- 4.75.29.1 Overview
- 4.75.29.2 TEP Universe
- 4.75.29.3 Definition of a TEP Examination
- 4.75.29.4 Coordinated Team Examination Approach and Procedures
- 4.75.29.5 Development of the TEP Workplan
- 4.75.29.6 Classification and Identification of Potential TEP Exams
- 4.75.29.7 Approval of TEP Examinations
- 4.75.29.8 Survey of Assigned TEP Examinations
- 4.75.29.9 TEP Roles and Responsibilities
- 4.75.29.10 Program Planning
- 4.75.29.11 Primary Area Office Control
- 4.75.29.12 Support Area Activity
- 4.75.29.13 Group Rulings
- 4.75.29.14 Planning the TEP Examination
- 4.75.29.15 The Examination Plan
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The purpose of the Team Examination Program (TEP) is to provide an examination program designed to address the compliance issues of large and complex organizations under the jurisdiction of the Director, Exempt Organizations. Typically, the examination of a TEP case involves significant resources and planning, as well as complex technical and procedural matters. The TEP will allow for a tailored approach to meet the challenges of these examinations.
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Bright-line standards will be used as the primary identifiers of organizations included in the TEP universe. Organizations meeting one of the following bright-line standards are included in the TEP universe and are systemically identified:
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Form 990 Filers - Total Income or BOY assets or EOY assets > $100 million;
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Form 990PF & 5227 Filers - Income or EOY assets > $500 million.
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Organizations not meeting the bright-line standard may be manually identified and included in the TEP universe. This may include the following situations:
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Organizations, which meet the bright-line standards described above, but are not required to file a Form 990 or 990PF (i.e., state universities and churches.) There may not be sufficient information to identify a Church as a TEP taxpayer until the initiation of either the Church Tax Inquiry or an Approved Church Examination. At the earliest opportunity, the Group or Case Manager will make this determination; or
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Organizations that do not meet the bright-line standard, but the examination requires the extensive use of a coordinated team examination approach and procedures.
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Exhibit 4.75.29-1, TEP Case Identification Worksheet and Instructions, provides the procedures for recommending that an organization be manually included in the TEP universe. Exhibit 4.75.29-1 also provides procedures for manually excluding an organization that may have been included in the universe in error.
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A TEP Case Identification Specialist (CIS) will be assigned to maintain, refine, and update the potential TEP universe on an on-going basis. Opportunities and methods for further refinement of the universe will be an important aspect of the CIS's role. During the refinement process, if any reliable additional systemic indicators are identified, they will be applied to the universe to more precisely identify the universe.
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The following are TEP examinations that will involve TEP resources and should utilize a TEP project code:
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Any examination of an organization or return filed by an organization in the TEP universe, regardless of whether a coordinated team examination approach will be used to conduct the examination. This will include examinations of claims and limited scope examinations; and
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EO support examinations conducted in support of LMSB cases as the result of a referral or request from LMSB.
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It is presumed that a coordinated approach and team examination procedures will be used in every TEP examination, unless, in the judgment of the Case Manager, and with concurrence from the Area Manager, a team examination approach will not facilitate the examination. Exhibit 4.75.29-2, TEP Case Selection Worksheet and Workplan Information Schedule and Instructions, provides an opportunity for each Area to document its decision to not use a coordinated team examination approach on an examination.
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A team approach and team examination procedures will be utilized on any case requiring two or more agents or specialists, with a division of work assignments and the on-going coordination by a team leader
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On occasion, TEP cases may not require a team examination because either the scope of the examination has been significantly limited, or the case is simply not complex enough to benefit from a team approach. While excepted cases may not employ a team examination approach, the case managers may utilize those team examination procedures that would benefit the examination.
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Examination Planning and Programs (EPP) has overall responsibility for the development and monitoring of the Examination Workplan. The TEP Program Manager will collaborate with EPP in the development of the TEP portion of the planning process.
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Annually, TEP examination priorities will be established and serve as guidance in the use of, and application of TEP resources. TEP examinations identified by either market studies or compliance projects, will be incorporated into the TEP Workplan. Early coordination by study or project committees with EPP and the TEP Program Manager will be essential in developing TEP priorities and planning the use of resources.
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EPP will maintain a running Area TEP Workplan for each of the EO Area Offices, as a monitoring and planning tool, that reflects the approved examinations and resources planned for the current and subsequent fiscal years. The purposes of the running Area TEP Workplans are:
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To provide the Area Managers, EPP, Classification, and the TEP Program Manager with a current and accurate document that reflects the planned utilization of TEP resources; and
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To assist the Area Manager and TEP Manager in ensuring that resources will be utilized for priority case work.
