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Part 8. Appeals

Chapter 7. Technical and Procedural Guidelines

Section 1. Guidelines for Cases with Special Issues

8.7.1  Guidelines for Cases with Special Issues

8.7.1.1  (11-06-2007)
Introduction to Cases with Special Issues

  1. This section provides general information about special issues found in Appeals cases, specifically Personal Holding Company-Deficiency Dividend, Restricted Interest, and Accumulated Earnings. It also provides information on requesting assistance from Appraisal Services within Appeals and the case procedures for jeopardy assessment, termination assessments, and refund suits.

  2. The section goes into detailed procedures on the provisions of IRC 7430, covering cases with Litigation and Administrative Costs at issue.

  3. The information covers procedures applicable to Appeals Officers, Appeals Team Case Leaders, Tax Computation Specialists and Appeals Processing Services employees.

8.7.1.2  (11-06-2007)
Personal Holding Company Tax Alleviated by Deficiency Dividend

  1. IRC 547 provides a method for relieving a personal holding company from payment of liability for tax imposed under IRC 541 by paying deficiency dividends. If the taxpayer agrees to a deficiency in personal holding company tax, the Appeals Officer (AO) advises the taxpayer of the procedures required to secure the benefits of IRC 547. The information is broken down by Appeals function.

  2. Appeals Officers and Appeals Team Case Leaders:

    1. Use Form 2198, Determination of Liability for Personal Holding Company Tax, as an informal agreement for liability of personal holding company tax under IRC 547(c)(3). For authority to enter into such agreements, see Delegation Order No. 8 (Rev. 11) in IRM 1.2.43.10.

    2. Do not accept Form 2198 unless sufficient time remains to make an assessment, taking into consideration the taxpayer is allowed 120 days.

    3. Do not accept this agreement form on behalf of the IRS unless the taxpayer executes an appropriate agreement form, such as Form 870 or Form 870-AD, covering the proposed adjustments to both income tax and personal holding company tax for the years involved. Form 870 must contain conditional paragraphs as shown in IRM Part 4. Ordinarily it is not necessary to insert conditional paragraphs on Form 870-AD since the acceptance of Form 870-AD and Form 2198 are concurrent. See also Rev. Proc. 63-1, 1963-1 C.B. 471.

    4. When using closing agreements as determinations under IRC 547(c)(2), see IRM 8.13.1, Closing Agreement Manual, and Rev. Proc. 68-16, 1968-1 C.B. 770.

    5. If Form 2198 is accepted, solicit taxpayer's claim ( Form 976) and secure necessary substantiating evidence.

    6. Specific rules for establishing the date of the determination are set forth in the Regulations. There are two deadlines that apply. The taxpayer has 90 days after the date of the determination (generally, the date the signed Form 2198 is mailed to the taxpayer by registered or certified mail) to distribute the deficiency dividend. The taxpayer has 120 days after the date of the determination to file a claim on Form 976, Claim for Deficiency Dividends Deduction by a Personal Holding Company, Regulated Investment Company, or Real Estate Investment Trust.

    7. If no unusual circumstances are involved and verification of payment of dividends can easily be made, verify the claim. Prepare Form 3189, Deficiency Dividend Deduction Case Transmittal, and Form 5402, Appeals Transmittal and Case Memorandum, and close the case.

    8. If unable to verify the claim, send the substantiating evidence and administrative file to Compliance to verify the claim and prepare the report. Clearly state on the transmittal that the entire case file must be returned to Appeals, including the Revenue Agent Report (RAR) reflecting the recommendation to allow or disallow the claim.

    9. When preparing settlement computations, the AO is responsible for providing the information contained in (3) below.

    10. Depending on local procedures, either APS or the AO controls the 120 days. APS must notify the AO of the date Form 2198 is mailed.

  3. Tax Computation Specialists (or employee who prepares settlement computation):

    1. Because the amount of personal holding company tax is embedded in the body of the settlement computation and hard to see, the employee preparing the settlement computations (AO or TCS) must provide the amount in Reference Number 321 field of the Form 5403 Worksheet. This requirement is valid for MFT 02 returns.

    2. The AO or TCS, whomever prepares the settlement computations, is responsible for preparing supporting schedules to explain the settlement pertaining to personal holding tax.

    3. Interest is restricted for personal holding company tax underpayments under IRC 547(f)(2) and on overpayments under IRC 547(b)(2). This information is annotated on Form 3610 when applicable.

  4. Appeals Processing Services:

    1. APS prepares Form 5403, Appeals Closing Record, in accordance with Examination function's claim verification and closes the case to the Campus.

    2. APS mails Form 2198, Form 976 and the cover, letter prepared by the AO, to the taxpayers using certified mail. The AO prepares the cover letter to explain that the taxpayer has 90 days from the date of determination to distribute the deficiency dividend and 120 days from the date of the determination to file a claim on Form 976, Claim for Deficiency Dividends Deduction by a Personal Holding Company or Real Estate Investment Trust.

    3. Depending on local procedures, either APS or the AO controls the 120 days. APS must notify the AO of the date Form 2198 is mailed.

  5. For further information relative to the handling and disposition of Form 2198, see IRM Part 4.

  6. For docketed personal holding company tax cases, see IRM 8.4.1, Appeals Docketed Cases.

  7. Termination of Form 872-A by the taxpayer is rare. For special rules concerning the termination of a Special Consent on a personal holding company tax case, see IRM 25.6.22.7.

8.7.1.3  (11-06-2007)
Accumulated Earnings Tax IRC Notification

  1. Appeals Officers or Tax Computation Specialists: Whoever prepares the settlement computations, is responsible for providing the following information when accumulated earnings tax is present in the case.

    1. Because accumulated earnings tax is embedded in the body of the settlement computation and is hard to see, prepare supporting schedules to help explain the computation.

    2. The Tax Computation Specialist responsibility for entries on the Form 5403 Instructions to APS spreadsheet is listed below: Accumulated earnings tax is provided in Reference Number 320 field on the Form 5403 Worksheet. This requirement is valid for MFT 02 returns due prior to 1/1/86.

  2. Appeals Processing Services: Except for the items listed below, follow the instructions for completing Form 5403, Appeals Closing Record, when closing a case with Accumulated Earnings Tax (AET). See Exhibit 8.20.7-1.:

    1. Item 12 - The amount entered will be the total of income tax deficiency PLUS the AET.

    2. Item 15 - If taxable period is 198509 or prior, enter the amount of AET with Ref. Number 320.

    3. Item 800/801 - Include the Item 12 amount but DO NOT include Ref. Number 320 amount because it would duplicate the AET amount already reflected in Item 12.

    4. Item A - Special Handling Instructions - Check the " Other" box and enter "AET of $ _included in Item 12."

  3. Termination of Form 872-A by the taxpayer is rare. For special rules concerning the termination of a Special Consent on an accumulated earnings tax case or a personal holding company tax case, see IRM 25.6.22.7.

  4. See IRM 4.10.13, Examination of Returns, Certain Technical Issues, for additional information and procedural instructions for accumulated earnings tax cases.

8.7.1.4  (11-06-2007)
Credit for Increasing Research Activities, IRC 41

  1. The research credit is a nonrefundable credit generally allowed for a percentage of expenditures paid or incurred for qualified research. See IRC 41, Credit for Increasing Research Activities, for details.

  2. The research credit was first enacted in the Economic Recovery Tax Act of 1981 as IRC 44F. Major revisions were made by the Tax Reform Act of 1984 and the section was redesignated as IRC 30 and again by the Deficit Reduction Act of 1986 when it was redesignated as IRC 41, where the authority remains today.

  3. The research credit is not a permanent credit. It has been extended numerous times through December 31, 2005, with one gap: no credit is allowed for expenditures incurred between June 30, 1995 and July 1, 1996.

  4. Currently, the research credit is not allowed for amounts paid or incurred after December 31, 2005. However, pending legislation may allow the research credit for later expenditures.

  5. Use care to ensure the correct law is applied when computing the research credit for any taxable year.

    1. See the Research Credit web site at http://lmsb.irs.gov/hq/pftg/research/index.asp for further information.

  6. Form 6765, Credit from Increasing Research Activities, provides for the various computations of the research credit, the reduced credit and the amount of the suspended research credit. Refer to the corresponding revision of the form and instructions for the applicable taxable year.

8.7.1.4.1  (11-06-2007)
Research Credit as Component of General Business Credit

  1. The Tax Reform Act of 1986 added the research credit to the general business credit (GBC) for years beginning after 1985. Prior to that it was a stand-alone credit. As part of GBC, it is subject to the carryback and carryforward provisions of IRC 39(a).

  2. Special rules apply where both the credit and a deduction is claimed for the same research expenditures.

    1. IRC 280C(c)(1) provides that no deduction is allowed for that portion of the qualified research expenses otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit determined for such taxable year.

    2. The taxpayer must reduce deductions by the amount of the credit computed, regardless of whether the taxpayer is able to utilize the full credit in the credit computation year, unless the taxpayer elects a reduced research credit pursuant to IRC 280C(c)(3).

    3. This is a yearly election and may be claimed only on an original timely filed return (with extensions).

    4. See IRC 280C(c) for details and prior law.

    5. Appeals Officers or Appeals Team Case Leaders must take IRC 280C into consideration when providing the Tax Computation Specialist with the adjustments to the research expenditures and the research credit.

