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Part 4. Examining Process

Chapter 46. LMSB Guide for Quality Examinations

Section 2. Administrative Matters and Annual Business Plan

4.46.2  Administrative Matters and Annual Business Plan

4.46.2.1  (03-01-2006)
Overview

  1. The LMSB Annual Business Plan sets out the priorities and objectives for the year. A draft plan is developed by Headquarters. Headquarters requests input from all parts of LMSB to complete the plan. Once Headquarters has received the input, it will be able to complete the plan.

  2. The Annual Business Plan contains resource allocations and where appropriate, expected return closures for critically important programs. This plan, while developed as a draft at headquarters, is a cooperative product of the entire LMSB organization.

  3. LMSB cases fall into two categories, Coordinated Industry Cases (CIC) or Industry Cases (IC). Point criteria described in this section are used to determine if a case falls into the CIC or IC category.

  4. LMSB is provided resources to service its customer base. The LMSB Annual Business Plan is an important tool for communicating priorities and allocating resources in LMSB. This plan describes the service and compliance objectives LMSB is expected to achieve. The resources provided to LMSB are to be applied in the most efficient manner to reduce taxpayer burden, increase customer satisfaction, and improve business results.

4.46.2.2  (03-01-2006)
Responsibility

  1. The industry and specialists directors have overall responsibility for development of the annual plan responses for their respective operations.

  2. Industry and specialist responses will reflect how resource allocations can best achieve the objectives of the draft annual plan. A final annual plan will be issued after these responses have been reviewed by LMSB Headquarters staff.

4.46.2.2.1  (03-01-2006)
Headquarters

  1. LMSB Headquarters staff will develop a draft annual business plan that, at a minimum, will provide primary resource allocations for LMSB’s strategic program priorities. The primary allocations are referred to as frontload items. This draft plan will then be transmitted to the Industries, Specialists, Directors of Field Operations, and other designated LMSB offices.

  2. Decisions are made about the best allocation of resources, and a final plan is distributed to the field, once responses are received and reviewed.

  3. A list of CIC examinations, which are expected to start during the fiscal year, will be forwarded to Criminal Investigation Division (CID). CID will supply any information that they have to the examination team, when requested.

  4. A list of CIC examinations expected to start during the fiscal year will be forwarded to LMSB Division Counsel Headquarters.

4.46.2.2.2  (03-01-2006)
Team Managers

  1. The LMSB Annual Business Plan is usually compiled and approved by management levels above the team manager. The plan’s reliability and accuracy depends on how well each team manager has developed his or her portion of the plan. This, in turn, is dependent upon the thoroughness of the team manager's analysis of cases to be brought under examination in the ensuing fiscal year and how well the manager knows the staffing needs of other cases that will be in process during that year.

  2. The team manager must decide which cases and tax years are to be examined and which are to be surveyed. These decisions will depend upon program objectives, agent availability, and individual case needs.

  3. The team manager must consider currency when evaluating the effectiveness of opening a new examination cycle. It is important to complete a preliminary risk assessment to determine which years should be included in the planned cycle.

  4. The final step is to determine staffing needs (team members, specialists, support or assistance, etc.) to be provided by the primary group and other sources. Staffing projections may be adjusted during the actual examination of a case if subsequent developments indicate a need for change.

4.46.2.2.3  (03-01-2006)
Specialist Managers

  1. Specialist managers and specialists’ involvement is critical in the early development of the CIC plan. It is imperative that team managers interact with their counterparts in developing the CIC plan for the year. This will help ensure that time planned for specialists is accurate.

  2. Specialist needs and time requirements should be discussed with specialist managers during the annual planning process. Time allocation should be based upon identification of specific needs. Assigned specialists should be named in the plan.

  3. Team managers should coordinate with the managers of team members who are contributing staff time during the plan year through assistance and support examinations. Mutual discussions and agreements are critical to ensure that each team member is available for the specified time.

  4. A more accurate annual plan would occur when specialist managers and support managers had mutually agreed commitments for staff days.

  5. Policy Statement P-4-5 must be considered for specialist managers and specialists, as well as other team members

4.46.2.3  (03-01-2006)
Formation of the CIC Plan

  1. The team manager is responsible for planing examination details and obtaining appropriate taxpayer input. The depth of the team manager's involvement in planning the examination is the key to proper annual program planning.

