Internal Revenue Manual - 4.71.4 Discrepancy Adjustments

Part 4. Examining Process
Chapter 71. Employee Plans Examination of Returns
Section 4. Discrepancy Adjustments

4.71.4.1 (06-01-2007)
Overview of the Discrepancy Adjustment Program

Chief Counsel has concluded that discrepancy adjustments do not constitute an inspection of the taxpayer’s books and records within the meaning of IRC 7605(b). Thus, discrepancy adjustments applied in accordance with these procedures will not constitute an examination of the taxpayer’s books and records as long as these guidelines are followed. If these guidelines are not followed, then SB/SE, W&I, and LMSB (Examination Functional Units) may have to institute reopening procedures for a return that TE/GE Division is deemed to have examined.
In order to reduce the number of referrals to the Examination Functional Units for minor adjustments to income, the discrepancy adjustment program was established. This program allows EP agents to make certain line adjustments to income tax returns with respect to issues arising from an examination of a return of a qualified retirement plan or other non-return retirement arrangements such as SEPs, SIMPLE IRAs, IRC 403(b) plans or 457 plans. Discrepancy adjustments may be prepared with respect to tax adjustments to —
1. Form 1040, U.S. Individual Income Tax Return, and
2. Form 1120, U.S. Corporation Income Tax Return.
An adjustment may arise when there is a discrepancy between information reported on an income tax return and facts developed during an examination of an employee plan.
An adjustment may originate directly from a related TE/GE examination or any other information that TE/GE has access to, such as determination letter applications and/or compliance projects.
Discrepancy adjustments fall within the scope of Rev. Proc. 85-13, section 3.02, which states the conditions under which a case closed after examination by the Service may be reopened to make an adjustment unfavorable to the taxpayer.
Adjustments are reported on Form 4549-E, Income Tax Discrepancy Adjustments, and the Revenue Agent's Report (RAR). The RAR is used as the primary narrative for the Taxpayer to explain the issues involved in making the adjustments to income and taxes due.
These procedures are for EP specialists or agents, unless otherwise specified.
Provisions enacted under the IRS Restructuring and Reform Act of 1998 (RRA) affect the procedures under this program.

4.71.4.2 (06-01-2007)
Referrals to Examination Functional Units

The Discrepancy Adjustment Program does not entirely preclude EP discrepancy adjustments from being referred to the Examination Functional Units. If the adjustment does not fall within the guidelines of the discrepancy adjustment program, a referral should be made to the appropriate Examination Functional Unit.
Referrals to the Examination Functional Units should be made when the related income tax return:
1. Is a Form 1120-S, U.S. Income Tax Return for an S Corporation;
2. Is a Form 1065, U.S. Return of Partnership Income;
3. Shows a net operating loss;
4. Was filed by a taxpayer that has filed for bankruptcy;
5. Was filed by a taxpayer that was dissolved, merged or sold;
6. Is under the jurisdiction of LMSB - International or is listed in the CEP Identity File;
7. Was never filed (no delinquent Forms 1040 or 1120 return will be secured), or
8. Is currently under examination;
9. Involves complex credit carry backs;
10. Involves capitalized pension or profit sharing costs.
Situations described in a. through d. above, may be processed as discrepancy adjustment cases by EP agents with the concurrence of the affected Area Director. Procedures may be adopted locally by EP Area Managers and Area Directors in Exam Functional Units. Any local procedures agreed upon should be coordinated with the Manager of EP Examinations, Programs and Review.
Under certain circumstances it may be advisable to refer the discrepancy adjustment issues to the Examination Functional Units (i.e., in case of complex income tax returns, or a more detailed inspection of income tax books and records is necessary to resolve the potential income tax issue).

Related cases that are, or have been, examined by the Examination Functional Unit may be examined by an EP agent, however,

IF...	THEN...
a. The return is open in an Examination Functional Unit	The discrepancy issue will generally be referred to that examiner for resolution.
b. The Examination Functional Unit has completed the examination	EP will process the discrepancy adjustment.
c. The return is in inactive status, i.e., unassigned in an Examination Functional Unit	A referral should be made to the Examination Functional Unit.

Note: The income tax return must be closed off the Examination Functional Unit’s AIMS before it can be established on EP AIMS as a discrepancy adjustment. Although it can take up to 365 days to drop off of the Examination Functional Unit’s AIMS from the time the case is closed by the Examination Functional Unit, the return may still be secured. However, it may be preferable for the EP agent to secure an amended return.

Any adjustment may be referred to an Examination Functional Unit at the discretion of the EP Group Manager if it is determined that the adjustment may be better handled outside of the TE/GE Division.

4.71.4.3 (06-01-2007)
Identifying Discrepancy Adjustments

The EP agent is responsible for identifying the discrepancy during the course of an examination, and initiating the discrepancy adjustment process.
The agent should determine that the correct amount of income has been reported on the subject income tax return by researching the appropriate internal systems. A RTVUE or BRTVU printout may be used as an original return for this purpose. Alternatively, the agent may order the original return from the Service Center using the ESTAB command code. Form 10373 or Form 6882 can be used for this purpose. Alternatively, the original return can be obtained from the Service Center by leaving item 8 blank on Form 5597 when establishing Form 1040 on AIMS.

4.71.4.3.1 (06-01-2007)
Examples of EP Issues

The following EP issues are examples of issues that can result in discrepancy adjustments:
1. Unreported income due to unreported or incorrectly reported distributions from deferred compensation plans.
2. Taxable allocations to participant accounts in defined contribution plans due to the revocation of the tax-exempt status of the plan trust.
3. Taxable distributions to participants resulting from violations of IRC 72(p) loan limits.
4. Adjustment to taxpayer deductions for contributions to a deferred compensation plan due to non-payment, late payment, excess contributions, plan disqualification, etc.
5. Unreported income from reversion of excess plan assets after a plan termination.
6. IRC 72(t) 10% additional tax on early plan distributions.