8.7.1.4.2  (11-06-2007)
Research Credit Suspension

  1. The Tax Relief Act of 1999 provides for two suspension periods for the research credit. As a result, credit arising from these suspension periods cannot be taken into account on original returns.

    1. First suspension period is July 1, 1999 – September 30, 2000: The credit cannot be taken into account prior to the later of October 1, 2000 or the date the return (which includes all or part of the first suspension period) is considered filed, including approved extensions.

    2. Second suspension period is October 1, 2000 – September 30, 2001: The credit cannot be taken into account prior to the later of October 1, 2001 or the date the return (which includes all or part of the second suspension period) is considered filed, including approved extensions.

  2. No credit involving the two suspension periods may be claimed on a timely filed or late filed original income tax return, even if that original return is filed after the expiration of such suspension period. The amount can only be claimed on a Form 1040X/ Form 1120X or a Form 1045/ Form 1139.

  3. Further, any claim for refund of an overpayment of tax attributable to a research credit suspension period cannot be filed before the expiration of the applicable suspension period or before the date the original return for the applicable taxable year is filed.

  4. See Notice 2001-1 and IRM 21.7.4 for additional information on research credit suspension periods.

  5. To determine the amount of the credit that is suspended, the taxpayer must first calculate the research credit for the taxable year.

    1. Because the research credit suspension periods merely delay the use of research credits attributable to a research credit suspension period, the limitations contained in IRC 38(c), IRC 39, and IRC 41(g) on the amounts of research credit allowable to any person as a credit against tax for any taxable year remain applicable.

    2. Further, taxpayers not electing to take a reduced credit under IRC 280C(c)(3) must continue to reduce applicable deductions, amounts chargeable to capital account, and credits for the taxable year by the full amount of the research credit as required by IRC 280(C)(c)(1) and IRC 280(C)(c)(2).

  6. The amount of the total credit that is suspended is based solely on the number of months in the fiscal year before the suspension date (October 1, 2000 or October 1, 2001) and the number of months after the suspension date, not on the dollar amounts incurred for qualified research activity during the suspension periods. Any adjustment to the credit amount is to be allocated to the different periods before and after the suspension date. See the examples below:

    1. Example 1: If the taxpayer’s fiscal year runs from April 1, 1999 through March 31, 2000 and the taxpayer has a $10,000 research credit, $2,500 (25% = 3 months for April, May & June out of 12 months) is allowable on the original return and the remaining $7,500 is suspended until October 1, 2000 (the months covering July through March involve a suspension period). The taxpayer can file a claim for the $7,500 credit that was suspended on or after October 1, 2000.

    2. Example 2: If the taxpayer’s fiscal year runs from December 1, 1999 through November 30, 2000 and the taxpayer has a $10,000 research credit, no credit is allowable on the original return because all 12 months involve the first or second suspension period. The taxpayer can file a claim for $8,300 (83% = 10 out of the 12 months involved in the first suspension period, December 1999 through September 2000) after their return is filed for the period ending November 30, 2000; and the taxpayer can file a claim for the remaining $1,700 (second suspension period for October and November 2000) on or after October 1, 2001.

    3. Example 3: If the taxpayer files a calendar year return for the year 2001 and the taxpayer has a $50,000 research credit, $12,500 (25% = 3 months for October, November & December out of 12 months) is allowable on the original return. Even though the due date of the original return (3/15/2002) is after the date the second suspension period expires (10/01/2001), the taxpayer cannot claim the suspended portion of the credit on their original return. The taxpayer can file a claim for the $37,500 suspended credit anytime after they file their original return.

  7. Any research credit not allowed in the taxable year that is attributable to a research credit suspension period may not be claimed as a carryback or carryforward until the day after the end of the applicable research credit suspension period. After the end of the applicable research credit suspension period, however, research credits attributable to a research credit suspension period not used currently as a credit against tax may be carried to other taxable years under the rules of IRC 39.

  8. During these suspension periods, the research credit is not used to determine any amount required to be paid for any purpose under the Internal Revenue Code. This restriction extends to the determination of underpayments for the computation of penalties and additions to tax.

  9. In general, additions to tax for failure to pay estimated tax are made under IRC 6654 or IRC 6655 for any underpayment of income tax imposed by the Code even if the underpayment is created or increased because of the suspension of the research credit. No additions to tax for failure to pay estimated tax, however, are made for any period before July 1, 1999, for any underpayment of income tax imposed by the Internal Revenue Code to the extent the underpayment is created or increased by reason of the suspension of the research credit. See Notice 2001-2.

  10. In determining estimated tax payments, a credit created by a claim for research credit can only be applied to an estimated tax payment that is due after the suspension period expires. An example of this is a credit attributable to the second suspension period cannot be used to reduce any estimated tax payment due before October 1, 2001.

  11. Since the taxpayer can apply a credit from a suspension period to an estimated tax payment, pay special attention to the preparation of Sequa Worksheets for interest computations.

  12. The suspension periods also affect the availability dates (e.g. interest computation date) of credits/abatements against the taxpayer’s tax liability, and must therefore be taken into consideration when preparing Form 2285 for restricted interest computations.

8.7.1.4.3  (11-06-2007)
Preparing Settlement Computations Involving Research Credit

  1. These procedures are used by the Appeals employee preparing the settlement computations (AO or TCS).

  2. To prepare Form 3610:

    1. Complete the top portion of the Form 3610 following normal procedures shown in IRM 8.2.1, General Settlement and Rule 155 Computations.

    2. Include restricted interest information, if applicable, on Form 3610.

    3. Determine whether any of the suspension periods apply, and if so, notate this on Form 3610.

      For Example:The computation of interest on the adjustment to research credits pertaining to tax year 1999 include research credit suspension periods require restricted interest as noted above.

        Total Research Credit Suspended % Suspended Research Credit Date Cr Allowed for Interest
      Per Original Return 2,840,536 50% 1,420,268 10/1/2000
      Per Settlement 1,600,164 50% 800,082 10/1/2000
      Adjustment     620,186
      ======       		 


      7/1/1999 - 12/31/1999 = 6 months suspended in the 12 month period
      It is also determined the deficiency for the taxable year 1999 is a large corporate underpayment under IRC 6621(c). Accordingly, the annual rate of interest payable on your income tax shall be two percentage points higher than the underpayment rate established under IRC 6621(a).

  3. Prepare the appropriate forms (i.e. Form 2210/2220 Sequa Worksheet and/or Form 2285) necessary to identify the availability dates for interest computations.

    1. Attach the Form 2210/2220 Sequa Worksheet behind the Form 5403 Worksheet. Mark an "X" in the appropriate tax year column on the Form 5403 Worksheet.

    2. If a Form 2285 is prepared, write the applicable code section in the appropriate tax year column of the Form 5403 Worksheet. Attach the Form 2285 to the Form 5403 Worksheet and to the settlement computation.

8.7.1.5  (11-06-2007)
Valuation Issues in Appeals Cases

  1. The purpose of this section is to make AOs aware of the offices of Appeals Appraisal Services and Art Appraisal Services within the Office of Chief, Appeals and to encourage contact with these offices when needed. These offices maintain a core of financial analysts and art appraisers to assist service personnel on their cases. In addition, these offices can assist Appeals Officers in locating experts in other fields.

8.7.1.5.1  (11-06-2007)
Requests for Art Appraisal Service Assistance

  1. The AO consults with the Office of Art Appraisal Services on any case claiming a value for a single work of art in excess of $20,000. Telephone discussions with this office are encouraged in order to take advantage of expert advice and to facilitate the handling of all referrals for valuation assistance. To determine information and items necessary to obtain valuation assistance on works of art, see IRM 8.18.1, Valuation Assistance Handbook, for detailed instructions and procedures.

  2. Send requests for Art Appraisal Services Assistance to:


    Chief, Art Appraisal Services
    Internal Revenue Service / Appeals
    1099 14th Street, N.W., Suite 4200–E
    Washington, D.C. 20005

8.7.1.5.2  (11-06-2007)
Requests for Appeals Appraisal Services

  1. Send requests for Appeals Appraisal Services (Financial, Business or Real Estate Investment Trust) Assistance to:

    Appeals Appraisal Services
    Room 5020, South Building
    950 L'Enfant Plaza, S.W.
    Washington, D.C. 20026

  2. Requesters are encouraged to contact the valuation specialists by telephone to informally discuss a valuation problem to determine the type of assistance required. For detailed instructions and procedures, see IRM 8.18.1, Valuation Assistance Handbook.

8.7.1.6  (11-06-2007)
Jeopardy and Termination Assessments Cases

  1. Code Section 7429 provides for administrative and judicial reviews for termination and jeopardy assessments.

  2. Appeals procedures for termination assessment cases are in many respects the same as for jeopardy assessments.

  3. The following subsections provide procedures for processing these type cases.

8.7.1.6.1  (11-06-2007)
Jeopardy Assessments

  1. Jeopardy assessments are made under IRC 6861 or IRC 6862. These sections provide an expedited assessment procedure when tax collection is endangered if regular assessment and collection procedures are followed. IRC 6867 allows the Service to presume that tax collection will be jeopardized in certain circumstances where an individual is in physical possession of an unidentified large amount of cash.

    1. IRC 6861 applies to assessments of deficiencies of income, estate, gift and certain excise taxes

    2. IRC 6682 applies to taxes other than income, estate, gift and certain excise taxes whether or not the due date for filing and paying the tax expired.