  2. The plan should have detailed information about each CIC examination that is expected to be in process during the next fiscal year. This includes the starting and ending dates, personnel assigned to the case and time to be applied by each team member and specialist. See Exhibit 4.46.2-1 for details.

  3. Group plans are routed through the Industry Planning and Special Program (PSP) to be combined with other group and territory plans into an industry plan. Industry plans are combined and must be consistent with the draft Headquarters' plan. Adjustments may be required at any level.

4.46.2.4  (03-01-2006)
Case Categories

  1. A CIC is a taxpayer and its effectively controlled entities that warrants the application of team examination procedures and meets the point criteria outlined in Exhibit 4.46.2-2.

  2. An IC is a taxpayer and its effectively controlled entities that warrants the application of team examination procedures but does not meet the definition of a CIC.

4.46.2.5  (03-01-2006)
Point Criteria Factors

  1. The factors used in computing the point criteria are as follows:

    • Gross assets

    • Gross receipts

    • Operating entities

    • Multiple industry status

    • Total foreign assets

    • Total related transactions

    • Foreign tax

  2. Each factor mentioned above is assigned a point value as described in Exhibit 4.46.2-2.

  3. A case qualifies as a CIC if after using the point criteria the case totals 12 or more points.

  4. However, cases may be excluded for the program with the approval of a the territory manager and the Director of Field Operations when it meets the point criteria.

  5. The following situations allow a case to be included in the CIC program if the case did not meet the above point criteria:

    1. It has sufficient complexity to warrant inclusion and would benefit from examination using the CIC approach; and

    2. The Director of Field Operations concurs with the territory manager's recommendation for inclusion.

  6. Territory managers and Directors of Field Operations are responsible for ensuring the accuracy of case point values assigned to cases under their control. The Office of Strategy, Research, and Program Planning is responsible for providing oversight of the pointing system to ensure consistent application of criteria.

4.46.2.6  (03-01-2006)
Identification Criteria

  1. CIC examination identification standards have been established with the objective of bringing all segments of a business together for concurrent examination. This facilitates an overview of the taxpayer’s structure and overall operations for level of compliance and accuracy of reported tax liability, as well as aiding in management of the case.

  2. The CIC examination package includes the primary taxpayer and all effectively controlled entities, plus those that are unrelated but associated with the taxpayer in activities having significant tax consequences. The name of the primary taxpayer is generally designated as the name of the CIC examination where multiple entities are involved.

4.46.2.6.1  (03-01-2006)
Effectively Controlled Entities

  1. The following factors will be considered in determining whether an entity is effectively controlled and therefore warrants inclusion in a CIC package.

4.46.2.6.1.1  (03-01-2006)
Stock Ownership - Factors

  1. The team manager should include entities in the CIC package that are effectively controlled by the taxpayer. Effective control is where more than 50 percent of a corporation’s stock is directly or indirectly owned by a taxpayer. However, the chain of control running from entity to entity may be the deciding factor.

  2. The following factors should be considered in determining examination jurisdiction when taxpayer ownership of a corporation’s stock is less than 50 percent.

    1. The degree of control exercised by each taxpayer through common officers, directors, or shareholders

    2. Whether one of the shareholders operates or directs the operations of that corporation on behalf of the other shareholders

    3. Whether the corporation constitutes a link in the organizational structure or in the operational process of one of the CIC entities.

  3. Team managers must coordinate with the other groups involved to ensure that the corporation is included as a component of one of the other CIC entities in instances where other stockholders of the corporation are themselves CIC taxpayers. The responsibility for coordination rests with the team manager.

4.46.2.6.1.2  (03-01-2006)
Other Factors

  1. Other Factors – an entity’s tax objectivity may be significantly influenced by any member of the CIC group through any one of the following means:

    1. Loan financing

    2. Control by a group of individuals who also control one or more members of the CIC group

    3. Major stockholders, officers, or board of directors of the entity who hold similar positions in other entities of the CIC group

    4. Principal sources of supply or market which are dependent upon other members of the CIC group

  2. Certain entities have business and economic relationships with more than one taxpayer. Generally, such entities should be included in the CIC entity where the relationships are strongest. Coordination should be established among examiners involved in examining other affected taxpayers. The coordination should extend to cases where the activities of an entity included in a CIC group may have a tax impact on other taxpayers not included in any CIC group.