4.71.4.4 (06-01-2007)
Processing Discrepancy Adjustments

The EP specialist is responsible for initiating the discrepancy adjustment process. During the course of his/her duties, each specialist should be satisfied that the correct amount of income has been reported and the correct amount of tax paid. Procedures involved in successfully working a discrepancy adjustment follow.

4.71.4.4.1 (06-01-2007)
IDRS Research

When it is determined that a possible discrepancy adjustment exists, the agent should:
1. Secure and review BMFOL (Form 1120) or IMFOL (FORM 1040) transcripts for each effected income tax return to determine the time remaining on the statute of limitations. These transcripts should also be reviewed to determine if there have been any other Service actions such as an examination of the return or other assessments made by the Service Center. Additionally, these transcripts will show if the return has been amended by the taxpayer. Ascertain that any post-filing adjustments (such as Service Center adjustments, amended returns, etc.) are properly accounted for when the return information is input into RGS. Refer to Chapter 8 of ADP and IDRS Handbook, Document 6209, for an explanation of Transaction Codes (TC) and Action Codes.
2. Obtain an INOLES print to determine the last known address of the taxpayer.
3. Obtain an IRPTRL print on the taxpayer (and taxpayer’s spouse if the applicable return is a joint return) to determine total income and total tax withheld.
4. Obtain an AMDISA print to determine if a Form 1040 or 1120 return has been established on AIMS by any Examination Functional Unit (i.e., W&I or SB/SE). If so, contact must be made to coordinate disposition of the issue. The discrepancy issue will generally be referred to that examiner for resolution. If the Examination Functional Unit agent/auditor has completed examination of the return, the EP specialist will process the discrepancy adjustment.
5. Obtain a RTVUE (Form 1040) or a BRTVU (Form 1120) print. Review to determine amounts taken into income, deductions taken, credits taken and tax withheld.
A RTVUE or BRTVU print will be accepted as the equivalent of a tax return if it provides sufficient detail to determine if there is a discrepancy, or if it gives sufficient line item detail to compute Form 1040 or 1120 income taxes. For "Unagreed" cases, EP Mandatory Review will obtain the original return before the case is sent to the tax court or appeals.
A copy of all IDRS research discussed in this section should be included in the case file.

4.71.4.4.2 (06-01-2007)
Preparation of Form 5597

If a discrepancy adjustment is warranted, establish the tax return on AIMS and EPIC using Form 5597, TE/GE IMF/BMF/EPMF Request.

Complete the following line items on Form 5597 as noted:

Item P7-8: Enter a source code of 87.

Item P10-12: Enter the primary business code as follows:

Primary Business Code	Area
401	Northeast
402	Mid-Atlantic
403	Great Lakes
404	Gulf Coast
405	Central Mountain
406	Pacific Coast

Item P20-23: Enter the examiner’s group code (i.e., 7653).
Item P25-26: Enter an MFT of 30 for Form 1040. Enter an MFT of 02 for Form 1120.
Item P28-29: Enter a status code of 12.
Item P31: Enter 3 for return request indicator.
Item P33-35: Enter the project code of the related Form 5500. If there is none, enter 0000.
Item P47: Enter a flowthru indicator of 1.
Item P1-12: Enter the taxpayer’s EIN/SSN.
Item A: Enter the taxpayer’s name. For Forms 1040, the individual's last name should appear first.
Item P14-17: Enter the name control for the taxpayer.
Item P19-24: Enter the tax period.
Item P26-28: Enter the three digit activity code. Refer to Document 6476.
Item B: Enter the taxpayer’s address.
Item C: Enter the reason for the establishment of the Form 1040 or 1120.
Item D: Enter the examiner’s name, organization and date.
Item E: Secure the group manager’s signature.
Item 2: Enter the tax period and the applicable statute of limitations date. If the statute has been extended, also enter that date (statute update).

See Exhibit 4.71.4-1 for an example of a completed Form 5597. See also IRM 4.5.1.3.8.1 and Exhibit 4.5.1-8.

4.71.4.4.3 (06-01-2007)
Statute of Limitations

The EP agent has the responsibility to ensure that the statute of limitations date on any Form 1040 and 1120 is correct and protected as necessary. Consents to extend the statute should be secured as needed.
Note: Restricted consents should rarely be accepted on discrepancy adjustment cases. See IRM 25.6, Statute of Limitations, for the limited circumstances when restricted consents may apply and for special procedures to be followed.
The correct statute of limitations date should be reflected on AIMS.
Statute procedures in IRM 4.71.9 should be followed. This includes preparing Form 895 to notify the agent of those assigned returns where the statute of limitations will expire within 210 days.
Specialists may propose adjustments on returns with short statutes if the adjustments are significant. Group Manager approval should be obtained prior to issuing a "30-Day Letter" on a return with less than 9 months left on the statute. Form 872 or 872-H, Consent to Extend the Statute, should normally be enclosed with the "30-Day Letter" in such cases.
Per the June 24,2003 memo from Bob Wenzel covering the use of fax and signature stamps:
1. Preparer/taxpayer signature stamps are not permitted on Form 872 or 872-H.
2. Forms 872 or 872-H will not be accepted if sent by fax.
3. The taxpayer’s original signature is necessary before an agent can accept a Form 872 or 872-H submitted by the taxpayer to extend the statute of limitations.

4.71.4.4.4 (06-01-2007)
Time Reporting

Discrepancy adjustment returns should be added to the agent’s Form 6490 as soon as AIMS controls are requested.
Any nominal time charges prior to AIMS establishment should be charged to the related return or activity.
The appropriate activity code will depend on the type of return the adjustment applies to. See Document 6476, Employee Plans Systems Codes. The AIMS generated activity code should be verified and the code used on Form 6490 should be in agreement, prior to closing the case.
The project code should be the same as the code used on the related examination. If no other code is warranted, use "000" .
No plan indicator is be used on Form 6490 for a return for which a discrepancy adjustment is being made.

