- 4.46.6.1 Overview
- 4.46.6.2 Definition of Workpapers
- 4.46.6.3 Purpose of Workpapers
- 4.46.6.4 Workpaper Considerations
- 4.46.6.5 Computer Data Backup at Audit Sites
- 4.46.6.6 Examination Reports
- 4.46.6.7 Taxpayer Agreement and Payment
- 4.46.6.8 Unagreed Report
- 4.46.6.9 Explanation of Items: Form 886-A
- 4.46.6.10 Approval
- Exhibit 4.46.6-1 LMSB Corporate SAIN Codes
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This section provides guidelines for the development of workpaper content and organization, as well as preparation of audit findings for a completed report. These guidelines are provided to promote quality and consistency in examiner workpapers and reports.
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Workpapers are the written records kept by the examiner which provide the audit trail and principal support for the examiner's report and document the procedures applied, tests performed, information obtained, and the conclusions reached in the examination. Electronic files are considered workpapers.
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Workpapers serve four basic purposes:
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Assistance in planning the audit and setting the scope of the exam
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Record of the evidence gathered, procedures completed, tests performed, and analyses conducted during the examination process. The workpapers demonstrate the quality of the examination.
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Provide support for technical conclusions
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Basis for review by management. (Case files will be reviewed for many purposes. Well prepared workpapers facilitate the use of the file by numerous customers after the case is closed. If the workpapers are prepared well, others will be able to use the file effectively.)
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Workpapers must be legible and organized. The workpapers are required to be identified by the appropriate SAIN number, (See Exhibit 4.46.6-1), and there must be logical order within each section so that others such as a reviewer or Appeals Officer, can easily follow your work product. The " Audit Tools" website provides pro-forma lead sheets for each SAIN area with standardized audit procedures that can be tailored to each examination.
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Workpapers should appropriately document techniques used and conclusions reached. For additional information regarding workpapers, refer to IRM 4.10.9 and IRM 4.46.3.10.2.2.
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Relevant workpapers should be separated from extraneous documents. Extraneous documents should be properly disposed of or returned to the taxpayer.
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Workpapers must properly document examination activities. which include Form 9984, Examining Officer’s Activity Record, is used to record this information.
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Standard Audit Index Number (SAIN) provides a consistent numbering system to be utilized in organizing corporate examinations.
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The numbering system follows these basics:
First Digit Items is: 1 Balance Sheet - Asset 2 Balance Sheet - Liability 3 Balance Sheet - Equity 4 Profit & Loss - Income 5 Profit & Loss - Expense 6 Income Tax computations & Credits 7 Minutes and other miscellaneous items 8 Planning file and specialist 9 Other Income and Expense Items -
The second and third digit often represent the line number of the item on Form 1120.
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Any additional detail is designated with a hyphen followed by a 2 digit numeric.
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Refer to Exhibit 4.45.6-1 LMSB Corporate SAIN Codes, for detailed listing.
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The workpapers will include all required team manager comments and document managerial involvement during the development of the case. Documentation may include signatures, notations in the activity records, or workpapers summarizing discussions of issues.
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The loss of computerized records related to examinations can have catastrophic consequences to the tax administration process and potentially result in the loss of large sums of current and future revenue. Proper backup and off-site storage procedures facilitate data recovery if a data loss occurs. Contact the Service’s Records Officer in AWSS for additional guidance.
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These procedures are intended to define the LMSB minimum standards and expectations for backing up vital computer files at audit sites and provide direction to managers and other employees on minimum acceptable procedures to protect data. The requirements are intended for any LMSB audit site where a government desktop or file server containing taxpayer data is left overnight at the site. This is not intended to mandate procedures for smaller audit sites where government computers are not left overnight at the taxpayer’s location.
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This policy outlines the minimum requirements for data backup and offsite storage for large audit sites. Additional or more frequent backups may be necessary depending on the audit site and should be determined by team coordinator.
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Utilizing existing tape devices, CD equipment and/or DVD equipment as available, all audit site computer data files will be backed up at a minimum on the last working Thursday of every month and stored in one off site location 50 miles or more from the audit site in a locked file cabinet.
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All IRS-owned taxpayer and case related data is to be backed up.
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It is not necessary to backup application or commercial software.
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One copy of backup files will be stored at a site, which is at least 50 miles from the audit site, i.e., the Territory Manager’s office or a site designated by the territory manager. Additional backup copies may be stored locally, but it is mandatory that the territory managers off site location receive monthly updates.
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A Form 3210 will accompany all shipments of backup files.
