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Part 4. Examining Process

Chapter 12. Nonfiled Returns

Section 1. Nonfiled Returns

4.12.1  Nonfiled Returns

4.12.1.1  (05-03-1999)
Overview

  1. This section discusses the procedures involved in handling nonfiled returns.

  2. Substitute for Return and Delinquent Return procedures were developed to deal with taxpayers who do not file required tax returns.

  3. The purpose of the procedures is to assess the correct tax liability by either:

    1. Securing a valid voluntary tax return from the taxpayer (Delinquent Return), or

    2. If securing a return is not possible, computing tax, interest, and penalties based upon information submitted by payers, or based on other internally available information (Substitute for Return).

4.12.1.2  (05-03-1999)
Source of Cases

  1. Examiners encounter nonfilers in several ways.

    • As related cases/spin-offs

    • As project cases

    • As referrals from other functions (Collection)

4.12.1.3  (05-03-1999)
Enforcement Period

  1. Policy Statement P–5–133 in the former IRM 1218 Policy discusses Delinquent Returns and the enforcement of filing requirements. The enforcement period is not to be more than six years. However, the extent to which delinquency procedures will be enforced will depend upon the facts and circumstances of each case and by reference to factors ensuring evenhanded administration of staffing and other Service resources. Enforcement for longer or shorter periods may be used when consideration has been given to:

    1. The taxpayer’s prior history of noncompliance

    2. The existence of income from illegal sources

    3. The effect upon voluntary compliance

    4. The anticipated revenue in relation to the time and effort, required to determine tax due.

    5. Any special circumstances existing in the case of a particular taxpayer, class of taxpayer, or industry, or which may be peculiar to the class of tax involved.

4.12.1.3.1  (05-03-1999)
Management Approval

  1. Management approval is necessary If the enforcement activity is less than or exceeds the six year period. Document the case file:

    1. Outlining the facts of the case;

    2. Detailing the reasons why enforcement for the longer or shorter period is recommended. (Deviating from Policy Statement P–5–133).

  2. Group manager approval is not needed if the nonfiler voluntarily files returns beyond the established enforcement period.

4.12.1.4  (05-03-1999)
Discovery of Nonfiling

  1. When examiners discover during any examination that a taxpayer has failed to file required Federal tax returns, they will, before soliciting any returns:

    1. Determine the taxable periods for which the taxpayer was required to file returns.

    2. Ascertain the reasons why the taxpayer failed to file the required returns.

    3. Determine whether any indications of fraud exist.

    4. Request a transcript of account. Use Form 6882, IDRS/Master File Information Request. Research under both the primary and secondary TIN if applicable.

4.12.1.4.1  (05-03-1999)
Indications of Fraud

  1. If there is an indication that the taxpayer’s failure to file the required return or returns was willful, or if there was any other indication of fraud.

    1. See the "Fraud IRM" for procedures.

    2. Do not solicit delinquent returns, payment of tax or any agreement from the taxpayer.

    3. If the taxpayer furnishes delinquent returns to the examiner, or indicates the intention to file delinquent returns, the examiner should proceed by using the procedures in the "Fraud IRM" .

4.12.1.4.2  (05-03-1999)
Indications of Fraud Absent

  1. If it is determined that indications of fraud are not present:

    1. Advise the taxpayer of the requirement to file all delinquent returns without regard to the number of years or taxable periods involved.

    2. Advise the taxpayer to deliver the returns promptly to the examiner along with a written statement under penalty of perjury, giving all the facts which caused the delay, The statement should also include any reasons which the taxpayer believes would establish reasonable cause for failure to file.

4.12.1.4.3  (05-03-1999)
Preparation of the Return(s)

  1. When a taxpayer is advised to file all required delinquent returns but refuses to file, or states an inability to file all of the returns:

    1. Determine the extent to which the filing requirements should be enforced using the criteria in Policy Statement P–5–133 and prepare the return(s).

