Internal Revenue Manual - 4.75.22 EO Delinquent and Substitute Returns Procedures

Part 4. Examining Process
Chapter 75. Exempt Organizations Examination Procedures
Section 22. EO Delinquent and Substitute Returns Procedures

4.75.22.1 (07-01-2003)
Overview

This section contains procedures for processing delinquent and substitute returns secured for Exempt Organizations.
These procedures are intended primarily for EO Examiners. They may also be useful to EO Reviewers, Group Managers, and other EO employees.
1. IRM 20.1, Penalty Handbook, is a consolidated penalty handbook that provides guidance to all areas of the Service for all penalties imposed by the Internal Revenue Code. It sets forth procedures for both assessing and abating penalties and contains discussions on topics such as the various types of relief from the penalties. All EO Examiners should familiarize themselves with this IRM section when securing delinquent returns.
2. IRM 21.7.7.4.22 contains a discussion of the various EO penalties. IRM 21.7.7.4.23 and IRM 4.10.8 contain a discussion of factors an examiner should consider in determining reasonable cause. Guidelines and procedures for the Exempt Organizations Examination Support Section (EO ESS) are located in IRM 4.5.3, TE/GE Automated Inventory Management System (AIMS) Special Processing Procedures.
3. This section supplements examination procedures contained in IRM 4.75, Exempt Organizations Examination of Returns.
The contents of this chapter are not intended to alter any existing technical or procedural policies of the Service.

4.75.22.2 (07-01-2003)
Definitions

A delinquent return is a return, that was not filed by the due date, including extensions thereof, and is subsequently filed by the taxpayer.
A substitute for return is used to establish an account for a taxpayer, who refuses to file, or is unable to file a required return.
An incomplete return is a filed return in which material information is omitted and the omission of such would hinder or preclude the Service from being able to perform the duties and responsibilities placed upon it by Congress. This type of return is treated in the same manner as if no return had been filed when considering whether to impose penalties.
Campus is the term formerly referred to as service center.

4.75.22.3 (07-01-2003)
Reasonable Cause Criteria

) Reasonable cause is based on all of the facts and circumstances in each situation and allows the Service to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations. When determining whether there was reasonable cause for the delinquent filing, the examiner should carefully consider the factors described in IRM sections 21.1.7.7.23 and 120.1.
In accordance with Policy Statement P-2-7, if clearly established by the taxpayer, the following eight specific causes for failure to file a return within the prescribed time will be accepted as reasonable cause. However, based on the facts and circumstances, the examiner is not limited to these criteria in determining reasonable cause.
1. The return was timely mailed. A return is considered mailed in time if the date of the postmark stamped on the envelope falls on or before the due date. If the due date falls on Sunday or a legal holiday, the following business day is within the legal period.
2. The return was timely filed but to an inappropriate Internal Revenue Service office.
3. The delay or failure to file was due to erroneous information given the taxpayer by an Internal Revenue Service office or employee.
4. The delay was caused by death or serious illness of the taxpayer or a death or serious illness in the immediate family. In the case of a corporation, estate, trust, etc., the death or serious illness must have been of an individual having sole authority to execute the return or of a member of such individual’s immediate family.
5. The delay was caused by unavoidable absence of the taxpayer. In the case of a corporation, estate, trust, etc., the absence must have been of an individual having sole authority to execute the return.
6. The return was filed late because of destruction by fire or other casualty of the taxpayer’s place of business or business records.
7. The return was filed late because the Internal Revenue Service failed to provide the proper returns, timely requested by the taxpayer, in sufficient time to permit the executed return to be filed on or before its due date.
8. The delay was caused because of the inability of the taxpayer, through no fault of its own, to meet with a representative of the Service, because a representative was not available, at an Internal Revenue Service office, for the purpose of securing information or assistance to properly complete its return.
9. Taxpayer was unable to determine amount of deposit or tax due for reasons beyond the taxpayer’s control. However this cause will be acceptable for taxpayers required to make deposits or payments of trust fund taxes only when the taxpayer was unable to have access to his/her own records.
10. The facts indicate that the taxpayer’s ability to make deposits or payments has been materially impaired by civil disturbances
11. Lack of funds is an acceptable reasonable cause for failure to pay any tax or make a deposit under the Federal Tax Deposit System only when a taxpayer can demonstrate the lack of funds occurred despite the exercise of ordinary business care and prudence.
Three additional circumstances, described below, constitute reasonable cause for failure to file a return by certain kinds of exempt organizations, See Part VII of the Law Enforcement Manual. An organization must meet all of the following criteria:
1. It is not a private foundation, 990PF filer, or other taxable exempt organization, such as those receiving income from business unrelated to the business for which the exemption was granted, 990–T filer; and
2. It is a membership organization, PTA, Boy Scout Troop, Ladies Blood Donor Group, Garden Club, Home Owners Association, or Volunteer Fire Co., etc.);
3. It has no full time employee responsible for administering the organization’s finances.
A private foundation has reasonable cause if it meets the requirements of Rev. Proc. 79–8, 1979–1 C.B. 487. This revenue procedure states that a private foundation has reasonable cause for failure to file and failure to pay for 90 days after it received a determination letter from the Service, stating that the organization is a private foundation or that it cannot reasonably be expected to be a public charity. This relief applies for a taxable year only if all of the following exist:
1. The organization filed Form 1023, Application for Recognition of Exemption, before the due date for filing the Form 990–PF in question; and
2. The organization claimed it was public charity and not a private foundation as described in IRC section 509(a).
This relief does not apply to returns or schedules that would otherwise have been due, for example Form 990–T.
A private foundation meets the requirements of Rev. Proc. 79–8 if all of the following exist:
1. The organization files all returns due no later than ninety days after the date of the determination letter; and
2. The organization pays all taxes and interest due on those returns within 90 days after the date of the determination letter; and
3. The organization attaches a statement to the returns explaining the basis for reasonable cause.
If the cause does not fall within one of the reasonable causes enumerated above, the examiner will decide whether, based on the facts and circumstances, the statement of facts submitted by the taxpayer establishes a reasonable cause for delinquency.
1. A cause for delinquency which appears to a person of ordinary prudence and intelligence as a reasonable cause for delay in filing a return and which clearly indicates no willful intent to disobey the taxing statutes, will be accepted as reasonable.
2. In cases where ignorance of the law is claimed, reasonable cause should not be presumed. Each case must be determined on its own merit.
3. Ignorance of the law can be considered for reasonable cause only if other facts support this contention, such as first-time filers, sudden first-time Federal Tax Depository (FTD) requirements, etc. The taxpayer should evidence ordinary business care and prudence and the case should be judged on its own merits. The Supreme Court has held that generally a taxpayer’s reliance on a professional agent, such as an attorney or accountant, to file a timely tax return does not constitute reasonable cause for purposes of section 6651(a). SeeU.S. v. Boyle, 85–1 USTC paragraph 13, 602.
In making a determination of reasonable cause, review the taxpayer’s filing history. Review the taxpayer's account using the Integrated Data Retrieval System (IDRS) to determine the filing history of the organization. Determine if the organization has filed returns timely for prior and/or subsequent tax years. In addition, analyze IDRS to determine if the organization has filed Forms 941, 940, and 990T for prior and subsequent tax years.
The taxpayer must make an affirmative showing of reasonable cause in the form of a written statement, made under the penalties of perjury. The written statement should set forth all the facts the taxpayer considers to constitute reasonable cause. Form 4571, Explanation for Filing Return Late of Paying Tax Late may be used for this purpose. See exhibit 4.75.22-1.