  2. Service policy on jeopardy assessments is found in Policy Statement P–4–88. Also see IRM 4.15, Examining Process, Jeopardy/Termination Assessments, and IRM 5.1.4, Collecting Process, General Handbook.

8.7.1.6.2  (11-06-2007)
Jeopardy Assessment Procedures for Compliance

  1. Under IRC 7429(a), the Compliance Area Director has five (5) days after a jeopardy assessment to furnish the taxpayer with a written statement of the information the Service relied on in making the assessment. See IRM 5.1.4.1 for pattern letters.

  2. As a result of the enactment of the IRS Restructuring and Reform Act of 1998 on July 21, 1998, it is now a statutory requirement for Chief Counsel or his/her delegate to approve all jeopardy and termination assessments and all jeopardy levies. Approval is now required by Counsel in ALL cases, not just in cases where time permits.

  3. Jeopardy assessments initiated by Collection personnel are limited to proposed:

    1. Trust Fund Recovery Penalty assessments;

    2. Employment and excise tax assessments, whether or not the return due date expired;

    3. Partnership penalty assessments;

    4. Income tax assessment when there is no question about the amount of the liability.

  4. A jeopardy assessment is requested when:

    1. It is determined collection is in jeopardy;

    2. One or more of the four conditions outlined in P-4-88 exists;

    3. Trust Fund Recovery Penalty assessments, and IRC 6020(b) assessments, for which appropriate appeal/protest periods are not expired;

    4. Assessment/collection action is proposed prior to the return due date for a signed return for income tax liabilities.

8.7.1.6.3  (11-06-2007)
Jeopardy Assessments On Cases Pending in Appeals

  1. The area Examination function occasionally investigates cases pending in Appeals to determine the need for a jeopardy assessment. An investigation by the Examination function is limited to whether collection of any proposed deficiency is endangered by any circumstance that might adversely affect the taxpayer's ability to pay or the Government's ability to collect. Appeals keeps responsibility for making the final determination of the tax liability in controversy.

  2. If a jeopardy assessment is not warranted on a case referred to the area for investigation, the Area Director returns the case to the Appeals Office with a notice to that effect.

  3. When a jeopardy assessment is warranted, it is made by the Area Director. The case and jeopardy assessment file are immediately returned to the Appeals Office that referred the case. In income, estate and gift tax cases, Appeals issues any notice of deficiency required by IRC 6861(b). Send a copy of the notice of deficiency to the appropriate Examination function.

  4. When a case and jeopardy assessment file are returned to Appeals, only consider the issues in the tax case. The taxpayer needs to ask for a review of the jeopardy for Appeals to consider it.

  5. Some jeopardy assessments lend themselves to complete resolution of both the merits of the case and the reasonableness of the assessment. Therefore, both aspects can be resolved by agreement if the action is taken within 15 days after the taxpayer's request is filed or the taxpayer decides not to request judicial review of the assessment in District Court.

8.7.1.6.4  (11-06-2007)
Termination Assessments

  1. The Area Director makes a termination assessment under the conditions found in Policy Statement P-4-89 and the procedures in IRM Part 4. Time limitations for holding Appeals conferences, rendering a prompt decision, and statutory provisions for filing suit in District Court are the same as for jeopardy assessment.

  2. Because of time limitations involved, if the taxpayer provides new information or documentation to the AO, the Area Director may need to promptly comment on the new evidence. Appeals retains jurisdiction over the case in instances where the Area Director comments on the new evidence.

  3. Inform the taxpayer of the right to judicial review when a taxpayer does not agree with the Appeals decision. Return the case file and a report, in duplicate, to the Area office Examination function.

  4. At the end of the full tax year, the taxpayer is required to file a full year return. Generally, Examination function is responsible for issuing the notice of deficiency required under IRC 6851(b) for the taxpayer's taxable year. Area office and Campus controls are established to determine whether or not the taxpayer files a full year return.

  5. Examination function either examines the taxpayer's return or prepares a substitute for the return. The taxpayer may protest the notice of deficiency and come to Appeals. In some cases, it is possible for Appeals to receive the case prior to issuance of the notice of deficiency. In these cases, Appeals issues the notice of deficiency. If Appeals issues the notice of deficiency, a copy of the notice is sent to the appropriate Examination function.

8.7.1.6.5  (11-06-2007)
APS Processing Termination and Jeopardy Assessment Cases

  1. These cases will not be controlled on AIMS unless the taxpayer files a return with Examination for the full taxable year. If the taxpayer does file, Examination will establish the full year return on AIMS.

  2. Appeals findings will result in one of the following actions:

    • District sustained in full

    • District sustained in part

    • Termination action not warranted (the collection of the tax was not in jeopardy)

    • Taxpayer agreement with the action taken

  3. If Appeals sustains the district in full (taxpayer does not agree):

    1. Close ACDS following general closing instructions. CLOSINGCD= 20.

    2. Return the file to Examination.

  4. If Appeals sustains the district in part (taxpayer does not agree):

    1. On Form 5402, request Examination make the appropriate abatement.

    2. Close ACDS following general closing instructions. CLOSINGCD = 13.

    3. Return the file to Examination.

  5. If Appeals finds that the termination was not warranted:

    1. On Form 5402, request Examination abate the entire assessment, release liens and any levies, as appropriate, and effect appropriate refund or credit.

    2. Close ACDS following general closing instructions. CLOSINGCD= 03.

    3. Return the file to Examination.

  6. If Appeals reaches agreement with the taxpayer:

    1. On Form 5402 request Examination abate any excessive tax assessed.

    2. Close ACDS following general closing instructions. CLOSINGCD= 03.

    3. Return the case to Examination.

  7. If the taxpayer files a civil suit at any time prior to the conclusion of the administrative appeal, Collection (SPF) will request the entire file, including Form 5402. Appeals procedures will be suspended.

  8. Retain a copy of the file to issue a statutory notice within the required period for issuance, which is 60 days after the later of the date the taxpayer files a return for the full taxable year or the due date of the return as extended. The 60-day period does not commence until a return for the taxpayer’s annual accounting period is filed. Send a copy of any report prepared by Appeals to Counsel within 24 hours. On ACDS, enter:

    1. ACTION DDJRET, and

    2. TODATE the date the case file was sent to special procedures function, Collection Division.

  9. Send the following to the Compliance Area Director:

    1. Copies of reports of reconsideration by Appeals and

    2. Copies of any statutory notices issued by Appeals on cases under jurisdiction.

  10. Transmittals to Examination and requests for abatements should be coordinated with Examination prior to returning the case files. Prepare Form 5403 marking the "Source Document Only" box at the top of the page.

    1. In Item 12 show the amount to be abated.

    2. Omit entries 800–811.

    3. In Item A, enter the following: "Abate excessive portion of jeopardy assessment manually. Full year return has not been filed. Do not process through terminal."

    4. Prepare Form 1331, Notice of Adjustment.

  11. Prepare Form 5403 for any full year returns established on AIMS. In Item 12 enter the NET deficiency (overassessment). Consider the amount previously assessed (including the termination assessment) and the tax liability on any tax return filed for the full year.

  12. Show the following computation in Item A or as an attachment, cross-referenced in Item A. Include a transcript of account in the administrative file.

    • Termination Assessment (adjusted for any overassessment allowed) $___

    • Liability per full year return (assessed or unassessed)$____

    • Total of 1 and 2 $___

    • Correct liability $____

    • Item 12 amount (+ or –) $____

8.7.1.7  (11-06-2007)
Civil Cases Involving Department of Justice

  1. The Department of Justice (DOJ) has exclusive jurisdiction over any action in which a taxpayer has filed a suit in the United States District Court or in the United States Court of Federal Claims for recovery of taxes paid.

  2. When a suit for refund of taxes is filed in a pending case, further consideration is postponed on the case, including all years under consideration (suit and nonsuit) and on any related cases.

  3. However, it is not necessary to postpone consideration for years not in litigation if the issues in the nonsuit years are unrelated to the issues in the years under litigation. In such situations, contact the DOJ through local Associate Area Counsel.

  4. Either the Campus or Associate Area Counsel notifies the appropriate Appeals office when a suit for refund is filed in a case pending before Appeals. See IRM 5.8 for cases in suits involving offers in compromise.

8.7.1.7.1  (11-06-2007)
Closing Department of Justice Cases

  1. Appeals is notified when the case jurisdiction changes to Department of Justice (DOJ), exclusively.

  2. After the Appeals Officer prepares the case for release to DOJ, close the case on both AIMS and ACDS. Once this is complete and administrative file recharged, send the case to Counsel.

  3. Prepare Form 5403 to close the AIMS file. Use "copy" procedures:

    1. Item 12 - Enter TC 300 for $0.

    2. Items 800 through 810 - Enter appropriate statistical information.

    3. Item 811 - Enter closing code 18 or 19, as appropriate.

    4. Attach a copy of the face of the return and Form 2275, Records Request, Charge and Recharge, to the Form 5403. Forward Form 2275 to the Campus to "recharge" the administrative file and original return to Department of Justice.