4.12.1.4.3.1  (05-03-1999)
IRC Sec. 6020(a)

  1. If the taxpayer will consent to disclose all information necessary for the preparation of the return(s), IRC Section 6020(a) states the return(s) may be prepared by the IRS. The return(s), signed by the taxpayer, may be received by the IRS as the return(s) of such person.

    1. Delinquency Penalties are applicable. See the Penalty, IRM 20.1.

4.12.1.4.3.2  (05-03-1999)
IRC Sec. 6020(b)

  1. Code Section 6020(b) states, "If any person fails to make any return required by any Internal Revenue Law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise."

    1. IRC SEC. 6020(b)(2) states "Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes."

    2. This is a Substitute for Return

    3. See the Penalty.

4.12.1.5  (05-03-1999)
Nonfiled Returns Involving Related Cases/Spin-Offs

  1. During the course of an audit an examiner may find that the taxpayer or a related taxpayer has failed to file a required tax return.

4.12.1.5.1  (05-03-1999)
Corporate Officers/Shareholders

  1. Examiners auditing corporate returns should inspect the returns of the officers and shareholders and request Master File transcripts in order to detect nonfiling.

4.12.1.5.2  (05-03-1999)
Delinquent Partnership and Partner Returns

  1. Follow the procedures given in the IRM section, which deals with delinquent partnership returns and delinquent returns of the partners.

4.12.1.5.3  (05-03-1999)
Partnership Substitute for Return (SFR)

  1. Where a partnership is required to file a return and fails to do so, and/or fails to file a delinquent return when requested, the "Substitute for Return" procedures in this section will be followed as well as the IRM partnership procedures with respect to each partner.

4.12.1.5.4  (05-03-1999)
Unincorporated Business Property IRC 761(A)

  1. The procedures outlined above do not apply when an Unincorporated business property elects under IRC 761(a) not to be treated as a partnership, since no partnership return is required to be filed.

  2. In addition, these procedures do not apply in the case of certain partnerships (those with ten or fewer partners) of the type that historically had not filed. However, the examiner must be satisfied that all partners in these types of partnerships have properly reported their share of partnership income (See Rev. Proc. 81–11).

4.12.1.5.5  (05-03-1999)
Delinquent Tax Exempt and Government Entities Returns

  1. If a delinquent return within the jurisdiction of the Tax Exempt and Government Entities is discovered, the examiner will attempt to secure the return.

  2. If the taxpayer refuses to file the delinquent return, or if a substantial amount of time will be required to secure the return;

    1. the delinquency investigation will be forwarded to the Tax Exempt and Government Entities for possible examination;

    2. use Form 5346, Examination Information Report for returns of exempt organizations;

    3. use Form 4632, Employee Plan Referral for returns of employee plans;

  3. If the delinquent Tax Exempt and Government Entities return is secured:

    1. file it with the appropriate service center;

    2. send a copy of the return to Tax Exempt and Government Entities for consideration. Use Form 5346 for Exempt Organizations. Use Forms 4632 and 4632–A for Employee Plans;

    3. use Form 5346 for Exempt Organizations;

    4. use Forms 4632 and 4632–A for Employee Plans.

  4. Delinquency penalties must be considered. See the Penalty IRM.

4.12.1.5.6  (05-03-1999)
Delinquent International Returns

  1. If during an examination, the delinquency of a return under the jurisdiction of the Director, Compliance is discovered, the examiner will attempt to secure the delinquent return.

  2. If the taxpayer refuses to file the delinquent return or if a substantial amount of time will be requested to secure the return:

    1. Form 5346, Examination Information Report will be forwarded to the Director, Compliance, Area 15.

    2. The examiner should also advise on Form 5346 if the taxpayer contends he/she is not legally liable for filing the return and whether such liability is an issue.