4.46.2.6.2  (03-01-2006)
Components of a CIC

  1. CIC examinations encompass all types of taxpayers, together with their effectively controlled entities. A CIC examination could consist of any one or a combination of the following components:

    1. Corporations and limited liability companies that are taxed as corporations, including effectively controlled foreign entities;

    2. Partnerships, joint ventures, syndicates, and cost companies or any other unincorporated business ventures, such as limited liability companies that are not taxed as corporations;

    3. Individuals, when their relationship to any segment of the case is close enough to significantly influence financial management and tax results of either or both;

    4. Trusts, where their operations or the fiduciary’s activities significantly affect, or are affected by, another segment of the case;

    5. Estates, where conditions similar to those enumerated for trusts exist. (An estate which substantially consists of stock investments in publicly held businesses would generally not be included. On the other hand, where the estate is involved with closely held family businesses, a more affirmative view as to audit potential would normally be warranted); or

    6. Foundations, pension trusts, profit sharing trusts and other exempt organizations if controlled by a member of a CIC group.

4.46.2.6.3  (03-01-2006)
Tme of Identification

  1. A case will be identified and included as a CIC after information comes to the team manager's attention that the taxpayer has met the criteria outlined in Exhibit 4.46.2-2 and the team manager obtains territory manager and Director of Field Operations approval. The advantages of early identification lie in the background support it offers LMSB in preparing the annual examination plan, and in facilitating a phasing-in of the examination when those later tax years are reached. The taxpayer should be promptly notified of its inclusion as a CIC.

  2. A Coordinated Examination Management Information System (CEMIS) record will be created for CIC taxpayers at the time of identification. All required information that is currently available should be input at this time.

  3. The team manager should forward cases identified as being controlled by another industry or group to the appropriate Director of Field Operations.

  4. A new CEMIS record should be created at the beginning of each examination cycle. Significant changes should be recorded in the narrative section as required.

  5. Points should not be changed on a specific cycle after the plan approval date.

4.46.2.7  (03-01-2006)
Planning for Industry Cases

  1. LMSB IC examinations play a critical role in ensuring compliance for cases that do not meet the criteria to be classified as CIC taxpayers. The size and complexity of issues may well be similar to those found in CIC examinations. Examinations of IC entities often involve the assistance of field specialists including international examiners. Early coordination by the team coordinator with field specialists, international examiners and technical advisors is critical to the development of the IC risk analysis and examination plan.

  2. LMSB recognizes that an examination presence is required in the IC program, sufficient to ensure that a balanced compliance level across the LMSB customer base is achieved. As with the CIC Program, identification of abusive and aggressive transactions is a priority in the IC program.

Exhibit 4.46.2-1  (03-01-2006)
Information Needed for CIC Annual Plan

  1. The following information is gathered by each industry for each identified CIC. Case Information is to be entered consistent with CEMIS entries

  • Case Name

  • Cycle Information entered in YYYMM format

  • TIN of Case

  • Industry of Case (could be different from team manager’s industry)

  • Case Type

  • Start Date

  • Cycle Type (R1, etc.)

  • Closet LMSB POD to case (could be different from team manager's POD)

  • Estimated Closing Date

  • Shelter ID

  • Total Plan Days - This is an estimate of the total days to be applied by team members (TC, RA, IE, Specialists) to the examination of this particular cycle

  • Assisted Cases -If entities are made for a case that is being examined as part of a Key Case, enter the name and TIN of the Key Case.

    1. Team Manager Information:

  • Team Manager Name

  • Team/Group Number

  • Industry, DFO, Territory, POD City and State

3) Team Member Information:

  • Team Member Name - Enter name as last name, first name

  • Member Type - TC, RA, Specialist Type

  • Team/Group Number

  • Industry, DFO, Territory, POD City and State

  • Total Team Member Days

Exhibit 4.46.2-2  (03-01-2006)
Criteria for the Identification of Coordinated Industry Case Program

This Exhibit is to describe the criteria to be used in identifying those cases for the CIC Program. The points should be combined to determine the score in the following 7 areas. LMSB job aids website may be used to access a current CIC pointing calculation worksheet.