  4. Update ACDS following general closing instructions:

    1. CLOSINGCD - 18 or 19, as appropriate.

    2. ACTION - ACKCLS.

    3. TODATE - Date administrative file is delivered to Counsel.

    4. FROMDATE - Date acknowledgment received from Counsel.

  5. The above instructions apply only to cases in Appeals jurisdiction. If a taxpayer petitions the District Court or Claims Court while in Examination jurisdiction, the DOJ transfer is coordinated between Examination and Counsel without involvement by Appeals. The case WILL NOT be controlled on ACDS.

8.7.1.8  (11-06-2007)
Appeals Procedures on Refund Suits

  1. This section explains procedures for handling Refund Suits in various scenarios. It provides information on the following:

    • When to issue the notice of claim disallowance.

    • What to do if the case involves an application to reconsider a claim previously disallowed.

    • What information should go in the Appeals Case Memorandum.

    • What to do before issuing a statutory notice of deficiency on the suit years.

    • What happens if the taxpayer files a petition with the Tax Court.

    • How to handle related cases that are in Appeals for consideration.

8.7.1.8.1  (11-06-2007)
Refund Suits with No Deficiency in Appeals Cases

  1. After notice that a suit has been filed in an Appeals case involving no deficiency, issue the notice of claim disallowance (if required) and prepare Form 5403, Appeals Closing Record (which identifies the case as a court case).

  2. Forward the return to Appeals Processing Section (APS) for processing. APS completes action and assigns a new DLN, then promptly sends the administrative file, including the return, to Counsel.

  3. However, if the Campus maintains a follow-up control on the Refund Litigation file, forward the administrative file to the Campus, referring in the transmittal to the Campus's Refund Litigation control number.

8.7.1.8.2  (11-06-2007)
Refund Suits with Disposition of Pending Claims

  1. If a claim has not previously been disallowed or Form 2297, Waiver of Statutory Notification of Claim Disallowance, was not signed by the taxpayer, issue a statutory notice of claim disallowance.

  2. If the case involves an application for reconsideration of a claim previously acted upon, prepare Form 5403 to transmit the return to APS and enter the date the notice of claim disallowance was issued or the date Form 2297 was filed. Finally, advise the taxpayer that, because of filing suit, the case is under jurisdiction of the Department of Justice and Appeals will give no further consideration to the case.

8.7.1.8.3  (11-06-2007)
Refund Suits with Deficiency in Appeals Cases

  1. If there are proposed deficiencies before Appeals for years involved in the suit, Form 5402 and accompanying ACM used to forward the return to Appeals Processing Section must include the following:

    1. the amount of the proposed deficiency;

    2. the basis for determination;

    3. if possible, an expression of Appeals' views on whether a statutory notice of deficiency is issued; and

    4. date of expiration of statutory period of limitations.

8.7.1.8.4  (11-06-2007)
Refund Suits with Statutory Notice of Deficiency Issued

  1. When issuing a notice of deficiency on the suit years, consult with the Department of Justice through Counsel, for advice and concurrence. If the Department of Justice concludes a notice of deficiency should be issued, they notify Counsel, who notifies the appropriate Appeals office.

  2. If the notice of deficiency raises an issue under a specific Internal Revenue Code section or Tax Court Rule 142 that places the burden of proof on the Government with respect to the issue, consider sending the proposed notice to Counsel for consideration.

  3. However, there is no need to consider sending the proposed notice to Counsel if the burden of proof issue involves only IRC 7491. Also notify Counsel if you have information the taxpayer will petition the Tax Court after receiving a notice of deficiency.

8.7.1.8.5  (11-06-2007)
Refund Suits When Petition is Filed with US Tax Court

  1. If the Tax Court acquires jurisdiction, process the case the same as other docketed cases. Chief Counsel notifies the Department of Justice that a petition was filed. See IRM 8.4.1, Appeals Docketed Cases.

8.7.1.8.6  (11-06-2007)
Refund Suits on Related Appeals Cases

  1. Appeals may have pending cases related to issues in suit involving either the same or different taxpayers. Use Form 5402 to transmit the years in suit, indicating the related cases is pending before Appeals, the issue involved, and the relationship with the years in suit. Also request prompt advice on disposition of the years in suit.

  2. If further consideration of related cases appears warranted, ask Counsel to determine whether the Department of Justice has any objection to adjusting the nonsuit year(s). Before taking final action on any related case covering the nonsuit year(s), ask Counsel to determine if the Department of Justice has any objection to the proposed disposition. If the Appeals case covering the nonsuit year(s) is docketed in the Tax Court, Counsel (rather than Appeals) coordinates action with the Department of Justice.

  3. For Department of Justice cases (or related issues or cases) involving closing agreements, see IRM 8.13.1, Closing Agreements.

8.7.1.8.7  (11-30-2001)
Settlements by Department of Justice (DOJ)

  1. This section covers the different settlements handled by the Department of Justice, specifically those where the settlement affects cases pending in Appeals.

  2. If the Department of Justice receives a proposal of settlement in a case previously considered by Appeals that affects only years in suit, Counsel does not refer the proposal to the Appeals office for comment unless circumstances warrant coordination.

8.7.1.8.7.1  (11-06-2007)
DOJ Settlements Affecting Appeals Cases

  1. If the proposal of settlement affects cases pending before Appeals, other than docketed cases, Counsel refers the proposal directly to the Appeals office for comment. Comments furnished to Counsel must be limited to adequacy of the proposal. If there is an issue in the Appeals case not present in the years in suit and not covered by the proposal of settlement, call the issue to the attention of Counsel. Also, mention any other factor which might cause problems with acceptance of the proposal. Do not enter into further settlement negotiations with the taxpayer without specific authorization.

  2. Delegation Order 155, as revised, delegates authority to Chief Counsel and the Associate Chief Counsels, to sign recommendation letters to the DOJ concerning settlement offers for years or parties not in suit, but related to pending refund suits for other years or parties.

  3. In exercising this authority, consider the advice of the Area Director of the Appeals office with jurisdiction over the nonsuit years or parties.

8.7.1.8.7.2  (11-06-2007)
Disposition Based Upon Department of Justice Settlement

  1. When Counsel notifies Appeals a settlement is accepted by the Department of Justice, dispose of the case for the nonsuit year(s) in the usual manner. Counsel disposes of the refund suit years. Resolve issues not covered in the settlement using normal procedures. Avoid entering into any agreement before the settlement of the years in suit is effective.

8.7.1.9  (11-06-2007)
Cases Involving Criminal Prosecution and Restrictions on Appeals Jurisdiction in Criminal Cases

  1. Appeals does not act on civil liability in a pending criminal prosecution case without concurrence of Criminal Investigation.

  2. In any case in which prosecution for criminal fraud is recommended to the DOJ, or in which the question of liability for criminal fraud remains under investigation, treat criminal prosecution as pending until a final disposition is made on the criminal aspects. IRM Part 4 and the Policies of the Internal Revenue Service Handbook, contain text relative to cases with criminal fraud implications.

  3. Appeals may act on civil liability when notified in writing by Criminal Investigation that:

    1. Recommended criminal prosecution was declined and no court proceedings will be instituted; or

    2. All court proceedings which were instituted as the result of the recommendation for criminal prosecution are complete.

  4. Appeals may act on civil liability when court proceedings on criminal prosecution are not fully completed, but only if the Department of Justice has given clearance for a determination or a settlement, in whole or in part.

  5. Under Policy Statement P-4-26, Appeals takes no action that would imperil successful criminal investigation or prosecution. In cases where Criminal Investigation did not recommend criminal prosecution but the case is pending with the DOJ, or an indictment was, in fact, returned charging attempt to evade or defeat tax or willful failure to file a return, coordinate with Criminal Investigation on intended action in the case. Criminal Investigation, in coordination with the DOJ, is better able to determine whether contemplated Appeals action on the case is contrary to the Government's interests in the criminal case.

8.7.1.9.1  (11-06-2007)
Appeals Jurisdiction in Criminal Cases

  1. The notice of Criminal Investigation referred to above releases Appeals from the restriction to act on criminal cases imposed by Delegation Order No. 66, as revised. However, the notice received from Criminal Investigation in pending criminal cases may have limitations or qualifications. Appeals authority is subject to any of these restrictions.

8.7.1.9.1.1  (11-06-2007)
Appeals Case Memo or Status Report on Pending Criminal Case

  1. State in the Appeals Case Memo (ACM) that there are criminal aspects in the case and indicate whether or not such aspects were completed.

  2. If Criminal Investigation's notice of clearance is prior to the completion of final criminal action and:

    1. Appeals action is completed within 45 days from the date of notice, give Criminal Investigation four extra copies of the Appeals Case Memo.

    2. Appeals action is not completed within 45 days from the date of notice, forward a status report (with four copies) at the end of that period to Criminal Investigation and send a similar report every 30 days until completion. Document the Status Report with any lack of cooperation or good faith on the part of the taxpayer or taxpayer's Counsel. Upon completion, give the Appeals Case Memo (with four extra copies) to Criminal Investigation.

8.7.1.9.2  (11-06-2007)
Report to Criminal Investigation When Convicted Taxpayer on Probation

  1. Appeals may consider the civil liability of a taxpayer convicted of violating the internal revenue laws and placed on probation for a specified period of time conditioned upon satisfactory settlement and/or payment of civil liability for taxes and penalties.

  2. Promptly inform the Special Agent in Charge, Criminal Investigation for the originating field office of any lack of cooperation, or any other act of the taxpayer, that appears intended to delay or to interfere with an orderly determination of liability. Also, give a Status Report on the case to the Special Agent in Charge, Criminal Investigation, no later than 60 days before the expiration of the probationary period or upon completion of the case, whichever occurs first.

