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Part 4. Examining Process

Chapter 4. AIMS Processing

Section 6. Conversion of Returns

4.4.6  Conversion of Returns

4.4.6.1  (02-08-1999)
Introduction

  1. This chapter provides instructions for the processing of the following types of conversions:

    • Separate return to joint return

    • Joint return to separate return

    • Form 1120S to Form 1120

    • Form 1041 and 1120 DISC/IC DISC to Form 1120

    • Form 1065 to Form 1120 or 1041

4.4.6.2  (02-08-1999)
Separate to Joint Return

  1. Sometimes during an examination, a husband and wife who originally filed their returns on a separate basis, find it would be to their advantage to use joint tax computations. To have this advantage of filing a joint return, such taxpayers are not required to actually file a joint return. Instead, execution of a joint agreement form will be sufficient to make this election. However, the election cannot be made unless the tax is paid in full for tax periods 1996 and prior. For tax periods 1997 and subsequent the full paid requirement is eliminated.

    Exception:

    IRC 6020(b) returns filed by the Commissioner, do not preclude a taxpayer from obtaining the benefit of joint rates under IRC 6013 whether or not a Statutory Notice of Deficiency has been issued. This exception will not apply to taxpayers who have filed a petition in Tax Court (due to the fact we no longer have jurisdiction over the taxpayer return) or when one or both spouses have previously filed a separate return.

4.4.6.2.1  (02-08-1999)
Husband and Wife Both Filed

  1. The group and closing function will follow procedures below when both the husband and wife filed separate returns.

4.4.6.2.1.1  (02-08-1999)
Group

  1. Keep both returns in the same case file.

  2. Prepare a Form 5344 for each account.

  3. Add the wife’s name in Item 4 of Form 5344 (husband’s SSN).

  4. Prepare Form 3198. Indicate Separate Returns Converted to Joint:, and, when appropriate, instruct the closing function that credits for estimated tax payments are to be transferred to the joint account.

4.4.6.2.1.2  (02-08-1999)
Closing Function

  1. Make the following entries on the Form 5344 Closing Function containing the husband’s SSN.

    1. Enter the tax and penalties for the joint account in Item 12.

    2. Enter the wife’s unrefunded prepayments as an increase in Item 15.

  2. Make the following entries on the Form 5344 containing the wife’s SSN.

    1. Enter the appropriate transaction codes and amounts in Item 12 to reduce all tax and penalties to zero.

    2. Enter Reference Number 999 with zero amount in Item 15.

    3. Make entries necessary to reduce unrefunded repayment credits by the same amount allowed as a credit on the return.

    4. Enter Hold Code 4 in Item 07 to prevent incorrect refunds or notices.

    5. Enter $1 amount in Item 35.

  3. Additional actions required on the wife s account:

    1. Prepare Form 2363 to add the wife’s name to the husband’s account and to correct the marital status code.

    2. Input a TC 971, Action Code 01, via Form 3177.

    3. To prevent a future Collection IRP activity, input TC 594, Closing Code 84.

    4. Prepare Form 2424 to transfer any cash credits to the joint account. Use TC 570 to prevent a refund of any credits that post before Form 5344 is processed.

    5. Enter Hold Code 2 in Item 07 of the wife’s Form 5344.

    6. Input Form 2424 two cycles after the wife’s Form 5344 is input.

    7. Input the joint form 5344 two cycles after the Form 2424 is input.

4.4.6.2.2  (02-08-1999)
Only One Spouse Filed

  1. The group and closing function will follow procedures below when only one spouse filed a separate return.

4.4.6.2.2.1  (02-08-1999)
Group

  1. The group will complete the following steps:

    1. Add the name of the spouse who has not in filed to Item 4 of Form 5344.

    2. Prepare Form 3198, indicating "Separate Return Converted to Joint Return" .

4.4.6.2.2.2  (02-08-1999)
Closing Function

  1. The closing function will complete the following steps:

    1. Enter the tax and penalty adjustments Item 12 of Form 5344.

    2. Enter credit adjustments in Item 15 of Form 5344.

    3. Prepare Form 2363 to add the name of the spouse who has not filed and to correct the marital status code.

4.4.6.2.2.3  (02-08-1999)
Delinquency Penalty Against Non-Filing Spouse

  1. The group and closing function will follow the procedures below when a delinquency penalty must be applied against a non-filing spouse:

4.4.6.2.2.3.1  (02-08-1999)
Group

  1. Compute the penalty manually. Be careful that any delinquency penalty imposed on the spouse who has previously filed is not duplicated in the computation.