  1. Gross Assets
    Total assets are determined by combining the assets of the principal taxpayer with those of all effectively controlled domestic and foreign entities. The total points assigned to financials, utilities, insurance companies, mutual funds, and stock brokerage firms shall not exceed 12 points for gross assets. In applying this criterion, use the tax year in the cycle being pointed that has the greatest gross assets. The following asset ranges will be used:

    • 1 point up to $500 Million in assets;

    • 2 points for assets in the $500 Million to $1 Billion asset range;

    • 3 points for assets in the $1 Billion to $2 Billion asset range;

    • 4 points for assets in the $2 Billion to $5 Billion asset range;

    • 5 points for assets in the $5 Billion to $8 Billion asset range;

  2. Gross Receipts
    Gross receipts are determined by combining the gross receipts of the principal taxpayer with those of all effectively controlled domestic and foreign entities. The total points assigned to financials, utilities, insurance companies, mutual funds, and stock brokerage firms shall not exceed 10 points for gross receipts. In applying this criterion, use the tax year in the cycle being pointed that has the greatest gross receipts.

    • 1 point up to $1 Billion in gross receipts;

    • 2 points for gross receipts in the $1 Billion to $2 Billion range;

    • 3 points for gross receipts in the $2 Billion to $3 Billion range;

    • 4 points for gross receipts in the $3 Billion to $5 Billion range;

    • 5 points for gross receipts in the $5 Billion to $10 Billion range;

    • Add one point for each additional $3 Billion, or fraction thereof, in excess of $10 Billion in gross receipts.

  3. Operating Entities
    Separate and distinct major entities (subsidiaries, branches, and operating divisions regardless of form) are included if the resources are available to address the large, unusual and questionable items in the entity and the examination time would require 50 or more staff days. This determination should be made as part of a documented risk assessment. Domestic subsidiaries (such as marketing, production, or research subsidiaries) or service organizations (such as management, real estate holdings, financial, or data services subsidiaries) are included if the principal customer is the parent or a related entity unless transactions among those entities have potential tax consequences, as in the case of foreign subsidiaries, branches, and divisions. Points are to be computed as follows:

    • Number of Entities 1 - Number of Points 1;

    • Number of Entities 2-5 - Number of Points 3;

    • Number of Entities 6-9 - Number of Points 5;

    • Number of Entities 10-13 - Number of Points 7;

    • Number of Entities Over 13 - Number of Points 9.

  4. Multiple Industry Status
    Separate and distinct major industries (subsidiaries, branches, and operating divisions regardless of form), are included if the resources are available to address the large, unusual and questionable items in the industry and the examination time would require 100 or more staff days of planned examination time. This determination should be made as part of a documented risk assessment.

  5. Domestic subsidiaries (such as marketing, production or research subsidiaries) or service organizations (such as management, real estate holdings, financial or data service subsidiaries) are included if the principal customer is the parent or a related entity, unless transactions have potential tax consequence among those entities, as in the case of foreign subsidiaries, branches, and divisions. Add one point for each industry.

  6. Total Foreign Assets
    Total Assets from Schedule F for all Forms 5471 are included. There is a maximum of 10 points for this factor. Points are to be computed as follows:

    • Up to $250 Million – 1 point;

    • $250 Million to $6 Billion – 2 points;

    • $6 Billion to $100 Billion – 3 points;

    • Add 1 point for each additional $100 Billion or fraction thereof.

  7. Total Related Transactions
    Total of transactions from Schedule M for all Forms 5471, (Lines 1 through 8 and 10 through 17 only). For Foreign Controlled Corporations, transactions included from Part IV, lines 1 through 6, lines 8 through 10, lines 12 through 17, and lines 19 through 21, (as shown on the 2004 form or equivalent) for all Forms 5472. There is a maximum of 9 points for this factor. Points are to be computed as follows:

    • Up to $1 Million – 1 point

    • $1 Million – $40 Million – 2 points;

    • $40 Million - $1 Billion – 3 points;

    • Add 1 point for each additional $1 Billion or fraction thereof

  8. Foreign Tax
    The sum of Foreign Taxes Paid or Accrued and Foreign Taxes Deemed Paid are included from Form 1118, Schedule B, Part II, lines 1 and 2 as shown on the 2004 form (or equivalent). There is a maximum of 8 points for this factor. Points are to be computed as follows:

    • Up to $7 Million – 1 point;

    • $7 Million - $100 Million – 2 points;

    • $100 Million - $200 Million – 3 points;

    • Add 1 point for each additional $200 million or fraction thereof.


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