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The running TEP Area Workplans will be developed and maintained by EPP as follows:
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EPP will add cases to an Area's Workplan as they are approved for examination (see Exhibit 4.75.29-2 for how examinations are approved) and revise the Area Workplan to address changing priorities or accommodate higher priority examinations;
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EPP will update and revise the information reflected for approved cases utilizing the Quarterly TEP Monitoring Reports submitted by the Area Offices;
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Annually, EPP will request that the Area Offices review the running TEP Area Workplan and identify any information that should be updated and corrected; and
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Quarterly, EPP will share a current running TEP Area Workplan with the Area Managers and TEP Program Manager. As needed, Area Managers may request an interim copy of the Area's Workplan from EPP.
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The identification of any TEP case for examination will be predicated upon either an identified potential noncompliance concern or, in the case of a market segment study or compliance project, the determination of the level of noncompliance. Classification will have overall responsibility for the independent classification and identification of TEP cases for examination, including cases from the following sources:
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Referrals from internal and external sources (including LMSB requests for EO support regardless of the size of the exempt organization.) This also includes follow-up examinations to ensure that an area of noncompliance identified in a prior examination has been corrected;
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Claims for refund; the merits or correctness of which, requires further review and/or examination; and
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The identification and classification of TEP returns or industries with noncompliance indicators that may merit examination (i.e., large, unusual, or questionable items.)
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Market Segment Studies and Compliance Project Committees may identify TEP taxpayers for examination as a part of a study or project. The TEP Case Identification Specialist (CIS) may be a resource to assist Committees in the identification of cases. The Committee will determine if any taxpayers identified for examination are TEP cases by consulting with the TEP CIS. For any TEP cases identified, the Committee will:
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Advise the TEP Program Manager as early as possible so that any identified cases can be considered in the development of the TEP Workplan; and
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Coordinate the assignment of any TEP examination through Classification.
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The compliance strategies and priorities will drive the selection of cases that will be examined. While potential TEP examinations may be identified from various sources, the decision to conduct the examination and the basis for the examination must be documented and approved, before the examination can be initiated and included in the TEP Workplan.
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The objectives and approval process will be to:
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Ensure that examination priorities are appropriately considered in the utilization of limited resources;
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Provide documentation, that will be archived by Classification, of the basis for the selection of an organization for examination; and
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Ensure that, where appropriate, a coordinated team examination approach is used to conduct an effective and efficient examination.
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A Case Selection Worksheet and Workplan Schedule will be used to document and approve the initiation of TEP examinations and to include approved examinations in the TEP Workplan.
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The Case Selection Worksheet and Workplan Schedule templates are in Exhibit 4.75.29-2, along with instructions on the completion of both. Exhibit 4.75.29-3, TEP Case Selection and Survey Process Overview, provides a flowchart of the steps involved in the processing of Case Selection Worksheets.
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The Worksheets and Workplan Schedules must be processed electronically and will be transmitted via email, using secured messaging.
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The Worksheets and Workplan Schedules will usually be initiated by the CIS in EPP and be emailed, via secured messaging, to the appropriate Group Manager, with a copy to the Area Manager and TEP Program Manager, as the case is being assigned to a group. In the event that a Worksheet and Workplan Schedule has not been pre-generated for a TEP case, the Group Manager will initiate the Worksheet and Workplan Schedule.
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Upon receipt of a Selection Worksheet and the associated casefile, the Group Manager must review the case and complete one of the two following actions:
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Within 45 days of receipt, submit a recommendation on Form 1900, Income Tax Survey After Assignment, to survey the case; or
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Within 90 days of receipt, submit a completed Worksheet and Workplan Schedule requesting approval to include the case in the Workplan and conduct the examination.
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The Group Manager should email, via secured messaging, the completed and signed Worksheet and Workplan Schedule to the Area Manager.
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Upon receipt of the Worksheet and Workplan Schedule, the Area Manager should consider the examination in light of existing priorities and resources within the Area. The Area Manager should discuss any resource or priority concerns with the TEP Program Manager. If the Area Manager concurs with the Group Manager's recommendation, he/she will indicate such on the Worksheet and email, via secured messaging. The Worksheet and Workplan Schedule will then be sent to the TEP Program Manager for approval.
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Upon receipt of the Worksheet and Workplan Schedule, the TEP Program Manager will assess the recommendation, considering examination priorities and resources.
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If approved, the Worksheet and Workplan Schedules will be distributed as follows:
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Copy to Area Manager to be shared with the Group Manager for inclusion in the workpapers and planning file;
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Copy to Examination Planning and Program (EPP) for inclusion of the case in the Area's Running TEP Workplan;
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Copy to EPP for the CIS to archive; and
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Copy to TEP Program Manager.
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If the TEP Program Manager does not believe the examination should be approved, he/she will discuss his/her concerns with the Area Manager. If, as a result, the Area Manager and TEP Program Manager agree that the examination should not be approved, the TEP Program Manager will indicate that the examination has not been approved on the Worksheet and distribute a copy to the Area Manager to be shared with the Group Manager for inclusion in the casefile.