4.71.4.4.5 (06-01-2007)
Preparation of the Discrepancy Adjustment Package

Form 4549-E is the report that will be utilized to communicate the discrepancy adjustment to the taxpayer and to request taxpayer agreement with the proposed discrepancy adjustment. The "Other Information" section on page two of Form 4549-E should reflect the following two comments in all cases:
1. "This discrepancy adjustment does not constitute an examination of your tax return" , and
2. "See the attached Form 886-A for an explanation of the issues"
A third comment should be included if IRC 6404(g) applies (See IRM 4.71.4.4.6). See Exhibit 4.71.4-3 for an example of Form 4549-E.
Form 4549-E will be generated utilizing current RGS software.
A Revenue Agent Report (RAR) must also be attached, which will include an explanation of the issue(s) being raised in the discrepancy adjustment package. The issue(s) should be communicated in a Facts, Law and Government Position format. Form 886-A can be utilized for this purpose.
Letter 3605-A ("30-Day Letter" ) will be utilized as the cover letter for the discrepancy adjustment package mailed to the taxpayer. See Exhibit 4.71.4-2 for an example of Letter 3605-A .

Note:

Include only the tax deficiency in the upper right under the "Tax Deficiency" heading on the first page of Letter 3605-A. Do not include interest and penalties being assessed under "Tax Deficiency" on Letter 3605-A.
The EP Specialist (not EP Mandatory Review) will mail Letter 3605-A ("30-Day Letter" ) to the taxpayer, unless the discrepancy adjustment has been established because of a plan revocation that is Unagreed.
If an Unagreed revocation results in discrepancy adjustments, the discrepancy adjustment reports will be issued by the Mandatory Review Staff (not the Group) simultaneously with the proposed revocation.
The "30-Day Letter" notifies the taxpayer of their rights, including Appeal rights.
The "30-Day Letter" gives the taxpayer 30 days to respond. If there is no response within 30 days, the case can be closed "Unagreed" to EP Mandatory Review. See IRM 4.71.4.6.2 below.
The discrepancy adjustment package should consist of the following:
1. Letter 3605-A
2. Pub. 1
3. Pub. 5
4. Pub. 504 (if the subject return is a Form 1040 series return and the taxpayer was married)
5. Pub. 594
6. Revenue Agent Report (RAR)
7. Two copies of Form 4549-E, Income Tax Discrepancy Adjustments
8. Penalty calculations (if applicable)
9. Interest calculations
10. Form 9465, Installment Agreement Request (optional)
11. Return Envelope
The discrepancy adjustment package must be mailed by Certified Mailto the taxpayer's last known address.
1. For the purpose of obtaining the taxpayer’s last known address, an INOLES print should be secured. INOLES reflects the address last given to the Service through the most recent filing of a return by the taxpayer or other notification by the taxpayer.
2. If knowledge is obtained through other sources, that the taxpayer’s address has changed subsequent to the address reflected on INOLES, then that subsequent address should be used.
If the applicable return is a Form 1040 filed jointly, separate packages should be mailed to each spouse, even if they live at the same address. Utilize the last known address of each spouse (or former spouse if no longer married).

Note:

When separate mailings to spouses is needed each letter should be individually prepared and addressed.

4.71.4.4.6 (06-01-2007)
Penalties and Interest

The agent must make a determination as to whether any penalties are appropriate.
1. Any applicable penalties should be applied through the penalty menu in RGS. The program will automatically compute the penalties and provide an explanation of the penalties being included as part of the Form 4549-E report.
2. The negligence penalty under IRC 6662(b)(1) is the most commonly applied penalty on discrepancy adjustment cases.
3. Per IRC 6751(b)(1), before certain penalties can be assessed, managerial approval is required (in writing). Per IRC 6751(b)(2), penalties assessed under IRC 6662 are not exempted from this requirement. Therefore, when the agent determines that penalties under IRC 6662 should be applied, managerial approval must be secured before the "30-Day Letter" package is mailed to the taxpayer. For this purpose, managerial approval should be documented on Form 5464, Case Chronology Record.
4. The workpapers should include a brief discussion on the applicability of penalties and whether or not penalties are being assessed.
Section 3305 of the IRS Restructuring and Reform Act of 1998 was enacted to provide for the suspension of interest in certain cases. If the IRS does not provide a notice to the taxpayer (who has timely filed their tax return) specifically stating the taxpayer’s liability before the "suspension period" begins, the IRS must suspend the imposition of any interest, penalty, addition to tax, or additional amount with respect to any failure relating to that return. The "suspension period" begins 18 months after the later of (1) the date on which the return is timely filed, or (2) the due date of the return without regard to extensions. The "suspension period" ends 21 days after the date on which the required notice is issued by the IRS. These changes have been incorporated into IRC 6404(g). See also IRM 20.2.7.6.
Note:

The provision does not apply to any penalty imposed by IRC 6651; any interest, penalty, addition to tax or additional amount in a case involving fraud; any interest, penalty, addition to tax or additional amount with respect to any tax liability shown on the return, or; any criminal penalty.
1. IRC 6404(g) applies only to timely filed returns (returns filed by the original due date or by the extended due date if a valid extension was filed).
2. IRC 6404(g) applies only to individuals, not to corporations.
3. IRC 6404(g) has an impact on discrepancy adjustments only with regard to the assessment of interest.
4. IRC 6404(g) applies only if the "30-Day Letter" package is mailed to the taxpayer later than 18 months after the later of (1) the date the return was timely filed or (2) the due date of the return (without regard to extensions). Therefore, interest should not be suspended for any period of time if the "30-Day Letter" package is mailed by the end of the 18 month period.
5. If IRC 6404(g) applies, the suspension of interest begins on the day after the end of the 18 month period and ends on the day which is 21 days after the day the "30-Day Letter" package is mailed. The suspension of interest over this period is granted whether or not Form 4549-E is signed or tax is paid.
6. If IRC 6404(g) applies, interest should be calculated on Form 4549-E from the original due date of the Form 1040 return through the 18 month period.
7. If IRC 6404(g) does not apply, interest should be calculated on Form 4549-E from the original due date of the return through 30 days after the date of the "30-Day Letter" .
8. The following example helps illustrate the suspension period:
  