4.75.22.4 (07-01-2003)
Examination of Delinquent Returns Assigned to Examiner

The examiner assigned a delinquently filed return for examination is responsible for determining the correct information, tax and penalty liability. This responsibility exists even when a Campus or payment compliance function has determined reasonable cause for a delay in filing or has asserted a delinquency penalty. The examiner may conclude the original determination was based on incomplete facts or an incorrect statement of facts and may propose an appropriate change.
Upon examination of a delinquent tax return showing no tax liability, the examiner may determine a tax deficiency exists. Under such circumstances, the examiner will describe the circumstances of the delinquent filing in the workpapers and determine whether there was reasonable cause for the delay in filing. If the examiner is unable to establish reasonable cause for the delinquent filing, the examiner will assert the delinquency penalty as part of the deficiency (except in cases involving fraud). In cases where there are indications of fraud, the examiner will refer the case to Criminal Investigation. See IRM 25.1.
If an examiner examines a delinquent return and adjusts the tax, the examiner will also adjust any delinquency penalty previously assessed. However, the examiner will not adjust the penalty for that part of the tax liability which is decreased because of a carryback, such as a net operating loss carryback, an investment credit carryback, or a foreign tax credit carryback. In these situations, the examiner will adjust the delinquency penalty based on the potential change to the tax liability, either a deficiency or overassessment, computed prior to application of the carryback.
If during the examination of a delinquent return the taxpayer contends there was reasonable cause for the delay in filing the return, the examiner will determine whether reasonable cause existed. If the taxpayer can establish reasonable cause, the examiner will recommend abatement of any penalties previously assessed.

4.75.22.5 (07-01-2003)
Delinquency Information Voluntarily Provided by Taxpayer

If a taxpayer or taxpayer’s representative not under examination voluntarily provides examiner information indicating that the taxpayer has not filed required EO returns, the examiner should seek to determine whether the taxpayer can demonstrate reasonable cause for the late filing.
If reasonable cause cannot be demonstrated and payment of the penalties would place an undue hardship on the organization, the examiner should:
1. Consider IRM 20.1.1.1.7, Application for a Taxpayer Assistance Order to Relieve Hardship, ATAO (Form 911);
2. Secure the delinquent return(s); and
3. Process in accordance with IRM.4.75.22.8.