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If the Area Manager and TEP Program Manager cannot reach agreement, the approval of the Case Selection Worksheet will be elevated to the Manager, Examination Programs and Review.
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The TEP Program Manager must approve a Form 1900 before an assigned TEP case may be surveyed and closed from the group. A Form 1900 recommending the survey of a TEP case must be emailed, by secured messaging, to the TEP Program Manager, within 45 days of assignment of the case to the group. Exhibit 4.75.29-3 provides a flowchart of steps involved in processing the Forms 1900.
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These procedures will not apply to a Form 1900 that involves the allowance of a claim or acceptance of a tentative allowance. In these situations, the Case Manager remains the approving official and a copy of the Form 1900 must be emailed, by secured messaging, to the TEP Program Manager, for informational purposes when the claim and/or tentative allowance is surveyed and closed from the group.
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Potential TEP examinations are identified from varying sources with varying examination priorities, including referrals, claims, compliance projects, and returns identified with large, unusual, or questionable items. Whenever a TEP case is assigned to a group, the Group Manager and Area Manager must consider all available resources in light of the existing examination priorities, as well as the merits and significance of the potential issues involved.
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If resource availability is the primary concern with respect to a case assigned to a group, the Case Manager and/or the Area Manager will consider the following alternatives before recommending that the case be surveyed:
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Are there planned lower priority TEP examinations that have not been started, and can either be delayed or surveyed to free resources for higher priority examinations;
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If the nature of the case will allow it, i.e., there is not a current statute of limitation concern or the issue is not one that must be addressed immediately, can the examination be planned for later in the fiscal year or for the next fiscal year;
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Is there another TEP group within the Area that has resources available to conduct the examinations; and
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Is the case of such significance that the Area Manager should consider either the use of general program resources to conduct the examination or the reassignment of the case to a TEP group in another Area?
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When a decision has been made to recommend the survey of an assigned TEP case, the following procedures will be utilized:
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The Case Manager will prepare the Form 1900, providing a complete and detailed explanation of the basis for the survey. If lack of resources is the basis, the Form 1900 must document the consideration of the alternatives described above;
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In submitting the Form 1900, the Case Manager will indicate his/her recommendation by signing and dating the "approved by" section of the Form 1900. The Form 1900 should be emailed, by secured messaging, to the Area Manager for review and concurrence.
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If the Area Manager concurs with the survey recommendation, he/she will annotate the Form 1900 in sufficient detail to describe the resource considerations and any other relevant information, and sign and date the annotation on the Form 1900. The Form 1900 should be emailed, by secured messaging, to the TEP Program Manager for approval.
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Upon receipt of the Form 1900, the TEP Program Manager will assess the recommendation, considering examination priorities and resources.
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If approved, the Form 1900 will be distributed as follows:
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Copy to the Area Manager, to be shared with the Group Manager for inclusion in the case file as the case is closed from the group;
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Copy to EPP for the CIS to archive; and
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Copy to TEP Program Manager.
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If the TEP Program Manager does not believe the examination should be surveyed, he/she will discuss his/her concerns with the Area Manager. If, as a result, the Area Manager and TEP Program Manager agree that the examination should not be surveyed, the TEP Program Manager will indicate that the survey has not been approved on the Form 1900 and distribute a copy to the Area Manager, to be shared with the Group Manager for inclusion in the case file.
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If the Area Manager and TEP Program Manager cannot reach agreement, the approval of the Form 1900 will be elevated to the Manager, Examination Programs and Review.
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The Area Manager is responsible for the general direction of the team examination program in the area office.
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The Case Manager is the supervisor responsible for organizing, motivating, controlling and directing experienced agents in TEP examinations, and for the TEP examination activities of specialist agents as well as the non-specialist agents assigned to the TEP case. The Specialist Manager participates in the responsibility of managing the activities of the specialists assigned to the TEP case, but the primary responsibility and financial concurrence still rest with the Case Manager.
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The Case Manager is involved in the management of each case. He or she is responsible for the:
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Scope and depth of the specific examination assignments to team members;
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Approval of the examination plan;
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Examination or survey of the primary organization's return;
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Examination, non-examination, or survey of returns of effectively controlled entities within the jurisdiction of EO Examinations;
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Prompt and proper disposition of problems and disagreements; and
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Requesting technical advice as early as practical in the examination of every case which warrants such action.
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The Team Coordinator is a team member who, in addition to being responsible for specific examination assignments, performs coordinating duties in planning and executing a team examination. During the examination, he or she is the focal point for communication. He or she works with the Case Manager:
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To prepare the pre-contact analysis;
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To participate in the pre-examination conference;
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To coordinate the overall plan and the report of examination; and
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To coordinate updating the planning and the administrative files.