  2. State the amount of penalty and designate Transaction Code (TC) 160 on the Form 3198.

4.4.6.2.2.3.2  (02-08-1999)
Closing Function

  1. Enter the manually computed delinquency penalty with Transaction Code (TC) 160 in Item 12 of the Form 5344.

4.4.6.3  (02-08-1999)
Joint to Separate Returns

  1. When it is determined during an examination that the taxpayers are not entitled to file a joint return, the case will be handled as shown below.

4.4.6.3.1  (02-08-1999)
Group

  1. The group will take the following steps:

    1. Flag the case with Form 3198, noted "Joint to Separate" .

    2. Enter only one name on Form 5344.

    3. If the spouse whose name is removed from the joint account is required to file a return, follow Delinquent Return procedures.

4.4.6.3.2  (02-08-1999)
Functions

  1. Prepare Form 2363 to remove one taxpayer’s name from the Closing Master File account (it will be lined through on Form 5344).

  2. If the spouse whose name is removed from the account is required to file a return, process the separate, related case file following Delinquent Return procedures. If the spouse under which the joint return posted is not required to file a separate return, see IRM 4.4.6.3.3 for procedures.

4.4.6.3.3  (02-08-1999)
Invalid Joint Return-Husband Not Required to File Separate Return

  1. Complete Form 5344 with the appropriate transaction codes and amounts in Item 12 to zero out the tax and penalties on the erroneous joint account.

  2. Make the necessary entries in Item 15 to reduce the unrefunded prepayment credit by the amount allowed as a credit on the wife’s separate account.

  3. Process Form 5344 with the original joint return.

  4. Prepare Form 2424 to transfer any cash payments to the wife’s separate account.

  5. Prepare and process a substitute for return (TC 150 zero) to set up the wife’s separate account. The received date for the substitute return will be the same as that of the joint return.

  6. When the TC 150 posts to MF, establish the account on AIMS.

  7. Prepare Form 5344 for the wife’s return. Enter in Item 12 the total tax including any adjustment by Examination and in Item 15 the amount of withholding credit equal to that which was decreased on the joint account.

  8. When AIMS is a full record, process Form 5344 with a copy of the substitute return numbering in the 000 blocking series.

4.4.6.4  (02-08-1999)
Form 1120S to Form 1120

  1. Procedures for converting a Form 1120S to Form 1120.

4.4.6.4.1  (02-08-1999)
Group

  1. Follow procedures as shown in Exhibit 4.4.6–2, Processed Form 1120–S Returns.

4.4.6.4.2  (02-08-1999)
Closing Function

  1. The case will be identified by Form 3198 attached to the file. Prepare the following forms:

4.4.6.4.2.1  (02-08-1999)
Form 5349

  1. Prepare Form 5349 to change the Form 1120S activity code to the appropriate code for Form 1120, as indicated on the Form 3198.

4.4.6.4.2.2  (02-08-1999)
Form 5344

  1. Code and edit the Form 5344 in the normal manner.

4.4.6.4.2.3  (02-08-1999)
Form 2363

  1. Prepare Form 2363 to input TC 091, changing the filing requirements to those of a corporation. Form 2363 and Form 5344 may be processed in the same cycle.

4.4.6.4.2.4  (02-08-1999)
Form 1725

  1. Prepare Form 1725 addressed to the service center Entity Control function. Form 1725 must include the statement, "Form 1120S converted to Form 1120 by Examination; update Form 2553." The following information must be furnished.

    1. The taxpayer’s name, address and EIN.

    2. Effective date of the termination.

    3. Reason for the termination.

    4. The area office code.

    5. A statement indicating that Form 2363 has been input.

4.4.6.5  (02-08-1999)
Form 1120 to Form 1041

  1. Sometimes it is necessary to convert Form 1041 to Form 1120.

4.4.6.5.1  (02-08-1999)
Group

  1. Follow procedures as shown in Exhibit 4.4.6–4, Conversion of Other Forms.

4.4.6.5.2  (02-08-1999)
Closing Function

  1. Conversion cases will be identified on Form 3198 attached to the file. In agreed cases the file will include a Form 1120 (or a photocopy thereof) marked "1041 converted to 1120 by Examination." In unagreed cases the file will include a Form 1120 marked "Substitute for return prepared by Examination."