8.7.1.9.3  (11-06-2007)
Civil Liabilities After Criminal Aspects Closed

  1. After disposition of criminal aspects of a case, the administrative file is forwarded to Appeals for consideration of any unsettled civil liabilities within its jurisdiction.

  2. The closed enforcement file received by Appeals reveals any additional facts or evidence obtained by Criminal Investigation or developed in any pretrial investigation by a special agent. It also reveals whether or not the case was tried. If tried, or if additional evidence was developed, there is a special agent's summary report, prepared in accordance with instructions in IRM Part 9. If the file does not contain the required report, request it from the area Criminal Investigation function.

  3. Include a concise statement in the ACM about the joint investigation by a special agent and revenue agent, the results, and the disposition of any recommendations for criminal prosecution.

8.7.1.10  (11-06-2007)
Introduction to IRC 7430 Costs

  1. The provisions of IRC 7430 allow a prevailing party to be awarded a settlement for reasonable administrative costs incurred in connection with an administrative proceeding within the IRS, and reasonable litigation costs incurred in connection with a court proceeding. The costs must be incurred in situations involving administrative or court proceedings connected to the determination, collection or refund of any tax, interest or penalty.

    1. "Administrative proceeding" means any procedure or other action before the IRS.

    2. "Court proceeding" means any civil action brought in a court of the United States, including the Tax Court and the United States Claims Court.

  2. In court proceedings, the prevailing party must exhaust all administrative remedies available before the court can consider awarding reasonable litigation costs. This requires the taxpayer to utilize their right to an Appeals conference, when available. For example -

    1. If the 30-day letter is issued and the taxpayer decides not go to Appeals but instead goes to Appeals when the court is petitioned on the 90-day letter, the taxpayer is not entitled to administrative or legal costs under IRC 7430 because all administrative remedies are not exhausted.

    2. If the Service decides not to issue the 30-day letter and only issues the 90-day letter, IRC 7430 applies because the taxpayer was not given the opportunity to go to Appeals.

  3. For a definition of the terms commonly used in these cases, See Exhibit 8.7.1-1.

  4. See IRM 35.10.1, Awards of Litigation and Administration Costs and Fees, for detailed information about IRC 7430 costs.

8.7.1.10.1  (11-06-2007)
Appeals Involvement in IRC 7430 Cases

  1. Appeals receives three types of cases where a request for IRC 7430 costs may be present. They are as follows:

    1. Claim cases with a request for administrative costs under IRC 7430(a)(1), and neither the substantive issues nor administrative cost issues were ever before a court of the United States with jurisdiction over the issues (including the Tax Court or United States Court of Federal Claims).

      Note:

      If the substantive issue and/or the IRC 7430 costs were previously under the jurisdiction of a U.S. court (including Tax Court or U.S. Court of Federal Claims), Appeals denies the claim and lets the taxpayer know the claim cannot be considered or settled in Appeals. Appeals does not have jurisdiction to settle these cases. Resolution of these cases is governed by Tax Court Rules and Procedures.

    2. Docketed cases in Appeals for settlement of substantive issues where the taxpayer raises the administrative or litigation costs and fees issue. The case is not a claim for refund. It may or may not have a qualified offer.

    3. Pre-90-day cases that include a qualified offer to resolve the substantive issues and the qualified offer was filed after the 30-day letter was issued.

  2. When a case is assigned, the Appeals Officer (AO) needs to determine whether the case has the IRC 7430 cost issue, and if it does, determine if the case meets the statutory and filing requirements of IRC 7430 for granting an award of reasonable administrative and litigation costs and fees.

8.7.1.10.2  (11-06-2007)
Claim Cases Involving IRC 7430

  1. Appeals considers claims for administrative cost awards if the substantive issues or IRC 7430 cost issues are not and have never been before any court of the United States with jurisdiction over these issues.

    Note:

    A claim for refund of administrative costs cannot include a claim for refund of litigation costs.

  2. Once the case is assigned the AO determines the following:

    1. whether the statutory requirements are met;

    2. whether the claim is properly filed and includes required documents; and

    3. whether the costs requested for refund are reasonable.

  3. If the taxpayer is denied an award (in whole or in part), he/she may appeal the decision by filing a petition with the Tax Court in accordance with the Tax Court's Rules of Practice and Procedure.

  4. The IRS is authorized but not required to notify the taxpayer of the decision to grant or deny an award. If the notice is not sent within 6 months of when the request is filed, the IRS’s failure to respond is considered a decision by the IRS to deny the claim.

  5. The taxpayer can Appeal a decision by the IRS to deny the claim, in whole or in part, after the expiration of the 6 month time-frame. An appeal is filed with the Tax Court following the Tax Court Rules of Practice and Procedures. This is a new proceeding requiring the use of Tax Court rules 270 through 274. See Treas. Reg. 301.7430-2(c)(7).

  6. Refer to IRM 35.10.1.2, Actions for Administrative Costs.

8.7.1.10.2.1  (11-06-2007)
AO Procedures for Processing Claim Cases with IRC 7430

  1. Prepare the Appeals Case Memorandum (ACM) recommending the costs be allowed in full, denied in full, or allowed in part.

  2. Prepare the appropriate decision letter to issue to the taxpayer when the case is closed.

    1. A full disallowance letter - Letter 2600. See Exhibit 8.7.1-2.

    2. A partial disallowance letter - Letter 2602. See Exhibit 8.7.1-3.

  3. Prepare an approval package that includes the following:

    1. Form 9333, Agreement on Administrative Cost Per IRC 7430 (in triplicate), with the taxpayer’s or power of attorney's signature. See Exhibit 8.7.1-4.;

    2. IRS Administrative Cost Data Sheet. An example of what this sheet looks like is located in See Exhibit 8.7.1-5.;

    3. ACM;

    4. Work paper file associated with the administrative cost claim;

    5. Affidavits, statements, documents and information supplied by the taxpayer to support the IRC 7430 award;

    6. Copy of power of attorney;

    7. Copy of Letter; and

    8. Any other pertinent information.

  4. Forward the approval package to the Appeals Director, Tax Policy and Procedures, Exam (TPP Exam) through the Appeals Team Manager. An analyst in TPP Exam reviews the award determination and computation and if acceptable, returns it to the AO for his/her signature on Form 9333.

  5. Secure the signature of the ATM, Area Director or Appeals Team Case Leader on the Form 9333 and return a signed copy to the TPP Exam analyst.

  6. The analyst sends the data sheet and the signed Form 9333 agreement to the Department of Treasury for payment. The check is returned to the analyst to send to the taxpayer. The analyst sends a copy of the check to the AO.

  7. Once received, send a copy of the executed Form 9333 to the taxpayer and close the case following normal procedures.

8.7.1.10.3  (11-06-2007)
Appeals Involvement in Docketed IRC 7430 Cases

  1. When Appeals is considering substantive issues in a docketed case and the taxpayer raises the IRC 7430 costs issue, determine if the IRC 7430 statutory requirements are met and if the costs claimed are reasonable. If they are, determine the proper amount of costs to reimburse.

    Note:

    If the docketed case contains a qualified offer, discuss it with the Field Counsel Attorney to determine whether it meets the requirements of a qualified offer and whether there is a need to expedite the settlement procedures. See IRM 35.10.1.3.1, Requirements for Qualified Offers.

  2. Identify if the 90-day offer period expired. If the case is within 90 days of when the qualified offer was filed, it is an expedite case. Contact the Appeals Director, TPP Exam and request immediate assistance from the analyst responsible for IRC 7430 costs. Also, discuss the expedite nature of the case with the ATM.

  3. Request that Appeals Processing Services (APS) enter "7430 qualified offer" in the notes section of the Appeals Case Summary Record.

  4. Once a determination is made, send the Field Counsel Attorney a memorandum stating the rational for the proposed settlement.

    1. Include both the IRC 7340 costs issue and the substantive issues in the Appeals settlement.

  5. If the Field Counsel Attorney concurs with the recommended settlement, he/she prepares a memorandum stating the reason for accepting the settlement and why the fee is justified. The settlement is included in the decision document/stipulation of agreed issues.

    1. IRM 35.8.2.6, Preparing Decision Documents for Cases Involving Claims for Attorney Fees under IRC 7430, explains when the IRC section 7430 cost issue is raised in settled or litigated cases and the parties agree on the disposition of the issue, the decision document must include either a provision stating the petitioner is not entitled to the cost, or a provision stating the petitioner is entitled and the amount he/she is entitled to under IRC 7430.

    Note:

    When a basis for settlement of the IRC 7430 issue is not reached in Appeals, forward the case to Field Counsel. The taxpayer files a motion for fees under Tax Court Rule 231(a)(2).

  6. If the parties agree to all issues except the IRC 7430 costs, the parties must submit a stipulation of settlement that includes the elements described in TC Rule 231(c). The rule provides the stipulation of settlement accompanies a motion for costs.

8.7.1.10.3.1  (11-06-2007)
Processing Docketed Cases with IRC 7430

  1. Prepare the Appeals Case Memorandum (ACM) recommending settlement to allow the IRC 7430 cost issue in full or in part, or to deny the costs. Include a discussion of the disposition of costs in the ACM.