4.75.22.6 (07-01-2003)
Delinquency Discovered During Examination

When during an examination, an examiner discovers a taxpayer has failed to file a required return or statement, before soliciting any return the examiner must:
1. Request a transcript of the taxpayer’s account to determine filing history;
2. Determine the taxable periods for which the taxpayer was required to file returns;
3. Ascertain the reasons the taxpayer failed to file the required returns;
4. Determine applicable penalties; and
5. Determine whether there are any indications of fraud.
The examiner must determine whether a return is actually delinquent. Blanket extensions or filing exceptions have been granted to certain exempt organizations under Rev. Rul. 71–236, 1971–1 C.B. 398, Rev. Proc. 83–23, 1963–1 C.B. 687, and Rev. Proc. 86–23, 1986–1 C.B. 564.
If there is an indication that the taxpayer’s failure to file the required return was willful, or there are any other indications of fraud, see IRM 4.10.6.2.2. The examiner will refer the case to Criminal Investigation, see IRM 25.1. In such cases the examiner will not solicit delinquent returns, payment of tax, or any agreement from the taxpayer. If the taxpayer furnishes delinquent returns to the examiner or indicates it intends to file delinquent returns, the examiner will notify Criminal Investigation.
If Criminal Investigation declines to accept a delinquency case for joint investigation, or withdraws from a joint investigation of a delinquency case, the examiner will then solicit delinquent returns from the taxpayer.
If there are no indications of fraud, the examiner will advise the taxpayer of the liability to file the returns. The examiner will solicit the returns, including any tax liability, with a written statement, signed under penalty of perjury, presenting all the facts and circumstances, which caused the delay. The statement should include any reasons the taxpayer believes would establish reasonable cause for failure to file. Form 4571 can be used for this purpose. See Exhibit 4.75.22-1.
When securing a delinquent Form 4720 (Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code), the examiner will advise managers and self-dealers, who have a Chapter 41 or 42 tax liability that they must pay any taxes imposed upon them with their own check or money order.
If upon solicitation of the returns, the taxpayer refuses to file, or states it is unable to file all the returns, the examiner will determine the extent to which to enforce the filing requirements and may prepare the return. The examiner’s determination must be consistent with the criteria published in policy statement P–5–133 and the Substitute for Returns, and Refusal to File guidelines

4.75.22.6.1 (07-01-2003)
Extent of Retroactive Enforcement

The extent to which the examiner will enforce the delinquency procedures will depend upon the facts and circumstances in each case. Policy Statement P-5-133 discusses delinquent returns and the enforcement of filing requirements. The enforcement period is not to be more that six years. However, the examiner may apply shorter or longer periods when such action appears to be in the best interest of the Service. If the examination involves a plan or trust that has been granted a conditional waiver of the minimum funding deficiency, the extent of enforcement may exceed six prior years.
Specific determinations of facts, which the examiner should consider include:
1. The taxpayer’s prior history of noncompliance;
2. The extent of the delinquency;
3. The effect upon voluntary compliance;
4. Whether the delinquency involves diverted trust funds;
5. Whether the circumstances are peculiar to a specific entity. (for example, an industry or class of taxpayer); and
6. Anticipated revenue in relation to the time and effort required to determine the tax due.

4.75.22.6.2 (07-01-2003)
Management Approval

Management approval is necessary if the enforcement activity is less than or exceeds six years. The examiner must document the case file to:
1. Outline the facts of the cases; and
2. Detail the reasons for recommendation of the longer or shorter period.
Group Manager approval is not needed if the nonfiler voluntarily files returns beyond the enforcement period established by Policy Statement P-5-133.

Note:

Managerial approval is not required if the examiner is satisfied, based on the information provided by the taxpayer, that no net tax would be due for the years under consideration.

4.75.22.7 (07-01-2003)
Conditions Under Which Returns Should Not Be Solicited

The examiner will not solicit nonfiled returns under the following conditions:
1. Fraud is indicated. See IRM 25.1;
2. The Master file indicates a return was filed for the period in question;
3. The taxpayer is not required to file Form 990. Gross receipts under $25,000;
4. The organization is a church. See IRM 4.76.7; or
5. The organization is a subordinate included in a group return.

4.75.22.8 (07-01-2003)
Processing Delinquent Returns Secured

Process the delinquent return(s) received in accordance with the following processing procedures.
Secure a TXMODA/BMFOLT print, not necessary for non-master file (NMF) returns for each return. Verify the taxpayer has not previously filed returns for the tax periods for which delinquent returns are being solicited.
Secure an INOLES or BMFOLO print. Verify that the fiscal year-end month, filing requirements, status code, name, and address are correct. Verify that the organization is tax-exempt.

Note:

The INOLES will not show a filing requirement for a Form 4720.
If the information in item (3) is not correct, prepare Form 2363-A, Request for IDRS Input for BMF/EO Entity Change. See Exhibit 4.75.22-2, which contains a completed Form 2363-A to correct an organization’s filing requirements.
Fax Form 2363A to ESS, to input the change to the entity information (e.g., filing requirements, fiscal year month ending) before forwarding the delinquent return package. It usually takes approximately two weeks for the information to post. Once BMFOLO shows that the change has posted, forward to the appropriate Campus the delinquent return package with a copy of the Form 2363A and the updated BMFOLO. Except for Form 4720, a delinquent return will not post to Master File unless a filing requirement is established.

Note:

A current transcript must be attached to the original delinquent return. The examiner must forward an original delinquent return to the appropriate Campus by the day after it is received. Additional time is granted to obtain a current transcript or if Form 2363A is required to change the entity information listed in item 3 above

.
A Form 4720 will post if the organization has a filing requirement for any other exempt organization return, for example, 990-PF or 990. The examiner will include a copy of the Form 2363-A in the workpapers.
Ensure the following items are present on the delinquent return(s):
1. Name of organization;
2. Address of organization;
3. EIN;
4. Taxable period, and
5. Original signature and date.
The examiner will date-stamp the delinquent return(s) with the date received and make a copy for the case file. If a date-stamp is not available, the examiner should annotate in the middle of the return over the wording, but not the numbers, the date received and the examiner’s name and title.
Annotate in bold red letters on the top of the ORIGINAL delinquent return(s) "Original DELINQUENT RETURN SECURED BY TE/GE, sent to _____Campus on (Enter date)." Leave enough room in the upper right corner for the DLN to be entered by the Campus. Write "TC599-CC96" , in red letters, in the bottom margin of the original return.

