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Part 4. Examining Process

Chapter 81. Tax Exempt Bonds (TEB)

Section 5. Examination Process

4.81.5  Examination Process

4.81.5.1  (11-01-2008)
Introduction

  1. This section is currently under development. For information on the Tax Exempt Bonds Examination Process see IRM section 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.2  (11-01-2008)
Case Assignment and Grading Criteria and Forms 8038–G and 8038–T Procedures

  1. This section is currently under development. For information on the Tax Exempt Bonds Case Assignment, Case Grading Criteria, and Forms 8038-G and 8038-T procedures see IRM section 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.3  (11-01-2008)
Establishment of Related Returns

  1. This section is currently under development. For information on establishment of Tax Exempt Bonds related returns see IRM 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.4  (11-01-2008)
Planning the Examination

  1. This section is currently under development. For information on planning a Tax Exempt Bonds Examination see IRM 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.5  (11-01-2008)
Scope of the Examination

  1. This section is currently under development. For information on the scope of a Tax Exempt Bonds examination see IRM 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.6  (11-01-2008)
Opening the Examination

  1. This section is currently under development. For information on opening a Tax Exempt Bonds examination see IRM 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.7  (11-01-2008)
Examination Techniques

  1. This section is currently under development. For information on Tax Exempt Bonds examination techniques see IRM 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.8  (11-01-2008)
Third Party Contacts

  1. This section is currently under development. For information on Third Party Contacts for Tax Exempt Bonds see IRM 4.81.1, Tax Exempt Bonds (TEB) Administrative Procedures.

4.81.5.9  (11-01-2008)
Communicating Identified Issues

  1. Once an examiner has identified a potential issue(s), it is important to discuss that issue with the taxpayer or the taxpayer's representative as soon as possible. Discussing the potential issue(s) with the taxpayer or the taxpayer's representative can lead to an early resolution of the case.

  2. If the taxpayer concurs with the examiner’s position on the identified issue(s), the examiner should notify the manager and initiate closing agreement procedures.

  3. If the taxpayer does not concur, the examiner will discuss the issue(s) with the manager. With the manager’s concurrence, the examiner will provide the taxpayer or the taxpayer's representative with a written summary of potential issues on Form 5701-TEB, Notice of Proposed Adjustment.

    The Form 5701-TEB should include the issues, facts law, and examiner's position.

    The taxpayer will be provided 30 days to respond to the Form 5701-TEB.

    Lack of response will be treated as non-concurrence.

  4. If the taxpayer concurs with the examiner's position as outlined on Form 5701-TEB, the examiner should notify the manager and initiate closing agreement procedures.

  5. If at any time the taxpayer requests technical advice on an identified issue, the examiner should follow the applicable Revenue Procedure, which is updated annually as the second procedure of the year. Additional procedures to be followed are being developed and will be published in IRM 4.81.9.

    Note:

    The significance of the identified issue(s), to which the taxpayer has concurred, will determine whether the examiner will continue to follow the original audit plan or modify the scope of the examination.

4.81.5.9.1  (11-01-2008)
Proposed Adverse Determination

  1. Upon completion of the examination, all unresolved issues will be included in Letter 4413, Notice of Proposed Adverse Determination Letter. Prior to issuance, the examiner’s group manager will review the letter for accuracy and forward to the Manager, Field Operations for approval. Once the Manager, Field Operations provides written approval, the proposed adverse determination letter should be mailed certified mail, with a request for return receipt. Sample Letter 4413 is included as Exhibit 4.81.5-1.

  2. Upon issuance of the Letter 4413, the examiner should initiate procedures to identify bondholders as outlined in IRM 4.81.7.

  3. In case of a conduit financing, if the conduit borrower is under examination by another operating division, simultaneously with the issuance of Letter 4413, the examiner should prepare Form 5701-TEB (Notice of Proposed Adjustment) disallowing the deduction under IRC section 150(b) and forward it to the examining operating division.

  4. If the taxpayer does not timely request an appeal in writing, the examiner will follow the procedures in IRM 4.81.5.9.2 for a final adverse determination.

  5. If the taxpayer provides a timely request for an appeal, the examiner should review the request and determine if it conforms to the requirements of Revenue Procedure 2006-40, 2006-42 I.R.B. 694 and IRS Publication 5.