  3. If the return is secured, it should be filed with the Philadelphia Service Center under existing manual procedures.

4.12.1.5.6.1  (05-03-1999)
Jurisdiction of the Director, Compliance

  1. As a general rule, the Director, Area 15 has jurisdiction over U.S. Income Tax Returns with a foreign address or where either the taxpayer or the principal books and records are located outside the United States.

    • Returns with a foreign address include Puerto Rico, Virgin Islands, Guam, America Samoa, and the Mariana Islands.

    • Returns with APO/FPO (Army Post Office/Fleet Post Office) are under the jurisdiction of the Director, Area 15.

  2. Returns having the principal books and records located outside the United States include:

    • Form 1040 with a claimed foreign income exclusion or deduction (Form 2555 attached).

    • Form 1040NR (Non-Resident Alien).

    • Form 1120F, Income Tax Return of a Foreign Corporation.

  3. Except as noted above, all returns with a U.S. address are under the jurisdiction of the area office where the principal books and records of the taxpayer are maintained.

    1. The examiner will write in red " DELINQUENT RETURN SECURED BY EXAMINATION" across the top of Form 5471 or Form 5472.

    2. This will alert the Philadelphia Service Center that the area office has taken appropriate action concerning the penalty under IRC 6038(b), 6038A, 6046A, or 6879.

    3. Form 5471, Information Return with Respect to a Foreign Corporation or Form 5472, Information Return of a Foreign Owned Corporation or Form 5472, Information Return will be sent to the IRS Service Center, 11601 Roosevelt Boulevard, Philadelphia, Pa. 19154.

    4. Area Directors and service center directors are authorized to make determinations that failure to file information return, Form 5471 or Form 5472 was due to reasonable cause. This determination should be made by the director who can conveniently make the evaluation of Form 5471 or Form 5472.

4.12.1.5.7  (05-03-1999)
Delinquent Employment Tax Returns

  1. During a field or office examination of an income tax return of a business taxpayer, the examiner will inspect CFOL information of each withholding tax return filed up to and including the last quarter for which a withholding tax return was due.

    1. Withholding taxes include employment taxes such as FICA, RRTA, FWT, and FUTA as well as back-up withholding, withholding on income paid to foreign persons, and withholding on gambling winnings.

    2. Withholding also includes the tax imposed on a buyer or other transferee (withholding agent) when a U.S. real property interest is acquired from a foreign person.

  2. If the required tax returns have not been filed, the examiner should follow the Substitute for Return and/or Delinquency procedures.

4.12.1.5.8  (05-03-1999)
Delinquent Excise Tax Returns

  1. If the taxpayer has failed to file a required Excise Tax return, the examiner will follow the Delinquency or SFR procedures as applicable. All excise tax returns will be sent to the Cincinnati Service Center for processing.

4.12.1.5.9  (05-03-1999)
Delinquent Estate Tax Returns

  1. When, in the examination of gift tax or estate tax returns, the examiner finds gifts were made and returns were due but not filed, he/she should request the donor or the executor of the estate to prepare and submit to him the returns covering the unreported gifts.

  2. While no tax liability may be involved if gifts are split between the spouses, it may still be important to secure returns for two reasons;

    1. use of additional unified credit may generate gift tax liability for either spouse in future years, or

    2. the additional taxable gifts may increase the total taxable interests on the estate return of a deceased donor.

  3. If a gift tax return is solicited and the executor refuses to file said return, a Substitute for Return should be prepared and processed using the Substitute for Return procedures.

4.12.1.5.10  (05-03-1999)
Failure to File Certain Information Returns (Other Than TEGE) or Furnish Certain Statements

  1. The examiner may find that a nonfiler failed to file information returns or furnish certain statements.

  2. The examiner will request all delinquent forms regardless of the number of years involved. Enforcement should follow Policy Statement, P–5–133 guidelines.

    1. Penalties will be recommended absent reasonable cause.

    2. If delinquent information returns are not filed, an information report should be filed where practical or a spin off examination conducted.