  2. If a settlement is reached between the petitioner and Appeals, prepare a docketed IRC 7430 package for the Field Counsel Attorney to use in processing the costs. This package includes the following:

    1. IRS Administrative Cost Data Sheet.

    2. ACM.

    3. Work paper file associated with administrative cost claim including affidavits, statements, documents and information supplied by the taxpayer to support the IRC 7430 award.

    4. Memorandum to the field counsel attorney requesting concurrence with the settlement of the IRC 7430 costs.

    5. Memorandum from the field counsel attorney indicating agreement with the settlement.

  3. Send the package to the Field Counsel Attorney with the request to prepare the decision document. Also send an information copy of the package to the Appeals Director, TPP Exam.

  4. Follow normal closing procedures for docketed cases when the Field Counsel Attorney is required to prepare the decision documents.

  5. Payment of the award is processed by the Field Counsel Attorney.

8.7.1.10.4  (11-06-2007)
Pre-90-Day Cases with a Qualified Offer

  1. Qualified offers are another way for the taxpayer to be a prevailing party. If an offer meets the criteria in IRC 7430(g) it is considered a qualified offer.

  2. Qualified offers must be expedited if they are received during the period the offer remains open. Make every attempt to resolve the issues within 90 days of when the qualified offer is filed. With the assistance of the ATM, decide if the substantive issues can be resolved within 90 days of receipt of the qualified offer.

  3. This time frame can be extended by the taxpayer. Since there is no specific form to do this, any written request is acceptable. The request must be faxed to the Appeals Director, TPP Exam, who ensures it is submitted to Counsel for immediate review.

  4. If the issue is not resolved within 90 days of when the qualified offer is filed, the taxpayer has a valid qualified offer for consideration by the court in awarding administrative costs and litigation costs, unless the case is subsequently settled before the court makes a determination or the taxpayer files a subsequent qualified offer. If either of these occurs, the qualified offer under consideration by Appeals is no longer a valid qualified offer.

  5. All other requirements under IRC 7430 dealing with administrative costs and litigation costs apply to qualified offer cases. However, IRC 7430(c)(4)(E) places additional limitations on qualified offer cases not placed on other administrative and litigation cost cases.

  6. If the taxpayer references qualified offer or IRC 7430(g) in the protest or in a separate letter in response to the 30-day letter or statutory notice of deficiency, contact the Appeals Director, TPP Exam. An analyst in TPP Exam immediately determines if it is a qualified offer and discusses required actions with the AO.

  7. If the requirements for a qualified offer are met and it is considered valid, request that Appeals Processing Services (APS) input "IRC section 7430 Qualified Offer" in the notes section of the Appeals Case Summary Record.

  8. Appeals assumes jurisdiction of the case even if the taxpayer fails to prepare a proper protest.

  9. If the requirements for a qualified offer are not met, inform the taxpayer that the offer is not valid. Explain how to correct the offer in case the taxpayer wishes to file another qualified offer. Proceed with resolving the substantive issues in the case. Identify the qualified offer as an issue that was considered.

  10. If the case is received with a qualified offer that is not within the 90 day time frame, continue with the normal case resolution procedures.

    Note:

    When considering the issues for settlement, remember if issues raised in the qualified offer are not settled by Appeals or Counsel, and subsequently there is a judgment entered by the court equal to or less than the amount in the qualified offer for the identified issues, the government is liable for IRC 7430 costs.

  11. If it is determined a SND or a notice of claim disallowance needs to be issued, the position taken must be a position the government can defend if the case is litigated, otherwise the government is liable for IRC 7430 costs from the date the last qualified offer was filed. The IRC 7430 costs are those incurred for the issues identified in the qualified offer and only if the judgment is equal to or less than the amount the taxpayer offered.

  12. For detailed information on qualified offers, see IRM 35.10.1.3, Qualified Offer Rule and IRM 35.10.1.3.1, Requirements for Qualified Offers.

8.7.1.10.5  (11-06-2007)
Recovering IRC 7430 Administrative Costs

  1. The costs the taxpayer is allowed to recover in an administrative proceeding are the administrative costs beginning after the earlier of the issuance of the 30 day letter, the NODA or the SND. The following represents some examples:

    For example: If the case comes to Appeals in pre-90-day status, the costs incurred by the taxpayer to have the protest prepared and a qualified representative present the taxpayer’s position in Appeals is included in administrative costs. If Appeals decides that the taxpayer’s position is correct on all but one issue, a notice of deficiency is prepared for the issue not substantially justified. If the taxpayer later files a claim for administrative costs, only the costs incurred for the issue in the SND is an administrative costs for purposes of an award under IRC section 7430. Since the government conceded the other issues before the receipt of the NODA, the taxpayer cannot recover these administrative costs in any future claim for IRC 7430 costs. Since the taxpayer received a NODA regarding one issue, the taxpayer is entitled to claim the costs for preparing the protest and qualified representation in Appeals for that one issue.

  2. To recover administrative costs, the taxpayer must file a written claim with the IRS personnel who has jurisdiction over the tax matter underlying the claim for costs. See Treas. Reg. 301.7430-2(c)(3) for details of the contents of the request.

    1. If the taxpayer does not know the IRS personnel with jurisdiction of the issue, he/she sends the request to the IRS office that considered the substantive issue.

  3. The request for administrative cost must be filed within 90 days after the final decision of the IRS is issued or otherwise furnished to the taxpayer. The final decision is the document that resolves the tax liability for the taxpayer including tax, additions to tax and penalties in the administrative proceeding such as Form 870 agreement or notice of assessment (if received earlier).

8.7.1.10.6  (11-06-2007)
Payment of Awards for IRC 7430 Costs

  1. Prepare the documents for consideration and payment of administrative and litigation cost awards. See IRM 8.7.1.11.2.1. The payment is made by the General Accounting Office (GAO) from the General Judgment Fund.

  2. Send the documents to the Appeals Director, TPP Exam who approves the administrative costs and processes the payment. Verification the payment is processed and the check issued is sent to the AO. Once received, close the case following normal closing procedures.

  3. The Field Counsel Attorney prepares the documents for payment of administrative and litigation costs when the case is docketed or the substantive issue or IRC 7430 issue is now or previously has been before a U.S. Court. After the decision to award litigation costs is made and Counsel processes the award, return the case to APS for closing.

  4. Non-docketed qualified offer cases and docketed qualified offer cases do not involve payment of awards at the Appeals Officer level.

8.7.1.10.7  (11-06-2007)
Appeals Procedures for Closing IRC 7430 Administrative Cost Cases

  1. If the request is disallowed the taxpayer is given the opportunity to go to Tax Court. If the taxpayer doesn't petition or the Tax Court denies the request, close the case off ACDS following the instructions in paragraph (4).

  2. If the request is allowed the case is processed in this manner:

    1. AO completes Form 9333, Agreement on Administrative Costs Per IRC 7430 - See Exhibit 8.7.1-4.

    2. AO completes IRS Administrative Cost Data Sheet - See Exhibit 8.7.1-5.

    3. Both forms are forwarded to the Director, Tax Policy and Procedure (TPP) (Exam). See below for ACDS update.

    4. After the agreement is reviewed, it is returned to the office for signature of the Area Director, Appeals Team Manager or Appeals Team Case Leader.

    5. No costs are paid unless the taxpayer or the representative signs the agreement form.

    6. A copy of the signed agreement and data sheet is returned to the Director, TPP (Exam) who forwards the signed agreement and data sheet to the General Accounting Office (GAO) for payment.

  3. When the Form 9333 and IRS Administrative Cost Data Sheet are forwarded to Director, TPP update ACDS:

    1. LACTION = Enter FLDSVCS.

    2. LTODATE = Enter the date information sent.

    3. LFROMDATE = Enter the date information is received back from Director, TPP (Exam).

  4. When the agreement is signed and forwarded to Director, TPP (Exam) for payment, follow general instructions for closing ACDS. In addition:

    1. CLOSINGCD =
      14 - if the request was disallowed
      15 - if the request was allowed
      16 - if the request was partially allowed.

    2. DATECLSD =
      If allowed - enter the date agreement (Form 9333) is signed by the Area Director, Appeals Team Manager or Appeals Team Case Leader.
      If disallowed - enter the date of the letter to the taxpayer.

    3. ACTION – ACKCLS.

    4. TODATE – Enter the date mailed to Collection, Campus and Appraisal Services for payment or the date a partial or full disallowance letter is issued.

    5. FROMDATE – Enter the date receipt is acknowledged.

    6. Paycode = 7.

    7. APPEALS AMTDIS – Enter the amount disallowed. (If the full amount of the claim is allowed, no entry is made on the return information screen.)

8.7.1.11  (11-06-2007)
Disaster Relief Cases

  1. If a disaster occurs, the President declares the areas (IRS Designated Disaster Area), to be eligible for Individual Assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C., Sections 5121-5206 (Stafford Act). Taxpayers and tax practitioners may require disaster/emergency relief measures to enable them to meet their tax obligations for filing returns or payment of taxes without being penalized. Certain compliance actions may be temporarily suspended.

  2. IRS issues a notice of Disaster Declaration from the Federal Emergency Management Agency (FEMA). MITS identifies the taxpayers by zip codes in the effected areas.