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The team means EO revenue agents, plus specialist revenue agents, as needed, working on assigned portions of the case examination under the direction of a Case Manager.
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Specialist revenue agents include employee plans specialists, actuarial examiners, engineers, excise tax agents, international examiners, computer audit specialists, income tax revenue agents, economists, etc.
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The primary organization is the entity that is in the approved TEP universe.
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The planning file provides the Case Manager assigned to the next cycle with as much historical data about the organization as possible. See Exhibit 4.75.29-6.
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The term "organization" shall refer to any entity for which EO Examinations has examination responsibility.
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It is very important for the Area Office to initiate advanced planning of its respective Team examinations.
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When a team examination approach is utilized, the Case Manager is responsible for planning examination details. The depth of the Case Manager's involvement in planning the examination is the key to proper direction and control.
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Advance planning is vital to an effective and efficient team examination. Thus, precision in setting the general issue scope will be of benefit, not only in developing the annual examination plan for large cases, but also in deciding what matters should be discussed in agreements formulated at the pre-examination conference.
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Cycling for purposes of EO TEP cases that employ a team examination approach does not have the same definition as it does for LMSB coordinated industry (formerly CEP) cases. For EO examinations, a cycle usually includes the examination of at least two years, and possibly three. Upon completion of the initial cycle, as part of the post examination critique, the team and the Case Manager should make a recommendation regarding the next examination, including the year(s) to be examined and the scope of the examination. The next cycle will therefore occur when the next examination occurs.
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Area Offices should establish procedures to assure the cycling recommendations are followed.
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Prior to the examination, the Case Manager should assemble and review as much information as possible regarding the TEP taxpayer.
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When there has been a previous TEP examination, the planning file, Exhibit 4.75.29-6, Planning File, should be the best single source of information available to the Case Manager in planning the examination. Typically, it should include information such as:
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History of the taxpayer;
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Organizational structure, including current organization chart;
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History of reorganization(s) and acquisition(s);
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Identification of taxpayer's principal officials and representatives;
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Location of records and facilities;
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Description of records;
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Transactions potentially affecting subsequent year returns;
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Summary of examination adjustments by year and techniques used;
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Unusual examination problems;
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Chart of accounts and taxpayer's accounting manuals, if they can be obtained;
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Copies of rulings from the EO Rulings and Agreements' Office affecting the taxpayer;
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Copies of elections, contracts, and agreements having a significant bearing on subsequent years;
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Difficulties encountered during the prior examination such as public relations, facilities problems, etc.
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Support Area Office problems encountered, requirements and recommendations;
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Most recent examination plan;
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Record retention agreements;
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Post examination management critique;
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Print and electronic media information; and
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Existing potential offset issues which should be considered in the event that claims are subsequently filed.
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The planning file of a taxpayer acquired or merged into another TEP case is invaluable to the Case Manager. The file should be transferred to him or her as soon as possible. If this is not feasible because of an ongoing examination, pertinent portions essential to the preliminary analysis should be duplicated and sent to the Case Manager assigned the subsequent examination.
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The same procedure is applicable when primary Area Office responsibility shifts from one Area Office to another.
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The Case Manager should retain the planning file, as appropriate.
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Administrative file documents may be of assistance in preparing for the pre-examination conference as well as in the development of the examination plan. Review of prior examination workpapers is particularly important where there are carryover issues or adjustments from the last examination.
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The Case Manager should review all related returns to ascertain:
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The size and complexity of the case;
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Identity of persons authorized to sign the various returns;
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Dollar volume of items for the year to be examined with dollar volume of like items in prior years;
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Location of entities, operations and plants; and
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Questionable items in regular or reconciliation accounts.
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The Case Manager may wish to consult other sources such as:
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Trade associations;
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Print and electronically generated media reports;
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Organizational web sites (if available);
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Newspapers;
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Other governmental agencies, e.g., FEC, SEC, postal service, HHS, etc.;
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Other audits;
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Other Case Managers who have examined similar organizations; and
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Various specialists.
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Primary Area Office control is exercised through a Case Manager, except as provided elsewhere in this section.
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Once a case has been assigned to a Case Manager, he or she will initiate steps to assume control over all examination activities of all entities comprising the case.
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A principal benefit inuring to taxpayers from the Team Examination Program is the centralization of control over all examination activity by the primary Area Office.
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The Case Manager should obtain all the returns related to the TEP examination. The Case Manager may decide to establish the taxable entities on EO AIMS as discrepancy adjustments. In instances where the Case Manager cannot determine if a discrepancy adjustment is likely to exist, he or she should coordinate with LMSB, and SBSE to establish the returns on their respective AIMS systems.
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When a Case Manager decides a return will not be examined, he or she should consider whether it is necessary to notify others of the decision.