    If the request does not conform to the requirements, the examiner should follow up with the taxpayer or the taxpayer's representative to perfect the request.

    Once the request is perfected, the examiner should review the perfected request and prepare a rebuttal to the arguments raised by the taxpayer or the taxpayer's representative. The examiner will then prepare the case for closure, in accordance with IRM 4.81.5.9.7, and forward the case to the manager.

    The manager will review the case for accuracy and completeness. If the manager concurs, the case will be forwarded to CPM for review.

  6. An examiner shall make a bondholder referral, in accordance with IRM 4.81.7.1 to the bondholder unit in all proposed adverse cases.

4.81.5.9.2  (11-01-2008)
Final Adverse Determination

  1. Final adverse determinations will arise as a result of a proposed adverse determination not being appealed or as a result of a proposed adverse determination being upheld in the Office of Appeals. The examiner is responsible for required actions arising from the final adverse determination.

  2. When a case results in a final adverse determination, as a result of the proposed adverse determination not being appealed, the examiner will issue Letter 4409, Notice of Final Adverse Determination. This letter will be sent by certified mail, with a request for return receipt. A sample of the Letter 4409 is included as Exhibit 4.81.5-2. The group manager will forward a copy of this letter to the Manager, Bondholder Unit, in accordance with IRM 4.81.7.4.

  3. When a case results in a final adverse determination, as a result of a proposed adverse determination being upheld after administrative appeal, a letter notifying the taxpayer will be sent by the Office of Appeals.

  4. When a case results in a final adverse determination, as a result of either, the following actions should be taken:

    1. In the case of a conduit financing, if the conduit borrower is under examination by another operating division or another TE/GE function, the examiner should inform them of the final adverse determination and coordinate as needed.

    2. In the case of a conduit financing, if the conduit borrower is not under examination, the examiner should make a referral to the appropriate operating division or other TE/GE function.

4.81.5.9.3  (11-01-2008)
No Change Examinations

  1. As a result of the examination of a bond issue, the examiner may conclude that there is no change to the position that interest received by bondholders is excludable from gross income under IRC section 103. The examiner will obtain the manager's concurrence.

  2. The examiner will prepare the closing letter, assemble the case file as outlined in IRM 4.81.5.9.7, and forward the case to the manager. The manager will review the case file and issue the closing letter. A sample of Letter 4411, No Change Letter, is included as Exhibit 4.81.5-3.

4.81.5.9.4  (11-01-2008)
No Change Advisory Examinations

  1. As a result of the examination of a bond issue, the examiner may conclude that there is no change to the position that interest received by bondholders is excludable from gross income under IRC section 103. However, the examiner may have identified issues that may result in a future rebate liability or an adverse determination, unless future corrective action is taken.

  2. Examples of issues that have no impact on the current examination which may have an impact in the future are:

    1. The examiner determines that currently a facility, financed with a governmental bond, has private use in excess of the amount permitted. If the level of private use continues throughout the remainder of the measurement period, the bonds will be private activity bonds. The No Change Advisory Letter, Letter 4410 , will advise the Issuer that if private use continues at the current level, the bonds may be taxable.

    2. The examiner determines the fixed rate for bonds under examination do not qualify for any of the spending exceptions and the exam reveals a potential rebate liability; however, the first computation date for computing rebate liability has not occurred. Letter 4410 will advise the Issuer that they do not qualify for any of the spending exceptions and therefore, may have a potential future rebate liability.

  3. With the manager's concurrence, the examiner will prepare Letter 4410 listing the identified issues. A sample Letter 4410 is included as Exhibit 4.81.5-4.

  4. Examinations requiring Letter 4410 will be closed using a "Written Advisory" disposal code (TREES-213 or 214/AIMS-08).

4.81.5.9.5  (11-01-2008)
Coordination with Other Operating Divisions

  1. IRC section 168(g) states that in the case of a conduit financing, the examiner should verify that tax-exempt bond financed assets are depreciated using the straight-line method.