4.12.1.5.11  (05-03-1999)
Coordinated Examination Program (CEP)

  1. During the examination of a CEP case, statistical sampling techniques should be considered to determine the noncompliance rate among the CEP case payees.

    1. Compensation to officers, wages and salaries, payments to individuals, etc. should be sampled and traced to Forms 1099 and/or W–2 filed.

    2. Files for Forms 1099 and other information reports and Forms W–2 should be sampled.

    3. Master File research should be conducted for individuals who did not receive either a Form 1099 or a W–2 to determine if returns have been filed.

    4. Invoices for cash payments to business should be sampled. Master File research should be conducted to determine if a return has been filed for the entity.

    5. Form 5346, Examination Information Report, should be submitted to the PSP Support Manager, to report identified nonfilers.

4.12.1.6  (05-03-1999)
Receipt of a Delinquent Return

  1. Upon receipt of a delinquent return follow the procedures outlined in Section 9 of IRM 4.4, AIMS/Processing Handbook.

4.12.1.7  (05-03-1999)
Examination of a Delinquent Return

  1. When an examiner secures a delinquent return, he/she will generally examine the taxpayer’s records in regard to the tax delinquency unless:

    1. it is impracticable to do so (based on necessary time, research, etc, required);

    2. under compliance check procedures it is not required.

4.12.1.7.1  (05-03-1999)
Information Report

  1. If the examiner does not examine a secured delinquent return, but believes such return warrants examination;

    1. A completed Form 5346, (Examination Information Report), will be stapled to the back of the return, extending one inch above the top

    2. This form will request that the delinquent return be sent to Examination for classification after being processed in the Service Center

    3. The examiner should indicate on the form the reasons why the return should be examined.

    4. The form should be approved by the manager before forwarding to the service center.

    5. If the examiner determines that another return filed or to be filed by the same or another taxpayer should be examined, the necessary information will be developed and submitted on Form 5346.

4.12.1.8  (05-03-1999)
Delinquent Returns Received After Statutory Notice Issued

  1. Situations where the nonfiler submits a delinquent return after the statutory notice of deficiency has been issued should be handled as follows:

    1. If the Service accepts the figures shown on the return as substantially correct the amount on the return should be assessed and the case closed. A revised report supplementing the notice of deficiency does not need to be issued even if the amount of tax shown on the return differs from the amount on the notice.

    2. If the Service does not accept the figures on the return as substantially correct the amount of tax on the return should be immediately assessed as a partial agreement and a revised report supplementing the notice of deficiency should be sent to the nonfiler.

4.12.1.9  (05-03-1999)
Refund

  1. If more than one delinquent return has been filed and one or more of the delinquent returns shows a refund, special procedures apply if the returns are accepted as filed. The processing of the returns must be cycled to process the balance due returns first.

    1. Attach Form 6469, Expedite Processing Cycle, to the balance due years.

    2. Instruct Case Processing Support on the Form 3198, Special Handling Notice, to process balance due returns first using cycling procedures

    3. Forward original and one copy of the returns to Case Processing Support for processing.

4.12.1.9.1  (05-03-1999)
Claim Case

  1. If the delinquent return shows a refund, a decision must be made based upon case file information whether to hold the refund and work the case following claim procedures.

    1. The Form 3198 should state Claim Case: Hold Refund — enter a "2" in item 7 (Hold Codes) of the Form 5344, to stop master file notices and to prevent excess credits from refunding.

    2. Claims procedures must be followed in cases where a refund was held and the refund was partially or fully disallowed.

    3. The starting point for the tax liability will be the tax shown on the secured delinquent return.

    4. The report will reflect additional tax assessments, changes to prepayment credits, and applicable penalties.

4.12.1.10  (05-03-1999)
Delinquent Return Secured With Reported Tax or Reasonable Cause in Question

  1. If the dummy TC 150 procedures are used, partial assessments will need to be made in situations where the secured delinquent return is in question and the examination cannot be closed within three days of receipt. In addition, if the nonfiler is appealing the delinquency penalties on the basis of reasonable cause, partial assessment for the tax will also need to be made.