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Examination of the employment tax returns should be initiated as part of the TEP examination and will be under the control of the Case Manager.
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Examination of the trusts related to pension and profit sharing plans should be considered as part of the TEP examination.
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In instances where the Case Manager deems it appropriate, any Forms 1120 should be examined concurrently with the TEP examination.
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As part of the pre-audit process the Case Manager should request the assistance of LMSB and/or SBSE in examining any related Forms 1120. If LMSB and/or SBSE is unable to comply with the assistance request and the Case Manager determines that the examination of the Forms 1120 is necessary, the Area Office should explore the feasibility of having exempt organizations' personnel conduct the examination. Upper management should be involved to determine if LMSB and/or SBSE is an essential part of the examination; and if it is, to take the appropriate steps.
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The Case Manager could also consider handling the matter as a discrepancy adjustment, if that is appropriate.
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In instances where a specialist is provided, the specialist will function as part of the examination team. The Case Manager should involve the LMSB Group Manager in developing the plan.
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On a case by case basis, the Case Manager will determine whether it is necessary to examine returns of key corporate officers.
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Key corporate officers are officers who have control or authority over corporate activities or whose relationship with any segment of the case is close enough to significantly influence corporate management or tax results. Key corporate officers include the board chairman, chief executive officer, chief financial officer, officers in charge of subordinate operations, officers in charge of governmental activities, or any other officer with significant decision-making responsibility.
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When the Case Manager decides that the examination of a corporate officer's return is necessary, the appropriate request for assistance is made to W&I.
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If W&I is unable to comply with the assistance request and the Case Manager determines the examination of the Forms 1040 is necessary, the Area Manager should explore the feasibility of having exempt organizations' personnel conduct the examination.
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The Case Manager may also consider handling the matter as a discrepancy adjustment.
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Recommendations to transfer jurisdiction of a TEP case may originate with the primary Area Office, a potential transferee Area Office, or the Director, EO Examinations. Form 4791, Large Case Proposed Change in Primary District Identity, will be used to initiate a recommendation for transfer of primary Area Office responsibility.
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The recommendation to transfer a case should be submitted to the Director, EO Examinations, for concurrence by the receiving Area Office prior to the transfer.
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If all parties agree with the recommendation, a copy of completed Form 4791 will be forwarded to EPR, Attention: EPP - Case Identification Specialist; or
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If there is disagreement regarding the recommendation, the matter will be referred to EPR, Attention: EPP, Case Identification Specialist.
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Upon agreement to transfer a case, the transferor Area Office will forward to the transferee Area Office all available returns, open claims, pertinent documents, planning file data, and other relevant information.
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There may be instances of simultaneous control by two Area Offices resulting from a change in primary Area Office identity. The transferor Area Office will retain primary Area Office identity for those tax years which are still in process. During this transitional period, the transferor and transferee Area Offices should maintain close coordination to ensure uniformity in the resolution of issues and to facilitate the sharing of specialized knowledge. One method of effectively accomplishing this objective would be to have personnel from the proposed transferee Area Office assist as team members on an examination of the concluding tax years being conducted by the Area Office relinquishing control.
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Where a taxpayer is acquired or merged into a controlled case located in another primary Area Office, jurisdiction for open years prior to the date of acquisition or merger may move to the Area Office having jurisdiction over the acquiring or surviving corporation. Jurisdiction of open years may not change if the offices, records and tax liability remain in the original Area Office.
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An objective of TEP is to secure support Area Office assistance in each case whenever the objectives of this program warrant examination work in Area Offices other than the primary Area Office. Under this concept, the support agent's knowledge of local conditions is brought together with the Case Manager's knowledge of the overall case.
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Since the primary Area Office Case Manager is the Service employee responsible for the examination, his or her involvement and knowledge of the entire examination are essential to a streamlined TEP audit process. The support Area Manager should advise the primary Area Manager of concerns and/or problems as they arise. This interaction will reduce misunderstandings and the likelihood of resentments arising between the taxpayer, primary Area Office, and support Area Office that the geographic distance imposes on the communication process.
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The cases included in the TEP frequently have subsidiaries, divisions, branches and/or plants located in Area Offices other than the primary Area Office. Without the utilization of support agents, there is a tendency to conduct a relatively superficial examination of these segments using primary Area Office team members or to conduct no examination at all. This situation may create a "safe haven" where the taxpayer can conceal or otherwise obscure unusual transactions which, if known or suspected, would warrant examination.
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The basic principles behind the support Area Office concept are that all segments of a case should be examined occasionally and that local examination work should be performed by agents in the local Area Office. The tendency to use primary rather than support Area Office team members is contrary to the TEP objectives and may have counter productive results. To give effect to these principles, it is necessary to avoid several practices which may adversely affect the examination, such as:
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Shipping records from local office operations to the primary Area location, thereby eliminating the opportunity to observe local operations or to make inquiries of taxpayer's on-site personnel; and
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Accepting the taxpayer's statements that there are no local personnel available to service the information needs of the support agent(s).