  Example 1 : Assume Jake Jones has an extension to file his Form 1040 for 2000, and timely files on 8/15/2001. Jake neglects to include a taxable pension distribution in the amount of $100,000 on his Form 1040. A "30-Day Letter" package is mailed to Jake on 7/1/2003, and Jake signs Form 4549-E and pays the deficiency on 7/30/2003. Jake owes interest on the deficiency from 4/15/2001 through 2/15/2003. Interest is suspended from 2/16/2003 through 7/21/2003. Interest again runs from 7/22/2003 through 7/30/2003 (although it is not necessary for the agent to provide interest calculations for the period after 7/21/2003).
Beginning with any notice issued or penalty assessed after December 31, 2000, the Service is required to include the name of the penalty, the Code section which imposes the penalty, and a computation of the penalty. Supervisory approval is required prior to assessment for any penalty that is not computer generated. Penalties under IRC 6651, 6654, and 6655 are exempted from the approval requirement. See Section 3306 of the IRS Restructuring an Reform Act of 1998.
After December 31, 2000, every notice sent to an individual which includes an amount of interest due must also include a detailed computation of the interest charged and a citation to the Code section under which the interest is imposed. See Section 3308 of the IRS Restructuring an Reform Act of 1998.

4.71.4.4.7 (06-01-2007)
Taxpayer Responses to the "30-Day Letter" (Letter 3605-A)

If the taxpayer submits information that changes the discrepancy amount (but does not eliminate it) or penalties, issue Letter 2657 with a revised report to the taxpayer. See Exhibit 4.71.4-7 for an example of Letter 2657.
If the taxpayer submits information that does not change the original report, issue Letter 2658 along with a copy of the original report. See Exhibit 4.71.4-8 for an example of Letter 2658.
If it is determined that a more detailed inspection of books and records is necessary to resolve an income tax issue, refer the case to the appropriate Examination Functional Unit.
In general, 26 CFR 601.105(d)1 does not provide for any extension of time to reply to a "30-Day Letter" . However, as a matter of practice, extensions may be granted under reasonable circumstances such as:
1. The taxpayer retains a representative and demonstrates a need for more time to prepare a meaningful protest.
2. The taxpayer retains a new representative.
3. Sickness or injury of the taxpayer or representative.
4. Issues are complex and require extensive research.
Requests for extensions should be in writing and should state the reason(s) why additional time is needed. Since many requests are made by telephone, the extension may be granted verbally and confirmed in writing upon receipt of the written request. Extensions should not be granted if the statute of limitations will expire within 150 days and the granting of an extension will not leave sufficient time to process the case.
Extensions should be approved by the group manager or a designated management official. The taxpayer should be notified in writing of the extension and the specific extended response date. Extensions are normally granted for no more than 30 days unless a specific reason supports additional time.
If the taxpayer does not protest within the 30 day period, but previously indicated his/her intention to do so, or if the report is returned as "undeliverable," Letter 923-A will be sent to the taxpayer to allow an additional 15 days to file a protest. Letter 923-A should be issued no later than seven calendar days after the response date of the original "30-Day Letter" . See Exhibit 4.71.4-9 for an example of Letter 923-A.
If the "30-Day Letter" is returned as undeliverable to the address on file, then an attempt will be made to obtain the correct address.
1. If the taxpayer’s correct address is determined, the "30-Day Letter" will be remailed to the new address. The period in which the taxpayer may respond starts with the date the letter was remailed.
2. If the taxpayer’s correct address cannot be determined, then the case will be processed as outlined in IRM 4.71.4.6.2 below.

4.71.4.5 (06-01-2007)
Agreed Case Procedures

Cases are considered agreed if one of two events occurs:
1. There is an "Agreed Tax Change" . In this instance, the taxpayer signifies agreement with the proposed tax change by returning a signed Form 4549-E to the agent. See IRM 4.71.4.5.1 below for further instructions.
2. Additional information is provided that results in a "No Change" . In this instance, information is provided by the taxpayer or through other sources verifying that no adjustment is warranted.

4.71.4.5.1 (06-01-2007)
Agreed Tax Change

If a signed Form 4549-E is secured from the taxpayer or power of attorney (if authorized to sign on behalf of the taxpayer on Form 2848), the case is agreed. An agreed case may be closed without payment from the taxpayer; however, the agent should make a reasonable effort to secure full payment of taxes, interest and penalties. If the taxpayer is unable to pay, see IRM 4.71.4.11 below for information on Installment Agreements.
Per the June 24,2003 memo from Bob Wenzel covering the use of fax and signature stamps:
1. Forms 4549-E reflecting additional tax of $25,000 or less can be accepted by fax if taxpayer contact has been made and the case chronology documents the date of contact and the desire of the taxpayer to submit the consent by fax.
2. Forms 4549-E reflecting additional tax in excess of $25,000 should be secured with original signatures.
If there is an "agreed tax change" , the disposal code is 03.
If the total discrepancy adjustment to one taxpayer results in an overassessment, or an agreed but unpaid deficiency, of $10,000 (pursuant to the changes enacted under RRA 3103) or more, the case must be processed within 22 calendar days (16 business days) after the agreement is filed or the overassessment is determined.
If payment is received, the following actions should be taken:
1. Complete Form 3244-A (Payment Posting Voucher) for each payment secured. See Exhibit 4.71.4-4 for an example of a completed Form 3244-A. Payments are required to be sent directly to the Service Center the same day as received, or the next business morning to ensure receipt within 24 hours.
2. Confirm that the check is made out to United States Treasury. If not, over-stamp it with the United States Treasury stamp that should be available in the group.
3. Staple the payment to the front of Form 3244-A.
4. Complete Form 3210, Document Transmittal, to accompany the payment being sent to the Service Center. The body of the Form 3210 should include the taxpayer’s name, SSN/EIN, tax return form number, amount of payment, and check number. If the payment applies to more than one tax period, the breakdown and details should be noted and itemized on the Form 3210.
5. Make a copy of Form 3244-A, Form 3210 and the payment (i.e., check) to be retained in the case file.
6. Mail Form 3244-A, the payment and Form 3210 via over-night mail to the Service Center where the taxpayer files his/her return (See the instructions to Forms 1040/1120 for the address).
  
