter may be sent to the taxpayer via either certified or non-certified mail.)
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Should an agreement not be reached, Review Staff will issue Letter 979 by certified mail. Regardless of whether the letter is returned with or without an agreement, the case file is forwarded to EO Closing Unit.
Note:
The Reviewer will summarize why records are not adequate on page two of Letter 979, using a summary of the unagreed Form 2807's list of specific books of account and records the taxpayer must maintain. The list must be specific as to records that must be kept but care must be used not to dictate to the taxpayer how the records are to be kept.
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Review Staff will forward Form 5666 (Examination Referral) to Classification for future year audit in both agreed and unagreed situations. Classification will then make the determination whether a follow-up audit is warranted.