    • If the conduit borrower is a taxable entity for federal income tax purposes or an organization exempt under IRC section 501(c)(3) and subject to Unrelated Business Income Tax (UBIT), the examiner should determine compliance with the requirements of IRC section 168(g). If the conduit borrower is not a taxable entity for federal tax purposes, any non-compliance with IRC section 168(g) would have no tax effect (for example, an organization exempt under IRC section 501(c)(3), not subject to UBIT, a government or municipal entity).

    • If it is determined that an IRC section 168(g) adjustment is necessary, the examiner should discuss the adjustments with their manager and obtain concurrence.

    • If the conduit borrower is currently under examination by another operating division and TEB is entering into a closing agreement to which the conduit borrower is a party, the examiner should coordinate with the other operating division to determine whether TEB is to include the IRC section 168(g) adjustment in the closing agreement or refer the adjustment to the other operating division. If the other operating division is to include the adjustment in its examination, the examiner should forward the proposed adjustment to the appropriate point of contact.

    • If the conduit borrower is not currently under examination by another operating division and TEB is resolving the examination with a closing agreement, then the IRC section 168(g) adjustment should be addressed.

    • If there are no issues impacting the tax-exempt nature of the interest paid on the bonds, under IRC section 103, the examiner should consider a closing agreement, solely on the IRC section 168(g) issue. If the conduit borrower does not wish to enter into a closing agreement on the IRC section 168(g) issue, the examiner should prepare a report proposing the adjustment as an attachment for an Information Report, Form 5666, for the appropriate operating division.

    • If there are other issues present in the bond examination that resulted in a proposed adverse determination to which the Issuer has submitted a timely protest, TEB will take an alternative position that the assets are tax-exempt bond financed and the IRC section 168(g) adjustment will be proposed.

  2. IRC section 150(b) states that in the case of a conduit financing where the conduit borrower is under examination by another operating division, simultaneously with the issuance of the proposed adverse determination, the examiner should prepare a Form 5701-TEB disallowing the deduction under IRC section 150(b) and forward it to the examining operating division.

4.81.5.9.6  (11-01-2008)
Case File Assembly and Closing

  1. Because further technical, administrative, and procedural action is sometimes required on a case after being closed from the examiner's inventory, it is important that the file be properly organized. This will assist group managers, reviewers, appeals officers, processing personnel, and others who may subsequently become involved with the case.

  2. The examiner is responsible for processing the examination case file within the TE/GE Reporting and Electronic Examination System (TREES) as delineated by Training Catalog Number 22269. Additional guidance for completion of the examination is detailed in the TREES program by accessing "TREES Help" on the "Help" menu. Periodic updates to TREES are found on the IRS intranet and can also be accessed on the "Help" menu by selecting "TREES on the Web" .

  3. In addition, the TREES Naming Convention was implemented pursuant to a memorandum dated April 11, 2008. This provides an established set of rules for naming files within TREES, so they may be logically and easily identified by users.

  4. Examiners will prepare all workpapers and other case file documentation in electronic format. All electronic files are to be included in the TREES case file and will close with the case. Any files which cannot be stored electronically, such as correspondence from the taxpayer or items with original signatures, should be included in the corresponding paper case file and forwarded to the Closing Unit simultaneously with the case closure on TREES.

4.81.5.9.6.1  (11-01-2008)
Case File Assembly

  1. Listed below are the documents which are part of a closed case file. Any documents not established, imported, or scanned into the TREES environment should be included in the paper case file.

  2. The paper case file must be identified with the taxpayer name, TIN, MFT, tax period, and report number on the folder tab. (Use a "status" label from the labels attached to the Form 5546, when available.)

  3. Form 3198-A, Special Handling Notice, must be stapled to the outside front of all paper case files and included as an electronic file within TREES. The Form 3198-A should identify the taxpayer name, tax period, and any special handling instruction (e.g. project, initiative, unagreed, penalty, referral).

  4. Confidential informant documents must be in a confidential envelope, with Document 6441 on the outside of the envelope. This must be attached to the inside left of the paper case file. Confidential informant documents include Form 211 (application for Reward for Original Information), Form 838 (Confidential Report on Claims for Reward), and Form 3949 (Criminal Investigation Information Item), etc.