Note:

The purpose for the TC 599-CC96 is to close any filing and or payment compliance controls and halt any notice that may be issued by the Campus.
Annotate on the COPY of the original delinquent return: "COPY OF DELINQUENT RETURN SECURED BY TE/GE SENT TO _______ Campus on (Enter date)" . Write TC 599-CC96 in red letters in the bottom margin of the original return.
Determine whether the failure to file was due to reasonable cause. Refer to 4.75.22.3. and IRM 120.1.7.9.1, Reasonable Cause Criteria.
1. Exhibit 4.75.22-3 contains a list of Computer Condition Codes (CCC), which Campus personnel use in order to restrict or not restrict computer generation of specific penalties .
2. If failure to file is due to reasonable cause, secure or prepare Form 4571, (Explanation for Filing Late or Paying Tax Late) for each return secured
3. To help assure penalties are not assessed on delinquent EO Information Returns when there is reasonable cause, enter the proper Computer Condition Code (CCC) in red in the upper right hand corner of the return to the right of the TIN.
4. For delinquent Forms 990/990-EZ and 990-PF, enter "R" to waive the penalty based on reasonable cause for failure to file the return timely, and "V" to suppress the daily delinquency penalty.
5. For delinquent Forms 990-PF and 990-T with tax liability enter " R" , "V" , and "D"
Note:

The presence of a CCC on a return alerts the Campus of compliance personnel consideration of the penalties and of their decision to assert or not assert them when reasonable cause is established or to identify a specific condition.
If the delinquent filing is not due to reasonable cause:
1. Prepare Form 4620, Transmittal Letter – Exempt Organizations, for each return, stating the facts and circumstances supporting the examiner’s conclusions;
2. Annotate in red on the top right margin to the right of the TIN on the original return CCC "7" , to help insure the Campus assesses the penalty
Prepare Form 4844, Request for Terminal Action, and send to ESS. A Form 4844 is not required for Form 4720 processed on NMF. The purpose for the TC599-CC96 is to close any filing and or payment compliance controls and halt any notice that may be issued by the Campus. (See exhibit 4.75.22-4).
Prepare Form 13133, Expedite Processing Cycle, for each return. Enter the examiner’s name, address, and phone number. Also, add the name of taxpayer, TIN, tax period, and MFT. Check the box "Delinquent return" . See Exhibit 4.75.22-5
Prepare Form 3198, Special Handling Notice, for each return. Indicate on Form 3198 whether or not to assess the failure to file and/or failure to pay penalties, as applicable. Note on the Form 3198 "Assess the failure to file and/or failure to pay penalty" or " Do not assess the failure to file and/or failure to pay penalty or other penalties - Reasonable Cause Established" , as applicable. See Exhibit 4.75.22-6.
Send all delinquent return packages through the Group Manager to the appropriate Campus. If remittance is received with the delinquent return(s) and the examiner is unable to submit the delinquent return within 24 hours because he/she is waiting for transcripts or waiting for the Form 2363A to post:
1. Make a copy of the remittance check(s) and attach it to the copy of the delinquent return(s);
2. Prepare Form 3244-A, Payment Posting Voucher, for each return for which remittance is received indicating payment as TC 610, Remittance with return; and
3. Send onlythe remittance and Form 3244-A overnight delivery to the appropriate Campus on Form 3210.
4. Address Form 3210 to transmit the remittance and the payment posting document to Ogden Campus if BMF or Cincinnati Campus if NMF. See Exhibit 4.75.22-7.
5. Transmit delinquent return package with a copy of the 3244-A and a copy of the remittance on Form 3210 to the appropriate Campus as soon as possible.
Note:

CHECKS MUST BE PROCESSED WITHIN 24 HOURS OF THE TIME OF RECEIPT.
Managers are responsible for establishing and maintaining adequate controls to ensure the security of taxpayer payments and returns with payments during transit to the appropriate Campus.
Make copies of all documents to be retained in the case files. The examiner will retain and clearly mark a copy of the return, the remittance, the Payment Posting Voucher, and transcript of account for the workpapers.
Assemble the original documents in the following descending order:
1. Copy of Form 2363-A, if applicable;
2. Copy of Form 4844 (Request for Terminal Action);
3. Form 13133;
4. Form 3198;
5. Form 4571 or Form 4620;
6. Copy of Form 3244-A Payment Posting Voucher and Remittance, if payment received;
7. Original annotated delinquent return; and
8. Current transcript, BMFOLT/TXMODA and INOLES/BMFOLO for BMF or IMFOLT for IMF, used in the determination of the organization’s failure to file a required return. The transcript must not be more than sixty days old.
Place all of the original return assemblies in an envelope in the same order as they are listed on Form 3210.
Staple the Form 3210 listing all of the returns being sent to the Campus to the front of the envelope.
Forward the delinquent return package to the group manager for approval. The group manager will forward the delinquent return package to the appropriate Campus.
If the examiner conducts or plans to conduct an examination of the delinquent return, the Group Manager will forward the following to ESS:
1. Form 5597 or 5588;
2. Copy of Form 2363A, if applicable;
3. Copy of Form 4844 (Request for Terminal Action);
4. Copy of Form 13133;
5. Copy of Form 3198;
6. Copy of Form 4571 or Form 4620;
7. Copy of Form 3244-A Payment Posting Voucher and Remittance, if payment received;
8. Original annotated delinquent return; and
9. Current transcript, BMFOLT/TXMODA and INOLES/BMFOLO for BMF or IMFOLT for IMF, used in the determination of the organization’s failure to file a required return. The transcript must not be more than sixty days old.
If the taxpayer fails to file a solicited delinquent return or statement, the examiner will apply the "Substitute for Return" procedures in IRM 4.75.22.17. In such case, the examiner should recommend assertion of the delinquency penalty. The examiner will explain the basis for the recommendation and comment on the taxpayer’s statement, if any, in the examination report and workpapers, as appropriate.
If the taxpayer fails to file a solicited delinquent tax return, but executes an agreement (e.g., Form 870, 2504, or 4549) to an examiner’s report (RAR) prepared as a substitute for the return, the agreed report constitutes a return under IRC section 6020(a).