  3. IRM 25.16.1,Special Topics, Disaster Assistance and Emergency Relief, Program Guidelines, provides servicewide instructions in working Disaster Relief cases. It provides:

    1. Program guidelines and Stewardship

    2. The role of the National Disaster Assistance Coordinator (NDAC) and the State Disaster Assistance Coordinator (SDAC)

    3. The Government Liaison/Stakeholder Liaison Response Plan

    4. Disclosure Provisions When Providing Emergency Relief

    5. General Procedures for all operating divisions

    6. Definition of Terms and acronyms used during a disaster and

    7. A sample pre-disaster message and

    8. The Role of Appeals.

      Note:

      Appeals will follow the guidelines contained in IRM 25.16.1.16(1),Role of Appeals.

  4. Appeals employees should become familiar with specific disaster relief "freeze" codes on the Integrated Data Retrieval System (IDRS). See IRM 26.16.1 for a complete discussion of the "-O" freeze and the "-S" freeze. See also Document 6209.These freeze codes are systemic disaster indicators on IRM Master Files available to assist in identifying and processing disaster relief cases. The freeze codes will appear on IMFOLI, BMFOLI, and TXMODA. A Transaction Code 971 AC 688 will also post to ENMOD.

    • The -O freeze code is used for extremely severe, catastrophic damage caused by terrorist attacks or hurricanes, such as Hurricane Katrina. Generally all case activity is suspended during the specified period of time that the disaster relief is in effect..

    • The -S freeze code does not automatically suspend all activities on Appeals' Examination and Collection Cases. Refer to IRM 25.16.1.16.

    • Appeals Employees should refer to IRM 25.16.1.16(4). If it is determined that an affected taxpayer's unique circumstances warrants a suspension in case actions due to an impact of a disaster.

    • Affected taxpayers who reside or have businesses located outside the designated disaster area MUST call 1-866-562-5227 to self-identify for disaster relief. After they have self-identified, a transaction code (TC) 971, action code (AC) 688 will post to IDRS.

Exhibit 8.7.1-1  (11-06-2007)
Definitions Common in IRC 7430 Cases

  1. Administrative proceedingsis defined in IRC 7430(c)(5) and explained in Treas. Reg. 301.7430-3(a). Generally it means any procedure or other action before the Internal Revenue Service that is commenced after November 10, 1988. However, an administrative proceeding does not include matters of general application, including hearings on regulations, comments on forms, or proceedings involving revenue rulings or revenue procedures; proceedings involving requests for private letter rulings or similar determinations; proceedings involving most technical advice memoranda, and proceedings in connection with collection actions excluding claim for refunds after payment of the assessed tax and proceedings described in Treas. Reg. 301.7430-8(c) and Treas. Reg. 301.7433-2.

  2. Administrative proceeding date is defined in IRC 7430(c)(7) and Treas. Reg. 301.7430-3(c). . The term administrative proceeding date means the earlier of--

    1. The date of the receipt by the taxpayer of the NODA; or

    2. The date of the SND.

  3. Attorney Fees is defined in IRC 7430(c)(3). For the purposes of reasonable litigation costs and administrative costs these are fees for services of an individual who is authorized to practice before the Tax Court or before the IRS. Pro bono services are covered if the fees are paid to the individual or his employer. The costs must be incurred after receipt of the NODA, SND, or the first letter of proposed deficiency that allows the taxpayer for an administrative review in the IRS, whichever is the earliest received.

  4. Court Proceedings is defined in IRC 7430(c)(6). It means any civil action brought in a court of the United States including the Tax Court and the United States Claims Court.

  5. Most significant issue or set of issues is defined in Treas. Reg. 7430-5(e). Where the taxpayer has not substantially prevailed with respect to the amount in controversy the taxpayer may nonetheless be a prevailing party if the taxpayer substantially prevails with respect to the most significant issue or set of issues presented. The issues presented include those raised as of the administrative proceeding date and those raised subsequently. Only in a multiple issue proceeding can a most significant issue or set of issues presented exist. However, not all multiple issue proceedings contain a most significant issue or set of issues presented. An issue or set of issues constitutes the most significant issue or set of issues presented if, despite involving a lesser dollar amount in the proceeding than the other issue or issues, it objectively represents the most significant issue or set of issues for the taxpayer or the Internal Revenue Service. This may occur because of the effect of the issue or set of issues on other transactions or other taxable years of the taxpayer or related parties.

  6. Net worth and size limitations is defined in IRC 7430(c)(4)(D) and explained in Treas. Reg. 7430-5(f). The determination is made on the administrative proceeding date.

    1. An individual taxpayer or an estate meets the net worth and size limitations if the taxpayer's net worth does not exceed two million dollars. For this purpose, individuals filing a joint return shall be treated as separate individuals.

    2. A taxpayer that is an owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization (other than an organization described in Treas. Reg. 7430(f)(3)) meets the net worth and size limitations if the taxpayer's net worth does not exceed seven million dollars, and the taxpayer does not have more than 500 employees.

    3. There are special rules for charitable organizations and certain cooperatives. Those listed in Treas. Reg. 7430(f)(3) meet the net worth and size limitations if the organization or cooperative association does not have more than 500 employees.

  7. Notice of the decision of the Internal Revenue Service Office of Appeals (NODA) is defined in Treas. Reg. 7430-3(c)(2). A notice of the decision of Appeals is the final written document, mailed or delivered to the taxpayer, that is signed by an individual in the Office of Appeals who has been delegated the authority to settle the dispute on behalf of the Commissioner, and states or indicates that the notice is the final determination of the entire case. A notice of claim disallowance issued by the Office of Appeals is a NODA.

  8. Notice of deficiency is defined in Treas. Reg. 301.7430-3(c)(3). A notice of deficiency is a notice described in IRC 6212(a), including a notice rescinded pursuant to IRC 6212(d). For purposes of determining reasonable administrative costs, a notice of final partnership administrative adjustment and a notice of final S corporation administrative adjustment will be treated as a SND.

  9. Prevailing party is defined in IRC 7430(c)(4) and explained in Treas. Reg. 301.7430-5. For purposes of an award of reasonable administrative costs in the case of administrative proceedings commenced after July 30, 1996, a taxpayer is a prevailing party if the taxpayer substantially prevails as to the amount in controversy or with respect to the most significant issue or set of issues presented; and the taxpayer satisfies the net worth and size limitations. An exception to this is that a party shall not be treated the prevailing party regardless of whether he substantially prevailed If the taxpayer files a 7430(g) qualified offer, the prevailing party rules of IRC 7430(c)(4)(E) will apply instead. A taxpayer is a prevailing party by reason of making a qualified offer if the taxpayer's liability under the last qualified offer would equal or exceed the amount of the taxpayer's liability under the judgment entered by the court.

  10. Prevailing Party under IRC 7430(g) is explained in IRC 7430(c)(4)(E). Additional limitations apply to IRC 7430(g) qualified offer cases. These additional limitations are:

    1. The determination of the prevailing party shall be made by reference to the last qualified offer with respect to the tax liability at issue in the proceeding.

    2. Reasonable administrative and litigation costs shall only include costs incurred on and after the date of the offer.

    3. IRC 7430(c)(4)(E) will not apply if the case is settled without a judgment.

    4. IRC 7430(c)(4)(E) will not include any proceeding where the amount of tax liability is not at issue.

  11. Position of the United Statesis defined in IRC 7430(c)(7) and explained in Treas. Reg. 301.7430-5(b). It is the position of the United States in an administrative proceeding as of the administrative proceeding date, and it is the position taken by the United States in a judicial proceeding.

  12. Presumption is explained in Treas. Reg. 301.7430-5(c)(3). If the Internal Revenue Service did not follow any applicable published guidance in an administrative proceeding commenced after July 30, 1996, the position of the Internal Revenue Service, on those issues to which the guidance applies and for all periods, during which the guidance was not followed, will be presumed not to be substantially justified. This presumption may be rebutted. The term applicable published guidance means final or temporary regulations, revenue rulings, revenue procedures, information releases, notices, announcements, and, if issued to the taxpayer, private letter rulings, technical advice memoranda, and determination letters.

  13. Qualified offer is defined in IRC 7430(g)(1) and explained in Treas. Reg. 7430-7. A qualified offer means a written offer made by the taxpayer to the United States during the qualified offer period, specifies the offer amount, is designated at the time it is made as a qualified offer and remains open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.

  14. Qualified offer period is defined in IRC 7430(g)(2) as the period beginning on the date the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in Appeals is sent and ending on the date which is 30 days before the date the case is first set for trial.

  15. Reasonable Cost:

    1. Reasonable litigation cost are defined in IRC 7430(c)(1) and explained in Treas. Reg. 301.7430-4(c)(3). They include reasonable court costs; and based upon prevailing market rates for the kind or quality of service furnished, reasonable expenses of expert witnesses, study analysis, engineer reports, and fees paid or incurred for attorney fees based upon defined limitations.

    2. Administrative costs are defined in IRC 7430(c)(2) and explained in Treas. Reg. 301.7430-4. They are any costs described in the regulation that are incurred in connection with an administrative proceeding and incurred on or after the administrative proceeding date.

  16. Substantially justified is defined in IRC 7430(c)(4)(B) and explained in Treas. Reg. 301.7430-5(c). The position of the Internal Revenue Service is substantially justified if it has a reasonable basis in both fact and law. A significant factor in determining whether the position of the Internal Revenue Service is substantially justified as of a given date is whether, on or before that date, the taxpayer has presented all relevant information under the taxpayer's control and relevant legal arguments supporting the taxpayer's position to the appropriate Internal Revenue Service personnel.