  5. Place on the inside of case folder, not fastened, in order listed (top down):

    1. Undated original closing letter on TE/GE letterhead. (Manager will date, sign, and mail letter, including fully executed closing agreement when applicable. A copy of the closing letter will be included in the case file. An original fully executed closing agreement will also be included, when applicable. See paragraph (6)a) below.

    2. Undated transmittal letter to the power of attorney. (Manager will date, sign, and mail with copy of the closing letter and place copy in case file. See paragraph (6)b) below.

    3. Stapled together in the following order: Form 5546, Examination Return Charge Out; Form 3244-A, Payment Posting Voucher-Examination; copy of the check received as payment; copy of the examined return; Form 8821, Tax Authorization; Form 2848 Power of Attorney and Declaration of Representative; and conflict of interest waivers.

    4. In an unagreed case, examiner will include as a package Form 4665, Report Transmittal, examiner's rebuttal to the protest, taxpayer's protest and the proposed adverse letter.

  6. Clip or fasten on right side of the case file in the order listed (top down):

    1. Copy of the closing letter, inserted by manager;

    2. Fully executed closing agreement, inserted by manager;

    3. File copy of the transmittal letter to the power or attorney, inserted by the manager;

    4. Form 5772 (EP/EO Workpaper Summary)

    5. Form 5773 (EP/EO Workpaper Summary Continuation Sheet); and

    6. The following items indexed to the Form 5773: workpapers; correspondence; Form 5464 (Case Chronology Record); attachments to workpapers; and exhibits.

4.81.5.9.6.2  (11-01-2008)
Case Closing Procedures

  1. Upon completion of the examination, the examiner is responsible for ensuring that the conclusion reached is technically correct and that the case is procedurally accurate. This includes, but is not limited to:

    1. Correctly preparing the closing letter and any transmittal letter(s) to the power of attorney;

    2. Identifying documents received in response to IDRs which are not necessary to support audit conclusions and preparing Letter 4412, Records Return Letter, addressed to the provider of the documents (e.g. taxpayer, conduit borrower, taxpayer's representative). An example of Letter 4412 is provided as Exhibit 4.81.5-5.

    3. Verifying workpaper documentation supports the conclusion(s) and are properly indexed to the Form 5772, EP/EO Workpaper Summary and the Form 5773, EP/EO Workpaper Summary Continuation Sheet.

    4. Ensuring case file is assembled as set forth in IRM 4.81.5.9.6.1;

    5. Purging unnecessary documents, including duplicate letters, envelopes, routing slips, etc.;

    6. Completing closing tabs on the TREES compliance activity correctly.

  2. The examiner is responsible for timely requesting closure through TREES and immediately mailing, utilizing Form 3210 (Document Transmittal), the paper case file to the manager.

  3. For unagreed cases, if the bonds were redeemed during, or prior to the examination, resulting in a situation where any remaining open statute years would be in jeopardy of being lost, the examiner should clearly indicate this information on Form 4665, Report Transmittal.

4.81.5.9.6.3  (11-01-2008)
Case Closing Procedures for Managers

  1. Upon receipt of a closed case from an examiner, the manager is responsible for ensuring that the conclusion reached is technically correct and that the case is procedurally accurate. This includes, but is not limited to:

    1. Reviewing the case timely;

    2. Returning the case to the examiner where appropriate;

    3. Pulling and mailing to the appropriate parties the closing letter, closing agreement, transmittal letter for copies to the power of attorney, and inserting copies in the paper case file;

    4. Mailing documents identified by examiner to be returned to provider, with Records Return Letter, and inserting copies in the paper case file; and

    5. Timely closing case in TREES and immediately mailing, utilizing Form 3210 (Document Transmittal), the paper case file to the Closing Unit.

Exhibit 4.81.5-1  (11-01-2008)
Letter 4413, Notice of Proposed Adverse Determination Letter

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Exhibit 4.81.5-2  (11-01-2008)
Letter 4409, Notice of Final Adverse Determination Letter

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Exhibit 4.81.5-3  (11-01-2008)
Letter 4411, No Change Letter

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Exhibit 4.81.5-4  (11-01-2008)
Letter 4410, No Change Advisory Letter

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Exhibit 4.81.5-5  (11-01-2008)
Letter 4412, Records Return Letter

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