4.75.22.9 (07-01-2003)
Examination of a Secured Delinquent Return

The examiner must determine whether to examine a delinquent return based on an inspection of the return, accompanying documents and the relevant facts and circumstances pertaining to the case. The group manager must approve the examination of a "prior-year" delinquent return. The examination of a delinquent return should be conducted as soon as possible after the return is secured.
If the examiner determines an examination of the return is warranted, prepare Form 5597 for each master file return and prepare Form 5588 for each non-master file return. In item 8 of Form 5597, enter the number " 1" to generate labels and charge out or "3" for no labels and charge out In item 22 enter Push Code 20, Delinquent Return Secured. Submit Form 5597 or Form 5588 with a copy of the delinquent return package to the group Manager for approval, establishment on EOIC and, forwarding to ESS for processing. The examiner will prepare Form 5597 or 5588 to establish the return on AIMS as soon as possible after initiating the examination.

Note:

A full account will not establish on AIMS until after the return posts to Master File.
The examiner will complete the examination from a copy of the delinquent return.
If there is no change to the delinquent return secured, the examiner will prepare an advisory letter indicating that a delinquent return was secured and accepted as filed. Enter disposal code 05, delinquent return secured, on Form 5599, TE/GE Examined Closing Record, when closing the return.
If the examiner proposes a change to tax, the examiner will solicit an agreement covering the proposed changes. If the taxpayer does not agree with the changes, the examiner will follow the unagreed case procedures in IRM 4.75.14, Concluding the Examination.
General instructions for completing the examination report are contained in IRM 4.75.15, Report Writing.
The examiner should refer to the IRM 20.1, Penalty Handbook and IRM 21.7.7.7.4.23 to consider whether delinquency penalties apply. See IRM 20.1.8, which contains penalty provisions of the IRC section that apply to Exempt Organizations. This section discusses the statutes, regulations, and procedural policy guidelines applicable to Exempt Organizations.

4.75.22.9.1 (07-01-2003)
Establishment of Delinquent Returns on AIMS

The examiner will prepare Form 5597 or 5588 upon deciding to conduct an examination and transmit through the Group Manager with a copy of the delinquent return package, if possible. The examiner can close the examination case file as soon as casework is completed. If the AIMS account is still a skeletal record, it will be held in suspense by ESS. There must be at least a skeletal record before the examiner can close the case to ESS

4.75.22.10 (07-01-2003)
Delinquent Return Under Other Operating Division Jurisdiction

If the examiner discovers the entity has not filed returns or forms, the examination of which are within the jurisdiction of another operating division (e.g., Form 1120), the examiner will prepare Form 5666, EO Information Report, and send to the Manager, EO Classification in Dallas. through the Group Manager. See IRM 4.75.16 for relevant EO closing procedures.

4.75.22.11 (07-01-2003)
Treatment of Timely but Unsigned Returns

The policy of the Service, see policy statement P–2–11, is not to assert a delinquency penalty if an unsigned tax return is timely filed on the prescribed form and if applicable, accompanied by proper payment, provided that:
1. The taxpayer, upon request, subsequently files a valid return, and,
2. The facts surrounding the failure to sign the return clearly indicate there was no willful intent to violate the statute, and gross negligence is not involved.

4.75.22.12 (07-01-2003)
Delinquent Information Returns Concerning Transactions With Other Persons