  Note:
  
  Do not include a copy of Form 4549-E with the payment package sent to the Service Center. Doing so may cause double assessment of tax to occur.
No closing letter is prepared for discrepancy adjustments when there is an agreed tax change.
If interest is being suspended in accordance with IRC 6404(g) as described in IRM 4.71.4.4.6(3), the following actions should be taken to notify the ESS unit that interest is to be suspended:
1. The IRC 6404(g) notice date should be listed in the "Other Information" section of the file copy of Form 4549-E. Suggested language is as follows: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)."
2. In the "Other Instructions" section of Form 3198-A, include the following: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer). Interest should be suspended beginning ____ (insert the date the suspension period begins) through ____ (insert the date the suspension period ends)." The Form 3198-A is attached to the outside of the case file as described in IRM 4.71.4.12.3.1. See Exhibit 4.71.4 -12 for an example of Form 3198-A.
3. Prepare Form 3177 in accordance with Exhibit 13 and attach it to Form 5599. The input of transaction code 971 with action code 064 and the "notice date" will suspend the interest as required by IRC 6404(g).
Prepare Forms 5772, EP Workpaper Summary, and 5773, Workpaper Continuation Sheet, along with any supplemental workpapers.
1. The workpapers will be limited to the discrepancy adjustment issue(s).
2. The workpapers should include a discussion on IRC 72(t) when the issue involves pension distributions.
3. The workpapers should include a brief discussion on the applicability of penalties and whether or not penalties are being assessed.
All IDRS research discussed in IRM 4.71.4.4.1 should be included in the case file. A current AMDISA print should be secured and attached to Form 5599, TE/GE Examined Closing Record, before the case is closed.
Prepare Form 5599, TE/GE Examined Closing Record in accordance with IRM 4.71.4.12.1.
The case should be updated to status code 51 on EPIC and AIMS before the case is closed from the group. For this purpose, the agent should complete Form 5595.
The case file should be assembled in accordance with IRM 4.71.4.12.3 and closed to the designated ESS unit.

4.71.4.5.2 (06-01-2007)
No Change

If information received during the 30 day period verifies that no adjustment is warranted, take the following actions:
1. Retain a current AMDISA print and a copy of the return (or applicable RTVUE or BRTVU print) in the case file. The AMDISA print should be attached to Form 5599.
2. Include the original return (if secured) with the closed discrepancy adjustment case file.
3. Prepare Forms 5772, EP Workpaper Summary, and 5773, Workpaper Continuation Sheet, along with any supplemental workpapers.
4. Prepare Form 5599, TE/GE Examined Closing Record in accordance with IRM 4.71.4.12.1.
5. Close the case off AIMS, disposal code 02 using Form 5599. Refer to the instructions under IRM 4.71.4.12.1 below for lines required to be completed. See Exhibit 4.71.4-5 for an example of Form 5599.
6. Prepare Pattern Letter 2656 . See Exhibit 4.71.4-6 for an example of Letter 2656 .

4.71.4.6 (06-01-2007)
"Unagreed" Case Procedures

"Unagreed" Case Procedures will be followed in two instances:
1. The taxpayer disagrees and files a protest with Appeals (or petitions the Tax Court).
2. The taxpayer fails to submit a proper response to the "30-Day Letter" .

4.71.4.6.1 (06-01-2007)
Disagreement by the Taxpayer

If the taxpayer disagrees with the proposed adjustments, the agent must inform him/her of:
1. The right to discuss the proposed adjustment with a supervisor.
2. His/her appeal rights.
A taxpayer that does not agree with the proposed adjustment should be encouraged to file a written protest for the case to go to Appeals. Pub. 5 summarizes the protest procedure.
1. If the protest does not change the report, close the case to EP Mandatory Review Staff for forwarding to Appeals with disposal code 07 (when the taxpayer files a protest to Appeals), or 11 (when the taxpayer files a petition to the Tax Court).
If the taxpayer files a protest, the agent must review the protest to determine whether —
1. The protest is adequate (See Pub. 5 — the protest may not be required to be in writing),
2. The case requires further development,
3. The Revenue Agent Report (RAR) must be modified to incorporate the taxpayer's position and the government's response to that position.
A copy of the RAR should be included in the case file in both hard copy and on a computer disk.
The case information on RGS must be copied onto a disk and included in the case file.
If interest is being suspended in accordance with IRC 6404(g) as described in IRM 4.71.4.4.6(3), the following actions should be taken to notify the ESS unit that interest is to be suspended:
1. The IRC 6404(g) notice date should be listed in the "Other Information" section of the file copy of Form 4549-E. Suggested language is as follows: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)."
2. In the "Other Instructions" section of Form 3198-A, include the following: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer). Interest should be suspended beginning ____ (insert the date the suspension period begins) through ____ (insert the date the suspension period ends)."
3. Prepare Form 3177 in accordance with Exhibit 13 and attach it to Form 5599. The input of transaction code 971 with action code 064 and the "notice date" will suspend the interest as required by IRC 6404(g).
Prepare Forms 5772, EP Workpaper Summary, and 5773, Workpaper Continuation Sheet, along with any supplemental workpapers.
1. The workpapers will be limited to the discrepancy adjustment issue(s).
2. The workpapers should include a discussion on IRC 72(t) when the issue involves pension distributions.
3. The workpapers should include a brief discussion on the applicability of penalties and whether or not penalties are being assessed.
All IDRS research discussed in IRM 4.71.4.4.1 should be included in the case file. A current AMDISA print should be secured and attached to Form 5599, TE/GE Examined Closing Record, before the case is closed.
Prepare Form 5599, TE/GE Examined Closing Record in accordance with IRM 4.71.4.12.1.
Update the AIMS status code to 20, "Review"
Attach Form 3198-A to the outside of the case file, identifying the case as "Mandatory Review" , and notate: "Unagreed Discrepancy Adjustment" .
If less than one year remains on the statute of limitations, see IRM 4.71.9, Statute Controls, for special instructions.
Close the case to EP Mandatory Review at the following address:

IRS
EP Mandatory Review
801 Broadway, Room 397
MDP 13
Nashville, TN 37203

4.71.4.6.2 (06-01-2007)
Failure of the Taxpayer to Properly Respond

The case should also be closed to EP Mandatory Review Staff for issuance of a statutory notice of deficiency in the following instances:
1. It appears reasonable that the taxpayer or authorized representative received the "30-Day Letter" , and the taxpayer neither agrees (i.e., signs Form 4549-E) nor protests within the 30 day period,
2. Or, if the "30-Day Letter" was not received by the taxpayer, the Service exercised due diligence in determining the taxpayer’s last known address,
3. The taxpayer is temporarily away and is not expected to return within a reasonable period of time, or has not returned after a reasonable extension has been granted, or
4. Follow-up action was taken without success.
The Revenue Agent Report (RAR) must be modified to state that the taxpayer failed to respond. A copy of the RAR must be included in the case file in both hard copy and on a computer disk.
The case information on RGS must be copied onto a disk and included in the case file.
If interest is being suspended in accordance with IRC 6404(g) as described in IRM 4.71.4.4.6(3), the following actions should be taken to notify the ESS unit that interest is to be suspended:
1. The IRC 6404(g) notice date should be listed in the "Other Information" section of the file copy of Form 4549-E. Suggested language is as follows: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)."
2. In the "Other Instructions" section of Form 3198-A, include the following: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer). Interest should be suspended beginning ____ (insert the date the suspension period begins) through ____ (insert the date the suspension period ends)."
Prepare Forms 5772, EP Workpaper Summary, and 5773, Workpaper Continuation Sheet, along with any supplemental workpapers.
1. The workpapers will be limited to the discrepancy adjustment issue(s).
2. The workpapers should include a discussion on IRC 72(t) when the issue involves pension distributions.
3. The workpapers should include a brief discussion on the applicability of penalties and whether or not penalties are being assessed.
All IDRS research discussed in IRM 4.71.4.4.1 should be included in the case file. A current AMDISA print should be secured and attached to Form 5599, TE/GE Examined Closing Record, before the case is closed.
Prepare Form 5599, TE/GE Examined Closing Record in accordance with IRM 4.71.4.12.1.
The case should be closed disposal code 10.
Update the status code on AIMS to 20, "Review"
Attach Form 3198-A to the outside of the case file, identifying the case as "Mandatory Review" , and notate: "Unagreed Discrepancy Adjustment" .
If less than one year remains on the statute of limitations, see IRM 4.71.9, Statute Controls, for special instructions.
Close the case to EP Mandatory Review at the following address:

IRS
EP Mandatory Review
801 Broadway, Room 397
MDP 13
Nashville, TN 37203

4.71.4.7 (06-01-2007)
Simultaneous Closing with Related Cases

Simultaneous closing with the related EP case (Form 5500) is preferable (unless the related case is a CEP case), but is not required unless the discrepancy adjustments are Unagreed because of an Unagreed EP issue. Include copies of all materials from the related EP file necessary to document the discrepancy that gave rise to the adjustment.
If an Unagreed revocation results in discrepancy adjustments, the discrepancy adjustment reports will be issued by the Review Staff (not the Group) simultaneously with the proposed revocation.

4.71.4.8 (06-01-2007)
Partial Agreement Procedures

If agreement can be reached on one or more issues, the taxpayer should be encouraged to enter into a partial agreement by executing a Form 4549-E covering the agreed issues. A typical situation might be where the taxpayer agrees to the discrepancy adjustment; however, he does not agree to the penalty associated with the adjustment to his tax liability.
Partial agreement procedures are not appropriate if the taxpayer agrees to the proposed adjustments in a specific tax period and does not agree with proposed adjustments in a prior or subsequent tax period.
For partial agreements, the specialist will complete two separate Form 4549-E reports.
1. Prepare one report showing only the agreed issues. Write "Partial Agreement" on top of the Form 4549-E.
2. Prepare a second report that includes both the agreed and unagreed issues.
The specialist will forward the above reports to the taxpayer, as well as the "30-Day Letter" . All enclosures listed on the "30-Day Letter" should be included.
If the taxpayer signs only the Form 4549-E "Partial Agreement" report but does not sign the report containing both agreed and unagreed issues, an explanation should be prepared of which items and amounts were agreed to by the taxpayer. This explanation should accompany the file to Mandatory Review Staff and should not to be sent to the taxpayer. The case should be closed as an "Unagreed" case as outlined above.
Attach Form 3198-A with an entry that the discrepancy adjustment is "Partially Agreed" .
Close the case to EP Mandatory Review as an "Unagreed" case in accordance with IRM 4.71.4.6.1.