Exhibit 8.7.1-2  (11-06-2007)
Disallowance Letter (L2600) for Administrative Costs

Internal Revenue Service Department of the Treasury
   
Date:   Person to Contact:
    Employee Identification Number:
    Telephone Number:
(Name and Address) Fax Number:
    Refer Reply to:
AP::
    In Re:
    Tax Period(s) Ended:
     
Dear    
We completed our review of your claim for administrative costs under Section 7430 of the Internal Revenue Code. We have fully disallowed your claim because:
(Additional Paragraph Selections)
  For costs incurred after January 18, 1999, you didn't incur the costs on the earliest of: (1) after the date on which we sent the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the IRS office of Appeals, (2) after the date you received the Appeals decision letter, or (3) the date of the notice of deficiency.
  For costs incurred between November 11, 1998 and January 18, 1999, you didn't incur the costs on or after the date you received the Appeals decision letter or the date of our notice of deficiency, whichever is earlier.
  You incurred the costs before November 11, 1988.
  You didn't substantially prevail on the amount in controversy or on the most significant tax issue or issues in question. (This means that you didn't establish that your position was correct on the amount in question or the most important issues.)
  You can't be treated as the prevailing party since the IRS has established that its position was substantially justified as of the date you incurred the costs.
  You didn't establish that you met the net worth and size limitations described below, for claiming administrative costs. For individual and estate taxpayers:
  Your net worth must not exceed $2 million. For estate taxpayers, the decedent's net worth must not exceed $2 million as of the date of the decedent's death. Charities and certain cooperatives: You must not have more than 500 employees. For all taxpayers other than the two categories listed above: Your net worth must not exceed $7 million, and you must not have more than 500 employees.
  You unreasonably prolonged that part of the proceeding that applied to your costs.
  Our records don't show that you filed your claim for costs within 90 days of our final decision.
  You didn't state that the issue of costs or the underlying substantive issues are not before or have never been before any court of the United States with jurisdiction over the issues.
  You didn't give us enough information to decide if you're entitled to claim administrative costs.
  Other (Explain)
You may appeal this decision by filing a petition with the Tax Court for reasonable administrative costs. If this letter is sent to you by registered or certified mail you must file your petition with the Tax Court before the 91st day after it was mailed. For more information on how to file a petition, please contact the Clerk of the Tax Court.
If you have questions, please contact the person whose name and telephone number are listed above.
     
    Sincerely,
     
    Signature
    (Title)
    Letter 2600 (Rev. 05–99)

Exhibit 8.7.1-3  (11-06-2007)
Partial Allowance Letter (L2602) for Administrative Costs

Internal Revenue Service Department of the Treasury
  Date:
    Tax Year(s):
    Form Number:
     
(Name and Address)  
    Person to Contact:
    Contact Telephone Number:
    Badge #
     
We've completed our review of your claim for administrative costs under Section 7430 of the Internal Revenue Code. We allowed the following part of your claim:
[List items and costs allowed for each item separately.]
 We disallowed your remaining costs because:
  For costs incurred after January 18, 1999, you didn't incur the costs on the earliest of: (1) after the date on which we sent the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the IRS Office of Appeals, (2) after the date you received the Appeals decision letter, or (3) the date of the notice of deficiency.
  For costs incurred between November 11, 1988 and January 18, 1999, you didn't incur the costs on or after the date you received the Appeals decision letter or the date of the notice of deficiency, whichever is earlier.
  You incurred the remaining costs before November 11, 1988.
  You unreasonably prolonged that part of administrative proceeding that applied to the costs we didn't allow.
  You didn't give us enough information to decide if you're entitled to your remaining costs.
  Other (Explain)
You may appeal this decision by filing a petition with the Tax Court for reasonable administrative costs. If this letter is sent to you by registered or certified mail you must file your petition with the Tax Court before the 91st day after it was mailed. For more information on how to file a petition, please contact the Clerk of the Tax Court.
If you have any questions, please contact the person whose name and telephone number are listed above.
     
    Sincerely,
     
    Signature
    (Title)
     
    Letter 2602 (Rev. 5–99)

Exhibit 8.7.1-4  (11-06-2007)
Form 9333

Internal Revenue Service Department of the Treasury
   
   
Under IRC 7430 of the Internal Revenue Code, pertaining to administrative costs,
(Taxpayer's Name, Address, and Identification Number)
   
   
   
makes the following agreement with the Commissioner of Internal Revenue:
   
It is hereby determined and agreed that the following reasonable administrative costs are recoverable from the Internal Revenue Service:
Fees paid for the services of a qualified representative
 1994 40 hours @ $ 98.88 per hour = $ 3,955.20
 1995 30 hours @ 101.41 per hour = $ 3,042.30
  $ 6,997.50
Expenses of expert witness = $ 5,495.00
Cost of engineering report and testing = $ 2,200.00
Total recoverable costs $14,692.50
   
   
  Form 9333 (5–99)
   
   
Internal Revenue Service  
Department of the Treasury  
   
Under IRC 7430 of the Internal Revenue Code, pertaining to administrative costs,
(Taxpayer's Name, Address, and Identification Number)
   
   
   
makes the following agreement with the Commissioner of Internal Revenue:
   
It is hereby determined and agreed that the following reasonable administrative costs are recoverable from the Internal Revenue Service:
 
Cost incurred between June 30, 1996 and December 1997:
Fees paid for the services of a qualified representative, 40 hours @ $110.00 per hour = $4,400.00
   
Cost incurred in 1998:
Fees paid for the services of a qualified representative, 60 hours @ $120.00 per hour = $7,200.00
 
Expenses of expert witness = $2,800.00
Cost of engineering report and testing = $2,000.00
Total recoverable costs $16,400.00
   
   
  Form 9333 (1–91)
This agreement on administrative costs is final and conclusive on the types of costs listed in this agreement except:
 Damages equaling the total amount of costs in this agreement, plus all costs of litigation shall accrue in favor of the United States of America in the event of fraud, malfeasance, or misrepresentation of material fact.
 By signing this agreement, the above parties certify that they have read and agreed to its terms.
   
Your signature  _____________ Date signed  __________
   
Spouse's signature (if related to a joint
return)  ________________ Date signed  _________
   
Taxpayer's representative  ____________ Date signed  ______
   
Taxpayer (other than individual)  _____________________
   
   
  By  _______________ Date signed  ______
 
    Title  ______________
Accepted for the Commissioner of Internal Revenue
     
  By  _______________ Date signed  ______
 
    Title  ______________
     
   
    Form 9333 (1–91)
     
Instructions
 This agreement must be signed and filed in triplicate. (All copies must have original signatures.)
 The original and copies of the agreement must be identical.
 The name of the taxpayer must be stated accurately.
 The agreement may relate to one or more tax years.
 If an attorney or agent signs the agreement for the taxpayer, the power of attorney (or a copy) authorizing that person to sign must be attached to the agreement. If the agreement is made for a year when a joint income tax return was filed by a husband and wife, it should be signed by or for both spouses. One spouse may sign as agent for the other if the document (or a copy) specifically authorizing that spouse to sign is attached to the agreement.
 If the fiduciary signs the agreement for a decedent or an estate, an attested copy of the letters testamentary or the court order authorizing the fiduciary to sign, and a certificate of recent date that the authority remains in full force and effect must be attached to the agreement. If a trustee signs, a certified copy of the trust instrument or a certified copy of extracts from that instrument must be attached showing:
 (1) The date of the instrument;
 (2) That it is or is not of record in any court;
 (3) The names of the beneficiaries;
 (4) The appointment of the trustee, the authority granted, and other information necessary to show that the authority extends to Federal tax matters; and
 (5) That the trust has not been terminated, and that the trustee appointed is still acting. If a fiduciary is a party, Form 56 Notice Concerning Fiduciary Relationship, is ordinarily required.
 If the taxpayer is a corporation, the agreement must be dated and signed with the name of the corporation, the signature and title of an authorized officer or officers, or the signature of an authorized attorney or agent. It is not necessary that a copy of an enabling corporate resolution be attached.
     Form 9333 (1–91)
   
   
   

Exhibit 8.7.1-5  (11-06-2007)
IRS Administrative Costs Data Sheet

A. TAXPAYER IDENTIFICATION NUMBER AND TAX PERIOD(S).  _________
 
______________________________________
 
______________________________________
 
B. TAXPAYER (PAYEE) NAME(S) AND ADDRESS  _________________
 
______________________________________
 
______________________________________
 
______________________________________
 
______________________________________
 
C. AMOUNT TO BE PAID  __________________________
 
D. LEGAL AUTHORITY FOR PAYMENT: 26 U.S.C. 7430(a)(1) AND 7430(d)(1)
 
E. DEBTS PAYEE OWES U.S. (IF KNOWN)  ____________________
 
______________________________________
 
______________________________________
 
F. BREAKDOWN OF ADMINISTRATIVE COSTS __________________
 
  EXPENSES OF EXPERT WITNESSES:    $  __________
 
  COST OF STUDY, ANALYSIS, ETC.:      $  __________
 
  ATTORNEY FEES:          $  __________
  APPROVED FOR PAYMENT:
   
  ________________
  DIRECTOR, OFFICE OF COLLECTIONS, CAMPUS AND APPRAISAL SERVICES
  FOR
  CHIEF, APPEALS

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