During an examination, an examiner may find a taxpayer failed to file information returns or furnish certain statements required under IRC sections 6041, 6044, 6049, 6050I, 6050L, or 6051(d), 6047(d), and 3402(q).
In such cases the examiner will secure delinquent Forms 1099 series or Form 8300 for all open prior calendar years preceding the date the examination commences, without regard to the tax period under examination, during which a delinquency exists. However, only the delinquent Forms 1099 for the latest completed calendar year will be sent to the Ogden Campus and only the delinquent Forms 8300 for the latest completed calendar year will be sent to the Detroit Computing Center. The examiner should assess appropriate penalties for failure to file for all years for which delinquent Forms 1099 and 8300 series are secured in accordance with the IRM 20.1.
The examiner will prepare a discrepancy adjustment for any significant income amount reported on Form 1099 series returns secured but not sent to a Campus. Refer to IRM 4.75.28 for discrepancy adjustment procedures. Submit Form 5666 for each Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, not sent to the Detroit Computing Center to the Manager, EO Classification.
If practicable, secure all delinquent Forms W–2, Wage and Tax Statement, W–2P, Statement for Recipients of Periodic Annuities, Pension, Retired Pay, or IRA Payments, or 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., regardless of the years involved.
Determine whether the failure to file was due to reasonable cause and not to willful neglect by applying the criteria in IRM 4.75.22.3. If reasonable cause exists and there is no willful neglect, the penalties imposed by IRC section 6721, Failure to File Correct Information Returns, or 6722, Failure to Furnish Correct Payee Statements, will not apply. An affirmative showing of reasonable cause or due diligence must be made in accordance with IRM 4.75.22.3.
Photocopy and place the delinquent information return(s) and/or statement(s) in the Penalty Case File pursuant to paragraph section 4.75.22.12(13). Forward the original delinquent return(s) and/or statement(s) to the appropriate Campus as follows:
1. Send Forms W–2G and 1099 series for all completed calendar years to the Ogden Campus under cover of Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
2. Send Forms W–2 and W–2P to the Ogden Campus under cover of Forms W–3. Transmittal of Income and Tax Statements. Send Form 8300 to:
  Detroit Computing Center
  P.O. Box 32621
  Detroit, MI 48232
Separate transmittals are required when a payer is filing more than one type of information return. The payer’s name and TIN used on transmittals and information returns should be consistent with the name and TIN used on the payer’s income tax return.

Exception:

Sole proprietors must use their Employer Identification Number (EIN) unless they are not required to have an EIN and then they must use their Social Security Number.
Annotate, in red, "Delinquent Returns Secured by TE/GE - Penalty Considered" , across the top of Forms W-3 and 1096. This will alert the Campus that the area office has taken appropriate action concerning the assertion of penalties under IRC sections 6721, and 6722, for returns due after 12/31/86 or IRC sections 6652, Failure to File Certain Information Returns, Registration Statements, etc., and 6678, Failure to Furnish Certain Statements. Enter Computer condition code " 7" in the upper right hand corner to the right of the TIN to help ensure the Campus assesses the penalty.
If reasonable cause for the delinquent does not apply, assess and collect any civil penalty imposed by IRC section 6721 or 6722, for returns due after 12/31/86, or IRC section 6652 or 6678, without regard to the procedures provided by Subchapter B of Chapter 63 of the Code, deficiency procedures in the case of income, estate, gift, or certain excise taxes. Taxpayer’s agreement and/or signature are not required on an examination report since normal deficiency procedures do not apply.
Inform taxpayers who disagree with the determination that a post-assessment appeal procedure is available which allows them to appeal the penalty determination to an Appeals Officer. See Code of Federal Regulations Section 601.106 (a)(1)(iii) after assessment, but prior to payment.
Assessment of penalties under IRC sections 6721 and 6722 will be made on Form 8278 ,Computation and Assessment of Miscellaneous Penalties.
See the IRM 20.1, Penalty Handbook, for instructions regarding the penalty computation.
Prepare a separate penalty case file for each calendar year. The penalty case file will also include a copy of the first page of the return, and copies of all documents previously forwarded to the appropriate Campus.
Attach Form 3198 to the penalty case file and annotate in the "Other" section as follows:Assess Civil Penalty as indicated on Form(s) 8278.
Close the Penalty Case File when the examination of the primary return is complete.

4.75.22.13 (07-01-2003)
Failure to File a Required Exempt Organizations Information Return

An examiner may be assigned a failure to file a required EO Information Return as an Information Item or as a special project. The following contains procedures examiners must follow upon assignment of an Information Item or special project case due to an organization’s failure to file a required return
1. The examiner should review the taxpayer's account using IDRS to determine if the organization recently filed Form 990 for the tax period in question. Document 6209 entitled, "ADP and IDRS Information" , is a reference guide that can be used in researching account information. Document 6209 can be viewed online at the Servicewide Electronic Research Program (SERP) website: http://serp.mainframe.irs.gov/.
2. Review the taxpayer's account using Command code (CC) TXMODA/BMFOLT to determine if a Form 990 posted to the module with a Transaction code (TC) 150 or another satisfying transaction with a TC 59X. If a TC 150 or TC 59X has not posted, request CC UPTIN to determine if the return recently filed is unpostable. If the above IDRS research determines that the organization filed the Form 990, prepare Form 5596, EO Non-Examined Closings, to close the AIMS/NMF account using disposal code 99.

4.75.22.13.1 (07-01-2003)
Locating the Organization

Attempt to obtain the location of the organization or the names, addresses and/or phone numbers of officers through the telephone directory or any other source. If the organization has no published phone number, consider the following actions:
1. Request the administrative file for the original application for exemption containing the Form 1023 or 1024 from the microfiche unit in Cincinnati. The request for microfiche should contain the name, address and EIN for the organization.
2. Request the most recently filed return to identify the current officers or power of attorney (POA). Check the names of the officers in the telephone directory.
3. Check to see if the organization has a website.
4. Contact the state agency that processes the records of incorporation. Obtain the names and addresses of the statutory agent or officers listed on the Articles of Incorporation.
5. Contact the state agency that processes charitable registration or charitable solicitation information sheets and applications for liquor or gaming licenses. Obtain the names and addresses of the statutory agent or officers listed on these information sheets, liquor or gaming licensees and review the reported financial data.
6. If the organization is a subordinate of a group ruling, contact the parent of the group ruling for the names and addresses of Officers and Trustees, and review the reported financial data.
  