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The effectiveness of a support examination bears a direct relationship to the degree of involvement by the Case Manager. Case Manager visits to the support site are encouraged as a means to:
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Obtain the support Area Office's continued commitment to a quality examination;
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Provide first hand knowledge about examination progress;
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Resolve major problems as they develop during the examination; and,
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Demonstrate the importance of the support Area Office activity as a viable part of the team concept.
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Factors which favor the use of support area office personnel include:
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Planned staff days to examine the entity are extensive;
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Examination requires use of personnel with local knowledge;
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Records required for examination are voluminous; and/or
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In-depth probes are planned.
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The Case Manager in various instances will find it more advantageous to send primary Area Office agents to other Area Offices to make on-site examinations or assist the support agent(s). Factors to be considered in this respect include the following conditions:
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Where data and records are fragmented between the primary Area Office and an out-of-Area Office subsidiary/division, the examination of which requires the participation by primary Area Office personnel for a minimal period of time;
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Where unusual accounting systems, closely integrated with the parent system, would require a possible support and primary Area Office team approach in conducting the on-site examination. Here, one of the primary Area Office team members would work with or assist the support agent(s) in the conduct of the out-of-Area Office examination; or
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Where the primary Area Office team has completed a significant portion of the examination on a particular subdivision at the primary Area Office and then needs to follow-up on specific areas at the out-of-Area Office subsidiary/division.
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Form 4485, LMSB Request for Assistance or Support Resources, normally will not contain complete details as to exactly what is needed.
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The support Area Office should assign the request to a supervisor or Case Manager to perfect. Such information would include:
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When and what to expect in the way of a plan from the Case Manager;
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What planning will be expected of the team member;
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Grade of agent and type of work to be performed;
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Location of work;
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Flexibility of starting or completion dates;
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Specialists or special skills needed; and
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Planned visits by Case Manager.
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Once the team member is designated, the support Area Office supervisor will arrange for direct communications between the Case Manager and team member.
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If a provision has been made in the communications agreement for support Area Office discussion of adjustments directly with the taxpayer, the support agent should first discuss them with the Case Manager so that a consistent approach to the issues will be presented to the taxpayer.
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Maintaining communications with the support Area Office will provide for a better examination. Some areas warranting follow-up are as follows:
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Periodic calls to the support Area Office to discuss progress of the examination plan and any changes in starting dates; and
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Visits to support Area Offices during the planning phase. In planning these visits refer to IRM 4.75.29.12.4 below.
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The Case Manager should be constantly aware of the need to keep the support Area Office currently advised regarding changes in time requested and planned starting dates.
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Any need for additional support Area Office time will follow the same procedures and approval as required for the original support request, Form 4485.
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In some instances, primary Area Office agents will travel to other Area Offices to conduct examinations. When such travel is planned, prior notification to the Area Manager of the Area Office being visited will be made. However, this special notification is not required under the following circumstances:
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Travel by specialists regularly serving an Area Office in their own area;
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Travel by agents from support Area Office(s) to primary Area Office at the request of the primary Area Office; and
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Travel by Case Manager or team members to other Area Offices for planning or coordinating purposes.
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Some Area Offices require prior notice of certain travel because of specific management needs or for program monitoring purposes. Where such requirements exist, they should be observed.
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When working in an Area Office other than his or her own, the team member should keep in mind that he or she is theoretically under the jurisdiction and authority of the local Area Manager. The traveling team member should be informed of the local Area Manager's practices and procedures and should be responsive to them.
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The practice of support Area Office participation has almost eliminated the need for collateral examinations in TEP cases. However, collateral work may still be in order for certain situations such as, work of short duration, work that does not require the examination of books and records, and/or work that calls for little independent judgment or conclusions. For example, a collateral examination would be justified where:
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An interview is required to get specific information for the Case Manager including sworn testimony and affidavit;
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A document is to be obtained;
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A transcript of an account or a listing of invoices is needed; or
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A summons needs to be served.
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Requests for collateral examinations should be routed through appropriate Area Managers.
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An Area Office may include a group ruling as part of their team examination program.
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The Area Office having primary control over a group ruling should notify by memorandum any other Area Office that has examination jurisdiction over subordinate entities of group rulings, when the primary Area Office has included a group ruling in their Team Examination Program (TEP). At that time the primary Area Office may specify any restrictions on the examination of subordinate entities.
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The Area Offices having examination jurisdiction over subordinate entities of a group ruling should notify the primary Area Office if they discover any issues which may have a nationwide impact. This will allow the primary Area Office to develop, in conjunction with the Director, EO Examinations, any necessary nationwide coordination.