4.71.4.9 (06-01-2007)
Relief from Joint & Several Liability

If a discrepancy adjustment involves a Form 1040 that was filed as a joint return , follow these procedures:
1. Research IDRS to confirm the current address for each spouse and update the Master File if the address has changed. For detailed procedures on locating taxpayers and what constitutes proper notice, see IRM 25.15, Relief from Joint and Several Liability.
2. Send a copy of the discrepancy adjustment report to each spouse, even if they live at the same address.
3. If IRC 6015 relief (innocent spouse relief) is inquired of by a taxpayer, include documentation on Form 5464, Case Chronology Record, that IRC 6015 relief was discussed. Note the taxpayer’s response, if any, regarding pursuit of this relief
4. If IRC 6015 relief is requested, refer this matter to EP Classification for appropriate routing along with Form 5666, TE/GE Referral Information Report.
5. If Form 8857, Request for Innocent Spouse Relief (or a statement that contains substantially the same information signed under penalty of perjury) is submitted, and the case is closed, date stamp the receipt date on the request and send the IRC 6015 relief request to:
  
  Internal Revenue Service, CSC
  
  Stop 829, Unit 11
  
  201 West Rivercenter Boulevard
  
  Covington, KY 41019.

4.71.4.10 (06-01-2007)
Claims

If a taxpayer files a formal claim with a Service Center on Forms 843, 1045, 1139, 1040X, or 1120X, while the income tax return is open on AIMS in EP , the Service Center will forward the claim to the EP agent for action.
On receiving a formal or informal claim directly from the Service Center, the EP agent should notify EP Classification of the receipt of the claim.
If EP retains jurisdiction over the claim and the discrepancy adjustment is open, the disposition of the claim must be explained in the "Other Information" box of Form 4549-E making no reference to "examinations" .
1. If the claim is fully or partially allowed, enter the claim description and amount on the appropriate adjustment line of Form 4549-E.
2. If a formal claim is fully or partially disallowed, the report will also contain Form 2297, Waiver of Statutory Notification of Claim Disallowance.
For additional information on claims see IRM 4.71.8.

4.71.4.11 (06-01-2007)
Installment Agreement Procedures

If the taxpayer is unable to pay the full amount owed, an installment agreement can be offered. Form 9465, Installment Agreement Request, may be sent to the taxpayer with the 30-Day Letter package.
Streamlined Installment Agreement procedures should be used where the amount is $25,000 or less. If the statute of limitations is imminent, a Form 872 should be secured to enable sufficient time to process the case. See IRM sections 4.20.4 and 5.14.5 for more information on installment agreements.
If the taxpayer has filed for bankruptcy, appropriate steps must be taken to protect the government’s interests. Coordination with the appropriate Examination Functional Unit may be required. Form 9439, Collectibility Evaluation , may be required when collectibility becomes an issue. See IRM 4.27 for further guidance on bankruptcy procedures.
The taxpayer will complete Form 433-D to enter into an installment agreement.

4.71.4.12 (06-01-2007)
Closing Procedures

All discrepancy adjustment cases will be closed utilizing the TE/GE Examined Closing Record, Form 5599. See Exhibit 4.71.4-5 for an example of Form 5599.
No closing letter is required to be prepared for either "Agreed Tax Change" cases or "Unagreed" cases.
A closing letter (Letter 2656) is only required when contact has been made with the taxpayer, and a determination has been made to close the case "No Change" .
The case file should be assembled in accordance with IRM 4.71.4.12.3 below.
The case should be updated to the proper status code on EPIC and AIMS before the case is closed from the group. For this purpose, the agent should prepare Form 5595.

4.71.4.12.1 (06-01-2007)
Completion of Form 5599

Form 5599, TE/GE Examined Closing Record, should be completed for all discrepancy adjustment cases worked.
Tax assessments, penalty assessments, and adjustments for prepayment credits related to discrepancy adjustments are made by ESS from the amounts that are listed by the agent in item 12 and item 15 of Form 5599. Therefore, the agent must be careful to input the correct amounts. See the guidance provided in the instructions for item 12 and item 15 in paragraph 4 of this section.
If the case is partially agreed, indicate in Part B (upper left portion of form) that the file is a partial agreement. Place a check mark in Box identified PartiaI = F. If partial agreement is secured, the file should be closed to EP Mandatory Review with the words "discrepancy adjustment — partial agreement" written in the remarks section of Form 3198-A.

Complete Form 5599 as follows:

ITEM	EXPLANATION
P7-18—TIN	Insert the EIN or SSN for the Taxpayer.
P21 - 22— MFT	Form 1040 = 30; Form 1120 = 02
P24 -29 — Tax Period	Insert the tax year being adjusted.
P31-34—Name Control	Insert the first four letters of the last name for Form 1040 or the first four letters of the name for Form 1120.
C—Name	Insert taxpayer's name (last name first for Form 1040).
02—Penalty Reason Code	No entry unless penalties previously assessed are being abated. See IRM 4.5.2, Exhibit 4.5.2-2 for applicable codes.
08—Agreement Date	Insert the date the signed Form 4549-E is received.
12—Tax Liability	Insert Code "300" and the amount of the increase in tax as shown on line 14 of Form 4549-E, OR Insert Code "301" and the amount of decrease in tax that resulted from the discrepancy adjustment.
12—Penalties	Insert Code "320" for civil fraud penalty and amount of penalty. Insert Code "160" for the amount of any delinquency penalty to be assessed on late filed returns Note: Accuracy related penalties should be reflected on item 15.
12—Interest	Leave blank. Interest will be computed and input by the closing unit.
13—Disposal Code	02 = No Change
	03 = Agreed Tax Change
	07 = Unagreed - Protest to Appeals
	10 = Unagreed - Without Protest
14— Statute Extended to	Insert current Statute of Limitations date if the statute has been extended.
15— Increase in Adjustment Dollars	Insert code "680" for accuracy related penalties being assessed under IRC 6662. Insert Code "806" to reflect tax withheld (i.e., on a distribution) but not previously claimed by the Taxpayer or credited to his/her account by the Service Center. This is the amount from line 15 of Form 4549-E (i.e., additional withholding).
15— Decrease in Adjustment Dollars	Insert Code "765" if reducing an earned income credit.
28— Examiner’s Time	Time can be entered in whole hours and in tenths of hours.
30— Technique Code	Applicable codes:
	1 = Office Interview Examination
	2 = Office Correspondence Examination
	4 = Field Examination
31— Examiner’s Grade	Enter applicable grade level.
32— Case Grade	Enter the grade of the case in the blocks from left to right as two digits
	Grade 9 = 09
	Grade 11 = 11
	Grade 12 = 12
	Grade 13 = 13
33— Examiner’s Name	Last, First
40— Project Code	Use same project code as used for Form 5500.
41a— No Change Issue Codes	Enter "99999999" for 1040 with Disposal Code "02" . Otherwise, no entry is required.
42— ARDI Code	An entry is required only if the disposal code is "03" . Leave blank if case is being closed "No Change" or is "Unagreed" .
	Applicable Codes:
	1— Fully Paid
	2— Not Paid
	3— Partially Paid
	4— Installment Agreement with payment
	5— Installment Agreement without payment
50— Employee Group Code	Enter the group number of the agent working the case.
701— Principal Issue Code	Use Code "27" in most cases. See Document 6476.

4.71.4.12.2 (06-01-2007)
Closing Letters

Letter 2656 serves as the closing letter in cases where the taxpayer’s response to the "30-Day Letter" results in the discrepancy adjustment issue being dropped. See Exhibit 4.71.4-6.
The "30-Day Letter" is the final letter on "Agreed" cases.

4.71.4.12.3 (06-01-2007)
Closed Case Assembly

A separate folder must be used for each taxpayer’s income tax return established on AIMS.
Label each folder with Taxpayer Name, EIN/SSN, Year and Return (Form 1040 or 1120).
Red folders should be used to identify cases with less that 210 days remaining on the statute of limitations.
For the case file assembly for the outside of the case file see IRM 4.71.4.12.3.1, below.
For the case file assembly for the inside of the case file, see IRM 4.71.4.12.3.2 and 4.71.4.12.3.3, below.

4.71.4.12.3.1 (06-01-2007)
Case Assembly - Outside of Case File

Staple the following Forms (as applicable) to the outside of the file folder from top to bottom, as follows:
1. Form 10329, Transmittal Sheet — Related Cases.
2. Form 895, Notice of Statute Expiration.
3. Form 3198-A, TE/GE Special Handling Notice.
Form 3198-A should be completed as follows:
1. Check the box for EP.
2. Complete the information related to the agent assigned the case in the "Required Entries" section - Person to Contact, Employee ID#, Phone #, POD, and Group.
3. Complete the information related to the case file in the "Required Entries" section - EIN/SSN, MFT, Year and Taxpayer's Name. Also mark any box that applies to the case.
4. In the "Required Entries" section under "Earliest Statute Date Is:" enter the statute date of the case to which the Form 3198-A is attached.
5. If the case is Unagreed, the case should be marked as Unagreed and subject to mandatory review in the "Mandatory Review" section of the form.
6. The case should be marked as a discrepancy adjustment in the "Special Features" section of the form.
7. If interest is being suspended in accordance with IRC 6404(g), in the "Other Instructions" section of Form 3198-A, include the following: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)."
8. Any other applicable part of the form must be completed.

4.71.4.12.3.2 (06-01-2007)
Case File Assembly - Inside Right of Case File

The inside right hand side of the case file folder should be organized from top to bottom (and clipped or rubber banded) as follows:
1. If the case is being sent from the group to EP Mandatory Review (or Special Review) or from EP Mandatory Review (or Special Review) to the group due to issuance of a Reviewer’s Memorandum, the Forms 5457 Response to Reviewer’s Memorandum — EP/EO and 5456 Reviewer’s Memorandum — EP/EO should be placed on the right hand side of the case file, loose and on top of all other items.
2. For "Agreed Tax Change" cases, a signed Form 4549-E. If interest is being suspended in accordance with IRC 6404(g) as described in IRM 4.71.4.4.6(3)a), the IRC 6404(g) notice date should be recorded in the "Other Information" section of the file copy of Form 4549-E. Suggested language is as follows: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)."
3. For "Unagreed" cases closed from the group to EP Mandatory Review, clip together a copy of the "30-Day Letter" , the Revenue Agent's Report (RAR), and Form 4549-E.
  
  Note:
  
  A copy of the RAR must also be included on a computer disk. The disk should be placed in an envelope and stapled to the left inside of the case file.
4. For all cases the following items should be clipped together in order as follows: Form 5599 with a current AMDISA print stapled to the front; Form 1040 or 1120 (or RTVUE or BRTVU print); Form 3244-A (if tax or penalty payment was received) stapled to the first page of the return; Form 2848 (if there is a POA) stapled face down to the back of the first page of the return; Form 872 or 872-H (if the statute of limitations was extended) stapled face down to the back of the last page of the return with the most current Form 872 or 872-H on top.
5. All workpapers rubber–banded or clipped together in the following order from top to bottom: Copy of the closing letter(s) (if applicable); Copy of the Revenue Agent Report (if the case is unagreed); Form 5772, EP Workpaper Summary; Form 5773, Workpaper Continuation Sheet; Form 5464, Case Chronology Record; Supplemental workpapers indexed to Form 5772; Copies of any referral forms (i.e. Forms 5666, 5346 or 4632); Copies of all correspondence between the IRS and the taxpayer in chronological order with the most current on top; Copy of Form 5597 if the return was established in the group; Prints for all IDRS research; Any miscellaneous items.