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Each backup media will be properly labeled. A label will be attached to the outside of each backup media (tape, CD or DVD) with at least the following information:
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Team coordinator's name
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Audit site
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Backup date
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Team coordinators will ensure that all team members back up computer files at a minimum of once a month to the file server. The coordinator will determine the specific date and time for each team member to back up files. However, the goal is to ensure the fileserver contains regular and timely backups from all laptop and desktop workstations.
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Team coordinators or their designee will back up the fileserver/desktop to tape, CD or DVD when made available, at a minimum on the last working Thursday of every month. The team has the option of retaining an additional backup copy at the audit site. The team coordinator or designee will mail or deliver one backup copy to the territory manager’s office or designated off-site storage location, the last working Thursday of every month along with a completed Form 3210.
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The policy establishes a minimum backup period of monthly. Sites may backup daily or weekly, as appropriate for case site.
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Territory managers will establish the designated backup storage facilities, consisting of a lockable file cabinet in their office location or another location a minimum of 50 miles from the audit site. Territory managers will monitor receipt and storage. Case sites will be contacted if backups are not received within five workdays. The territory manager or designee will sign and return a copy of the Form 3210, on receipt of monthly backups, retaining the file copy of the form. Territory managers will include the backup process in their managerial reviews and evaluations.
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All backup files will be stored in a locked file cabinet. Forms 3210 will be processed and acknowledged as soon as received. If files are not received within five workdays following the last working Thursday of each month, the audit site will be contacted. Two months of backup files will be retained in the storage cabinet for each audit site. When a third month’s backup is received from an audit site, the oldest backup should be returned to the originating manager for reuse.
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The policy requires that data be backed up and stored at least 50 miles off site. The policy offers examples of the media that can be used for backup: tape drives, CD equipment, or DVD. The policy does not prohibit use of any other media to affect the backup. If other media is available it can be used including any on-line backup capability that would result in safely backing up the data and storing in an approved location 50 miles from the site. If other media can be provided by local MITS it can be used.
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MITS is responsible for all computer equipment and operates with the same need to back up files.
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If the audit site equipment necessary to effect back up is not operating or no longer available at the site, the team coordinator will request repair of the equipment or upgrade of the equipment through MITS, sufficient to accomplish the back up.
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Media supplies are ordered through the management supply order process. If a site does not have sufficient media supplies they should request them through their management and through local MITS.
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If the employees at the audit site need instruction or training to operate the backup equipment or media, they may obtain the instruction or a short demonstration from the following sources depending on which is most available to them at their site
-Computer Audit Specialists (CAS)
-Local MITS
-Other Audit teams
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Examination reports should contain all the information necessary to ensure a clear understanding of the adjustments and demonstrate how the tax liability was computed. Examination reports serve as the basis for assessment and collection action. Examiners should take all necessary steps to ensure the accuracy of examination reports.
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Instructions – Team members should refer to the examination plan for specific instructions on the preparation of the examination report.
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Consistency - The team coordinator, after receiving the individual portions from team members, should make whatever editorial changes are needed in order that the report going to the taxpayer is uniform as to composition and style of presentation. A team member’s transmittal letter should not be changed.
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Tax computation and report preparation software are available to LMSB agents. Approved software is to be used to generate examination reports and for entry of all data required for the Examination Operational Automation Database (EOAD):
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BNA Software is used to generate Form 1120, income tax examination reports.
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Report Generation Software (RGS) is used to generate individual, partnership, subchapter S and noncorporate income tax examination reports. Procedures for use of RGS can be found in the RGS User Guide.
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See IRM 4.10.16 for procedures related to EOAD.
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Form 4549, Income Tax Examination Changes, is the basic report form used to prepare the Revenue Agents Report for most LMSB examinations.
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Form 4549A, Income Tax Examination Changes, is used in partially agreed cases and cases where no agreement is reached. The size and nature of LMSB cases make it practical to prepare reports using Form 4549A with Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, even for agreed cases.
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Form 4549B, Income Tax Examination Changes should be used on most LMSB cases. Any case with more than 7 adjustments will use the Form 4549B to show each adjustment. The Form 4549B should be used to detail adjustments by entity for reports on consolidated returns. Total adjustments detailed on Form 4549B are then entered on the Form 4549, line 1a.
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Reports for partnerships and subchapter S corporations are prepared on Form 4605, Examination Changes Partnerships, Fiduciaries, and S Corporations.
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Form 4666, Summary of Employment Tax Examination is used to summarize the employment tax examination results. Form 4667, Examination Changes – Federal Unemployment Tax, and Form 4668, Employment Tax Examination Changes Report, are prepared by the Employment Tax Examiner. Refer to IRM 4.10.12.