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Nothing in the above procedures should be interpreted as affecting an Area Office's ability to examine subordinate entities, absent a specific request by the primary Area Office.
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Should Area Offices disagree over restrictions on the examination of subordinate entities, the matter should be referred to the Director, EO Examinations. Should the Area Offices be unable to agree with the Director, EO Examinations, the matter should be referred to the Director, Exempt Organizations.
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Case Managers should view the planning process as their single most important activity. The Team Coordinator will take an active role in assisting the Case Manager in developing the case plan.
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Planning an examination is very often a painstaking and time-consuming process, particularly in view of the many variables and unknowns that are part of every TEP examination.
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Audit or issue priorities should be established through a process, which compares the potential benefits to be derived from examining an audit area to the resources required to perform the examination. This process, referred to as "risk analysis" , is an integral part of the planning process to ensure efficient and effective use of resources. Some factors to be considered are:
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Compliance considerations;
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Adjustment potential;
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Potential impact on future years;
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Historical examination data;
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Industry issues, practices, and trends;
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Appeals and litigation considerations;
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Financial condition of the company;
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Taxpayer's systems and controls; and
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Resources.
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Risk analysis is a subjective process; it is based on experience, judgement and objective analysis. Therefore, the risk analysis process should be periodically revisited and updated.
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Each TEP case has its own peculiarities in systems, historical evidence of compliance, internal controls and industry practices. Therefore, planning the examination should be directed toward creating a written plan, tailored to the special circumstances of each taxpayer. Additionally, Case Managers should consider other matters such as the prevailing economic factors during the years to be examined, issues common to the particular industry or issue areas common to the taxpayer's business operations. The taxpayer is uniquely situated to give the Case Manager and any appropriate team members information and training on industry practices, trends and prevailing economic factors.
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A three-stage planning process, as outlined in IRM 4.75.29.14.3 through IRM 4.75.29.14.5 below, should be followed in most examinations.
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It is especially important to bring the Computer Audit Specialist (CAS) into the planning process as early as possible. See IRM 4.47.1, Computer Audit Specialist Program Handbook. By doing so, the CAS may provide some excellent planning tools, i.e., comparative financial statements, stratification of accounts, etc. The Area Office should follow the automated Specialist Referral System (SRS) for requesting all non-EO specialists.
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The Technical Advisor must be contacted in all identified industry cases and other TEP cases having the business activity of the identified industry, so that the Technical Advisor may provide helpful information relative to a particular industry. This will include:
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Identification of unique industry issues and coordinated issues;
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Economic conditions in the industry;
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Description of accounting or business practices peculiar to the industry;
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Suggested audit procedures; and
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Computer programs which may have potential application.
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A Technical Advisor will not be personally present and assist in every examination plan. In cases where the Technical Advisor cannot participate in the planning meetings and decisions, alternative means of involvement should be adopted.
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The TEP examination planning process should:
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Include appropriate taxpayer and Service personnel;
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Promote a mutual understanding of the taxpayer's systems and the Service's processes;
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Best utilize each party's resources; and
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Generate quality examinations in a timely manner.
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To achieve such an objective the TEP planning process must be flexible, ongoing and consider the concepts described below.
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Mutual Cooperation and Benefits - The examination should be approached in the spirit of mutual cooperation. This can be achieved if:
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Each party understands at the beginning of the process each other's priorities, resources, and available time frames;
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Steps are taken to mutually apply resources to ensure the minimum of "down time" for the taxpayer, as well as the Service; and
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The specialists and experts of the taxpayer and of the Service are matched and their work is scheduled to mutual benefit.
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Open and Candid Communication - Planning with the taxpayer encourages open and candid communication between the parties. This can be achieved if both parties understand the examination will be conducted to minimize its impact on their resources. Delineating a clearly defined line of communication between the examination team and the Organization's representatives should be established for purposes of preventing disclosure issues.
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Communications - Forthright communications throughout the entire planning process should include:
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A discussion of the potential issue areas which will be pursued to avoid surprises presented late in the examination, e.g., new issues, claims, and technical advice requests;
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Clarification on the use and role of specialists on the examination team;
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A discussion of the advisory role of Area Counsel;
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A discussion of efforts to achieve currency in the examination process;
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A discussion of any potential penalties as they arise;
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Problems associated with the examination of proprietary information, trade secrets, and similar items;
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Commitments, by both parties, to share all information necessary to bring the examination to a quick and successful conclusion. Neither the report of examination nor the protest should be the vehicle to transmit new facts on an issue; and
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Planning for an ongoing mutual critique process of the taxpayer and the Service.