  Note:
  
  It is important to note that IRS employees may not contact any third party without first providing reasonable notice to the taxpayer that contacts with persons other than the taxpayer may be made. IRM 4.75.11 provides the third party notification procedures.

4.75.22.13.2 (07-01-2003)
Compliance Check

Attempt to contact the officers of the organization by telephone, if possible, to determine why the organization failed to file the Form 990 and why there was no response to any computer generated letters. Conduct a compliance check.
A compliance check is not an audit or an examination. A compliance check is a pre-audit review, and does not qualify as an investigation under IRC section 7605(b) or as an audit under section 530 of the Revenue Act of 1978. Compliance checks are made to ensure adherence to recordkeeping and information reporting requirements and are not directly related to determining tax liability for a particular period.
In a compliance check to determine whether or why an organization failed to file a Form 990, the examiner may properly ask :
1. To see any IRS information returns required to be filed or maintained. For example, Forms 990, W-2. 1099, and W-4);
2. The organization why it failed to file the return;
3. If the taxpayer filed no forms, ask if the annual gross receipts normally exceeded $25,000 or if payment was made to any worker, and if so, why no forms were filed.
4. Any and all questions necessary to determine whether the organization is or is not required to file a return. For example, whether the organization’s gross receipts normally exceed $25,000; and
5. the organization to provide any and all books and records necessary for the examiner to determine whether the organization is or is not required to file a return
In a compliance check, the examiner should not question any particular tax liability. For example, do not ask questions concerning whether to treat a worker as an independent contractor or as an employee unless an examination commencing an examination.
Use the compliance checks as an educational opportunity to explain the Form 990 filing requirement to the taxpayer.

4.75.22.13.2.1 (07-01-2003)
Determine if the Organization Normally Has Gross Receipts of Less Than $25,000

In accordance with IRC section 6033(a)(1), Treas. Regs. section 1.6033-2(a)(1), and the Instructions for Form 990, gross receipts means the gross amount received by the organization without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amount (also see Treas, Reg. Section 1.6033-2(g)(4) on the definition of gross receipts.
Rev. Proc. 83-23, 1983-1 C.B. 687, provides the criteria to determine if the annual gross receipts of an organization are normally not more $25,000. An organization's gross receipts are considered to be "normally " not more than $25,000 if:
1. The organization has been in existence for one year or less, and it has received, or donors have pledged to give, gross receipts of $37,500 or less during the first tax year of the organization.
2. The organization has been in existence for more than one but less than 3 years and the average gross receipts received by the organization in the first 2 tax years is $30,000 or less; or
3. The organization has been in existence for 3 years or more, and the average gross receipts received by the organization in the immediately preceding 3 years, including the year for which the return would be required to be filed, is $25,000 or less.
If the compliance check determines that the organization is not liable for filing the Form 990 since their annual gross receipts are normally not more than $25,000, prepare the following documents:
1. Form 2363-A to correct the filing requirement on the BMF.
2. Form 4844 to satisfy the module for this tax period. In remarks write, "Input TC 590 CC 75."
3. Form 5596, to close the AIMS/NMF account using disposal code 99.
4. Attach any supporting documentation or correspondence addressing the issue that the taxpayer is not required to file the Form 990. Because the examiner only conducted a compliance check, a closing letter is not required.

4.75.22.13.2.2 (07-01-2003)
Determine If the Organization Ceased Business or Terminated

If the compliance check determines that the organization is not liable for filing Form 990 because the organization ceased to operate or went out of business, the examiner should expand the compliance check to an examination to obtain the following:
1. Any required final returns;
2. Copies of any documents authorizing dissolution; and
3. A statement signed by an officer of the organization showing the disposition of assets on hand at the date of dissolution
Upon receiving these documents, the examiner should:
1. Issue an examination letter indicating the organization is no longer in business and the Service will no longer recognize the organization’s exempt status effective as of the date of dissolution;
2. Prepare the Form 2363-A to correct the status code on BMF to 20, Termination and
3. Close the case from AIMS using Disposal Code 14.

4.75.22.13.2.3 (07-01-2003)
Determine If the Organization Is Inactive.

Where an organization recognized as exempt becomes temporarily inactive but retains its identity as a corporation or association, the exempt status need not be terminated. However, if the evidence clearly indicates that the organization will not resume operating for an exempt purpose, as required by Treas. Regs. Section 1.501(c)(3)-1(c)(1), the examiner should terminate the exempt status. Rev. Proc. 90-27, 1990-1 C.B. 514.
If the compliance check determines that the organization is not liable for filing the Form 990 since the organization is inactive, prepare the following documents:
1. Form 2363-A, to correct the filing requirement on BMF;
2. Form 4844 to satisfy the module for this tax period. In remarks write, "Input TC 591 CC 75" ; and
3. Form 5596, to close the AIMS/NMF account using disposal code 99.

4.75.22.13.2.4 (07-01-2003)
Determine If The Organization Filed a Group Return With The Parent Organization.