4.4.6.5.2.1  (02-08-1999)
Agreed Cases

  1. Process agreed cases as follows:

    1. Close the Form 1041 in the normal manner, and process Form 2363 (TC 016) to eliminate 1041 filing requirements.

    2. Forward the Form 1120 to service center for processing to MF (MF). Retain a photocopy of the return for closing purposes.

    3. After the return has posted to MF, input TC 424 to establish the account on AIMS.

    4. After AIMS becomes a full record, process Form 5344 for the Form 1120 in the normal manner, using return copy procedures.

4.4.6.5.2.2  (02-08-1999)
Unagreed Cases

  1. Process unagreed cases as follows:

    1. Place the converted Form 1120 substitute for return in the case folder. Do not forward the substitute to service center for processing to MF or establishment on AIMS.

    2. Process Form 5344 for the Form 1041 in the normal manner by closing to Appeals. Do not change filing requirements. If necessary, Appeals will take action to process the Form 1120 to MF, open the case on AIMS and request a change to the filing requirements.

4.4.6.6  (02-08-1999)
Form 1065 to 1120 or 1041

  1. Conversion or Form 1065 to Form 1120 or Form 1041 requires special considerations.

4.4.6.6.1  (02-08-1999)
Group

  1. Follow procedures in IRM 4.4.6–4, Conversion of Other Forms.

4.4.6.6.2  (02-08-1999)
Closing Function

  1. Conversion cases will be identified on Form 3198 attached to the file.

    1. Process agreed cases in the same manner as conversions of Forms 1041 to Forms 1120 (see procedures in IRM 4.4.6.5.2.1 above) except that the return forms involved will be Form 1065 and Form 1120 or 1041 as appropriate.

    2. Process unagreed cases in the same manner (except for the return forms involved) as conversions of Forms 1041 to Forms 1120 (see procedures in IRM 4.4.6.5.2.2.

Exhibit 4.4.6-1  (02-/08-1999)
CONVERSION OF RETURNS

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Exhibit 4.4.6-2  (02-08-1999)
PROCESSED FORM 1120–S RETURNS

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Exhibit 4.4.6-3  (02-08-1999)
UNPROCESSED FORM 1120–S RETURNS

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Exhibit 4.4.6-4  (02-08-1999)
CONVERSION OF OTHER FORMS

(Reference IRM 4.4.6.5.1)


Form 1041 converted to Form 1120: On the top margin of the Form 1120 and on 3198, Special Handling Notice, print "Form 1041 converted to Form 1120 by Examination" . Add the activity code of the new Form 1120 to the Form 3198.


Form 1065 converted to Form 1120 or 1041: On the top margin of the Form 1120 (or 1041), and on Form 3198, Special Handling Notice, print "Form 1065 Converted to Form 1120 (or 1041) by Examination" . Add the activity code of the new Form 1120 or 1041 to the Form 3198.


Form 1120 DISC/IC DISC converted to Form 1120: On the top margin of the Form 1120 and on 3198, Special Handling Notice, print "Form 1120 DISC/IC DISC converted to Form 1120 by Examination" . Add the activity code of the new Form 1120 to the Form 3198.


For these conversions:

  • The "received date" on the new return is the date of a timely filed return if the return being converted is timely filed. Otherwise, it is the date that the return being converted was filed.

  • The amount of tax resulting directly from the conversion is shown in the tax computation of the Form 1041 or 1120.


Agreed: Transmit the newly prepared form to the service center for processing through Case Processing Support. When appropriate, instruct the SC to transfer credit for tax payments. Keep the original return in the case file until the final disposition of the case. Reestablish the account on AIMS after the newly converted return has been processed. Close the original AIMS control through the terminals using the original Examination assembly. Use disposal code 28 for Form 1120 DISC/IC DISC which is Non-Master File.


Unagreed: Forward the unprocessed Form 1120 or 1041 with the original return to Appeals.


When the Form 1120 DISC/IC DISC is converted to Form 1120 that is part of a consolidated return (IRC 1504 (B) (7)):


AGREED:
Close the Form 1120 DISC/IC DISC using disposal code 28. Incorporate the adjustments to the consolidated return on Form 4549 or 870. Close consolidated return. No special procedures are required for converted 1120.


UNAGREED: Forward Form 1120 DISC/IC DISC (NMF) to Appeals. Include converted Form 1120 taxable income as part of consolidated as part of the consolidated adjustments and close consolidated return, unagreed, normally. Do not establish a separate 1120 conversion return.


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