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Examination reports must meet the following standards
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Issues, facts, law, arguments, and conclusions should be adequately addressed. Agreed versus unagreed report status will greatly affect the detail required.
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Reports are tied to the workpapers.
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Legal citations support application of law on unagreed issues. Internal Revenue Manual references do not qualify as legal citations.
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Taxpayer’s position on unagreed issues must be addressed.
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Pertinent legal arguments on unagreed issues must be addressed.
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Specialists’ adjustments must be included. Their reports become a part of the case transmittal letter.
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Joint Committee spreadsheet that traces the appropriate carrybacks and carryforwards must be included if the case meets Joint Committee criteria.
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MAP (Mutual Agreement Procedure) report is required if the audit proposes adjustments that affect the taxpayer’s income in a treaty country.
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Taxpayer agreement to an examination report may be secured on Form 4549, 4605, 2504 or on Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment. See IRM 4.10.8.4.3 Instructions for Completing Waivers on Form 870.
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Agreement forms are considered executed when the taxpayer has signed the form. Executed agreement forms should be date stamped upon receipt.
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When signed agreement forms are received, cases should be processed promptly.
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Solicitation of Deficiency - Examiners must solicit payment of tax deficiency and interest. This action must be documented on Form 9984, Examining Officers Activity Record.
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Cash Bonds or Payments - Taxpayers may pay a deficiency or proposed deficiency by either posting a bond or making an advanced payment. A Form 3244A, Payment Posting Voucher -- Examination, should be prepared and processed with the funds received, according to LMSB guidelines.
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Processing Checks Received – Procedures for processing remittance checks received from taxpayers are found in IRM 5.1.2, Remittances, Form 809 and Designated Payments. Remittances made to the IRS must be made payable to the "United States Treasury" .
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Report forms used to present the audit findings for an unagreed case are similar to those used for agreed cases and the instructions for completing agreed case reports generally apply. However, unagreed report forms do not include a signature line for the taxpayer's consent to assessment and collection.
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Form 4549A or 4605A is prepared to summarize all adjustments. Form 886-A, Explanation of Items, provides a detailed discussion of each unagreed issue. Each issue should be explained on a Form 886-A, Explanation of Items, detailing the facts, law and argument, taxpayer’s position, and a conclusion.
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Taxpayers will be informed of their rights to discuss proposed adjustments with the examiner’s team manager.
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Taxpayers will also be informed of their formal appeal rights.
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Examiners are required to solicit payment for tax deficiency and interest on all agreed issues, unless the adjustments agreed to generate a net refund.
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Factual or legal differences must be addressed if the taxpayer submits a protest. The examiner must review the taxpayer’s position and prepare a rebuttal to share with the taxpayer.
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Taxpayers should be encouraged to enter into a partial agreement by executing a waiver such as Form 870, if agreement can be reached on one or more, but not all issues or years, unless the adjustments generate a net refund.
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Form 886-A will be prepared and attached to the report form to explain the adjusted items. A separate Form 886-A should be used for each adjustment. If the adjustment is applicable to more than one year, the adjustments should be shown on one combined Form 886-A. Form 886-A is often prepared as an attachment to Form 5701, Notice of Proposed Adjustment.
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The following format should be used for LMSB cases:
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Title -- Each explanation should be numbered and titled to correspond with the adjustment on the audit report. Issue areas should include a reference to SAIN to facilitate tracing back to workpaper detail of the adjustment. For added clarity, include the amount per return, the amount per audit, and the resulting adjustment.
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Facts -- Each explanation will include a statement of the facts upon which the adjustment is based. The statement should be in narrative form. The facts must be relevant to the issue and should be stated accurately and objectively. Facts favorable to both the Service's and taxpayer's position must be included.
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Applicable Law -- The applicable authority should be correctly cited and explained. Rulings and opinions relied upon are to be clearly stated and identified in the explanation. Citations are not required when the adjustment is predicated entirely on facts, or when they serve no useful purpose. However, reports should be informative for the taxpayer.
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Taxpayer's Position -- The taxpayer's position should be stated in narrative form. The legal authority should be cited if the taxpayer is using the authority as the basis for the argument. If the taxpayer has provided a written position statement, include the entire statement in this section or summarize the statement and include the entire document in the report as an exhibit.
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Argument – Each explanation will have a narrative, related facts, as previously discussed in b), and the cited authority to support the Service's position and the Service's rebuttal of the taxpayer's position.
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Conclusion -- Briefly state a conclusion of the Service's position.
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The team manager will approve the audit report prior to issuing it to the taxpayer.
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