If the compliance check determines that the organization is not liable for filing the Form 990 since the organization filed a group return with the parent organization, prepare the following documents:
1. Form 4844 to satisfy the module for this tax period. In remarks write, "Input TC 590 CC 14." ; and
2. Form 5596, to close the AIMS/NMF account using disposal code 99.

4.75.22.13.2.5 (07-01-2003)
Organization is liable to file Form 990

If the compliance check determines that the organization is liable for filing Form 990, solicit the delinquent returns with a definite response date.
If the organization does not file Form 990 by the required date, notify the taxpayer that the examiner is converting the compliance check into an examination.

4.75.22.14 (07-01-2003)
Refusal to File a Required EO Information Return

If the organization refuses to file a return, the EO examiner will send by certified mail a written notice to the organization requesting the return be filed with the Area Office within 90 days of the date of the notice.
The written notice will inform the organization of the $20 per day, $100 per day for organizations having gross receipts exceeding $1,000,000 for the subject tax year, penalty imposed by IRC section 6652(c)(1) and solicit a written statement explaining the cause for late filing.
If the organization is exempt under IRC section 501(a) and the return is required by IRC section 6033 or IRC section 6043(b), the written notice will notify the organization if it fails, without reasonable cause, to file the return, its exempt status will be revoked because it has failed to establish it is observing the conditions required for continuation of its exempt status
If the organization responds to the notice by filing a completed return within the 90-day period, the EO examiner will take the following actions:
1. Process the delinquent return in accordance with IRM 4.75.22.8;
2. If an examination is warranted, submit Form 5597 using Push Code 020 along with a copy of the delinquent return package to ESS, to establish an AIMS/BMF account;
3. Retain a copy of the return for the case file;
4. Close the AIMS/NMF account using disposal code 99, Information Report and Miscellaneous;
5. Complete the examination.
If the organization fails to respond to the 90 day demand letter, Rev. Rul. 59-95, 1959-1 C.B.627, provides that the failure or inability of an organization to file a required information return can result in termination of the organization’s exempt status because the organization is not complying with the conditions required for continuation of exempt status.
Revocation is appropriate where the sanctions of IRC section 6652 have proven ineffective in securing compliance with the filing requirements of IRC section 6033 or IRC 6034.
Thus, if an organization is required to file, but refuses to file a completed return, or an officer of the organization states that it is out of existence but refuses to submit a document authorizing dissolution and the disposition of assets, the examiner will process the case in accordance with the following procedures:
1. Prepare a substitute for return package in accordance with section 4.75.22.17;
2. Prepare a RAR proposing revocation of exempt status to be issued with cover Letter 3618 for IRC section 501(c)(3) organizations or Letter 3610 (DO) for all other organizations;
3. The stated reason for revocation will be the that organization has not established that it is observing the conditions for continuation of its exempt status.
The RAR for the proposed revocation will include the following:
1. A statement of the material facts upon which the revocation is based;
2. The applicable statute, regulations and other governing precedent;
3. The Service’s proposed conclusion and a clear explanation of the underlying reasoning;
4. The proposed effective date of revocation; and
5. A statement that the organization is required to file Form 1120 returns for the tax periods after the effective date of the revocation.
  
  Note:
  
  The effective date of the revocation will be the first day after the end of the 90-day period (91st day).
Forward the case file and RAR through the Group Manager to Mandatory Review for issuance of the proposed revocation.

4.75.22.15 (07-01-2003)
Refusals to File a Required EO Tax Return

If an examiner solicits a tax return, e.g., Form 990–T, Form 4720, Forms 940 or 941, Form 730 or Form 11-C, and the organization refuses to file the return, the examiner must prepare a substitute for return package in accordance with IRM section 4.75.22.17.
In Form 4720 cases only one substitute for return for each tax period can be filed. Prepare the substitute for return for the organization in the name of the organization and establish on AIMS/BMF with push code 021. Establish the Form 4720 for any disqualified person liable for Chapter 42 taxes on AIMS/NMF.

4.75.22.16 (07-01-2003)
Processing of 1120 Return Secured Upon Agreed Revocation of Exempt Status

If the examiner proposes revocation of exempt status of an organization and the organization agrees to the revocation, the examiner should solicit the Form 1120 Returns for the open years. If the organization submits the Form 1120 Returns with remittances, the examiner should:
1. Prepare Form 3244-A, Payment Posting Document, enter the payment under TC 640, Advance Payment, and forward with remittance to the Ogden Campus;
2. Make a copy of Form 3244-A and remittance;
3. Prepare Form 2363A to change the filing requirement from Form 990 to Form 1120;
4. Enter at the top of the return, "Converted Form 1120 Return Secured by TE/GE."
5. Prepare Form 3198, Special Handling Return and state, " Converted 1120 Return from 990. The statute of limitations starts with the filing of Form 990 on (enter date 990 was filed) and expires (enter statute expiration date of 990)" . Attach to the front of each Form 1120.
6. Place Forms 1120 in an envelope, along with copy of remittance, copy of Form 3244-A and original Form 2363A for Mandatory Review.
Once the Form 990 closes off AIMS, the reviewer will FAX Form 2363A to ESS to change the organization’s filing requirement to Form 1120. It usually takes approximately two weeks for the information to post. Once BMFOLO shows the change has posted, the Reviewer will forward to Ogden Campus the Form 1120 Returns with a copy of the Form 2363A and the updated BMFOLO
Make copies of all documents to be retained in the case file