    1. A copy of the tax return and a Form 5344 will be forwarded to Case Processing Support for assessment of the amount of tax on the return and applicable penalties.

    2. Form 3198, Special Handling Notice, will be attached to the copy of the return. It should be notated in red "Secured Delinquent Return, Partial Assessment Required" and notated whether or not delinquency penalties are to be assessed.

    3. A current transcript verifying "dummy/SFR" TC 150 has been posted, must be attached to the copy of the return.

    4. After the assessment of the tax and penalties, Case Processing Support will return a copy of Form 5344, Examination Closing Record, showing the assessments (to be stapled to the original return). The original return will remain in the case file.

    5. In computing the 4549 the starting point for the tax liability will be the tax shown on the secured delinquent return. The report will reflect additional tax assessments, changes to prepayment credits, and applicable penalties.

4.12.1.11  (05-03-1999)
Case Closed Without Examination Report Delinquent Return Letters

  1. If the case is closed without an examination report one of the following letters is to be issued:

    1. Letter 2769, No Change, is to be issued when the examination results in a delinquent return being accepted as filed and the nonfiler did not have reasonable cause for the failure to file. The examiner should indicate on Form 4318, Examination Workpapers, that Case Processing Support is to issue Letter 2769.

    2. Letter 2778, No Change Delinquency Penalty Not Charged, is to be issued when the examination results in a delinquent return being accepted as filed and no penalty being asserted. The examiner should indicate on Form 4318 or Form 4700, Examination Workpapers, that Case Processing Support is to issue Letter 2778.

    3. No Change letters should not be issued on cases where refund statute of limitation has expired.

4.12.1.12  (05-03-1999)
Appeal of the Delinquency Penalties

  1. If the nonfiler requests an Appeals Conference on the assertion of the failure to file/pay penalties or the fraudulent failure to file penalty in no change or agreed cases.

    1. Indicate on the Form 3198 not to assess the applicable penalties when the delinquent return is being posted or examination report is being assessed.

    2. Close the case to Appeals following normal procedures after the delinquent return or the TC 150 SUB has posted to Master File. Appeals will assert the penalty if applicable.

4.12.1.13  (05-03-1999)
Substitute for Return

  1. When it has been determined that a taxpayer is liable for filing a return, and upon due notice from the Service fails to do so, a Substitute for Return will be prepared by Examination.

    1. Examination uses this procedure to establish an account and examine the records of a taxpayer when the taxpayer refuses or is unable to file and information received indicates that a return should be filed.

    2. The examiner will request a transcript of the account to determine what action has been taken. If there is any indication that the taxpayer is married, research for a spousal SSN must also be performed.

    3. The examiner should submit the request on Form 6882, IDRS/Master File Information Request; or On-line research can be performed using Command Code IMFOL/BMFOL/INOLE.

4.12.1.14  (05-03-1999)
Firm Indication of Fraud

  1. Where there is a firm indication of fraud the preparation and submission of a Substitute for Return will be postponed.

  2. See the Fraud IRM to determine how to proceed.

4.12.1.15  (05-03-1999)
Establishment on Masterfile

  1. To establish a Substitute for Return on master file follow the procedures in Section 9 of IRM 4.4.

4.12.1.16  (05-03-1999)
TC 150 Posted

  1. Do not submit a delinquent or substitute return if TC 150 has posted.

    1. A TC 150 posting with no taxability followed by a TC 240 posting for $500 (W–4 penalty) indicates that the service center has posted a dummy return.

    2. If a TC 150 has posted, any adjustments must be made as subsequent adjustments (i.e. TC 300).

4.12.1.17  (05-03-1999)
No Return Secured Agreed Closure IRC 6020(a)

  1. If the nonfiler does not provide a delinquent return, all adjustments, tax, and penalties will be proposed on an income tax change report (Form 1902–B or Form 4549). If the nonfiler signs this report, it becomes a return filed by the Service under IRC 6020(a).

    1. Form 3198, Special Handling Notice, will be attached to the case with notation "IRC 6020(a) Return — Close Disposal Code 08" .

    2. If a "dummy/SFR" has not been processed follow procedures to establish the entity on Master File.

4.12.1.18  (05-03-1999)
No Return Secured Unagreed Closure

  1. If a cooperative nonfiler is unable to provide a delinquent return, all adjustments, tax, and penalties will be proposed on an income tax change report (Form 1902–B or Form 4549).

  2. If this nonfiler does not agree with the proposed assessment, the case will be closed as an unagreed case.

  3. If the nonfiler does not respond to our actions and continues to be uncooperative;

    1. managerial involvement/approval should be obtained prior to issuance of a 30 day letter;

    2. after consulting with the manager, the examiner will prepare and send the 30 day letter which includes an unagreed income tax change report reflecting all adjustments, tax, and penalties.

  4. The nonfiler can request a hearing with the Office of Appeals to review the proposed deficiency during closing and after receipt of 30-day letter.

  5. If the nonfiler requests an Appeals hearing, the case file will be closed to Case Processing Support for processing to the respective Appeals Office serving that area.

  6. If the nonfiler is uncooperative, both the 30-day and 90-day letters will need to be issued.

4.12.1.19  (05-03-1999)
No Return Secured Refund Years

  1. A statutory notice of deficiency should not be issued for years where the nonfiler refuses to file a return or sign a waiver prepared as a return and the known information indicates the nonfiler is due a refund for that year.

    1. Known information should include consideration of external sources (comparative year analyses, third party information, statistical data), to insure that the potential refund year reflects the nonfiler’s substantially correct taxable income. In these cases the examiner should issue Letter 2770, Refund Invitation Letter, advising the nonfiler to file a return/claim for the refund year. This letter should be sent at the same time the 30 day letter is issued.

    2. If the nonfiler does not submit a delinquent return within 30 days, close the case.

    3. If the refund year has been established on AIMS, prepare Form 3198 to inform Case Processing Support to close the case for the year using Disposal Code 41.

    4. Close any balance due years using Statutory Notice of Deficiency Procedures.

4.12.1.20  (05-03-1999)
No Return Secured No Filing Requirement/Little or No Tax Due

  1. There may be instances of an assigned nonfiler case where the nonfiler has no filing requirement or tax liability cannot be determined.

    1. Form 3198, Special Handling Notice, is to be notated, "No return filed, Taxpayer not liable this period or little or no tax due."

    2. If the case is fully established on AIMS, close using Disposal Code (DC) 36, No Return Filed.

    3. If there is only a 424 skeletal record on AIMS, delete the skeletal AIMS record with command AM424D.

    4. Group manager approval of the closure is required.

    5. Workpapers will be filed behind the DC 36 or 424D request in Case Processing Support.

    6. If the nonfiler case includes some years where returns are secured and other years where a return is not due, all workpapers are to be placed in the case file for the most current year with a deficiency where a return was secured. Each case file must be notated as to which year contains the workpapers.

4.12.1.21  (05-03-1999)
No Return Secured Years Outside Enforcement Period

  1. Close years outside the enforcement period on AIMS using Disposal Code (DC) 36, No Return Filed or CC AM424D, if the account is only a Transaction Code (TC) 424 skeletal record on AIMS.

  2. If a delinquent return was not secured, Form 3198, Special Handling Notice, is to be notated "No Return Filed — Outside Enforcement Period."

  3. File workpapers in the case file for the years in which returns were secured.

4.12.1.22  (05-03-1999)
When a Case Is Closed From the Group

  1. Follow the procedures in Section 9 of IRM 4.4, for closing a case from the group.


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