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Mutual Understanding of Processes and Procedures - Early in the planning process, the taxpayer and the Service should agree to develop an understanding of each other's processes and procedures. This will include a study of the taxpayer's accounting system, commercial framework, tax return preparation methodology, industry practices, language and terminology, and IRS audit procedures. The taxpayer should provide the necessary orientations, presentations and training regarding industry techniques, problems, and economic factors which impact on the tax considerations of the company.
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Early Coordination - For the expeditious conclusion of an examination, both parties should recognize the importance of a commitment to, and reaching an understanding with regard to:
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Resolving any questions regarding the content of Information Document Requests (IDR), Form 4564;
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Response times for IDRs, which should be negotiated with the taxpayers with consideration for issue priority and the difficulty in securing the information;
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The need for periodic meetings to review progress and emerging problems in the administration of the examination plan;
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The need for flexibility and ongoing planning;
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Coordination of the examination of off-site records and facilities, e.g., support examinations, travel requirements and scheduling;
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The use of Service and taxpayer resources, such as working hours, office space and equipment, computer time, libraries and tax workpapers; and
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The need for examiners to timely communicate new potential issue areas identified during the course of the examination to the taxpayer.
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Negotiated Items - Initial joint planning sessions with the taxpayer should include negotiations regarding the following items:
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Procedures for obtaining the returns of related parties without the use of IDRs, e.g., shareholders, corporate officers and partnerships;
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Existence and presentation of taxpayer documentation of items which the taxpayer feels might reduce the tax liability;
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Specific time frame for the submission and honoring of IDRs, Forms 5701, Notice of Proposed Adjustment, and receipt of reports of examination;
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Such remedial procedures as may become necessary including discussions with top level officials, summons and the use of IRC 982 procedures;
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Use of, and access to, taxpayer's facilities, personnel, and equipment;
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What the taxpayer will do to support the Service's examination, e.g., carryover computations, and reconciliations; and
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Procedures for obtaining statute extensions.
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Issue Resolution - The planning process should include a discussion directed toward resolving issues at the lowest possible level. This concept involves taxpayers and examiners working together to pursue all methods and means appropriate to resolve issues. For example:
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Early submission of Technical Advice Requests;
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Requests for legislative changes to clarify the law or resolve tax inequities;
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Development of regulations, revenue rulings or procedures; and
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Resolution of an issue through the current filing year, with the agreement of the taxpayer.
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The size and complexity of team examination cases require workpapers be standardized to a greater degree than other examinations. An agent's workpapers are subject to review by the Team Coordinator, Case Manager, EO Special Review staff, Appeals SBSE-TEGE, Area Counsel, and possibly a Joint Committee reviewer, and more importantly, the informal review by other agents who must rely on existing workpapers as they examine related entities and resolve related issues. Workpapers indexed in a uniform manner will permit efficient research.
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Use of the EO Standard Audit Index Number (ESAIN) system is required on all team examination cases except where the Case Manager approves deviation. The ESAIN represents a compilation that is analogous to a " chart of accounts" within the accounting profession. However, for the EO specialists, the chart of accounts may mirror the primary items main categories, shown on the Form 5772, EO Workpaper Summary. The EO specialists are free to use the ESAIN as illustrated in Exhibits 4.75.29-4, ESAIN for EO Team Examinations, and 4.75.29-5, Alternative Sample ESAIN for EO Team Examinations, or a derivative thereof. Further, the ESAIN can be expanded to allow the specialists to identify additional audit areas utilizing the general scheme illustrated in the exhibits.
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Footer - The bottom right hand corner of each workpaper and any folded papers will be marked in a manner so the following information is visible without unfolding papers:
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Paper Number;
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Total Pages; and
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ESAIN.
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Cover Page - Form 5606, Workpapers Cover Sheet, or suitable alternative, will be prepared as a summary of all workpapers. It will be placed on top of the complete set of workpapers.
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Lead Page - Form 4764-B, Large Case Examination Plan, will be prepared for each ESAIN account examined. This form will serve as a summary of workpapers for each ESAIN account and will be numbered as page 1.
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Numbering - Workpapers will be numbered consecutively for each ESAIN. Form 4764-B will always be page 1. Total number of pages will always be shown on Form 4764-B and Form 5606.
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Indexing - ESAIN is designed to be a flexible indexing system providing the uniformity required in EO team examination cases. Each ESAIN consists of a minimum of three digits. Please refer to Exhibits 4.75.29-4 and 4.75.29-5 for an illustration of the applicable ESAIN numbers.
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Size - Standard size government issue lined and unlined paper and 7 column and 13 column pads should be used. Thirteen column papers will be folded to be uniform with the 7-column paper. Any copies provided by the taxpayer may be used regardless of size.
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Heading - Each workpaper will be headed with the following information:
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Name of Primary Case;
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Entity Being Examined;
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Years Covered by Workpaper;
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Source of Information;
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Team Member's Initials; and
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Date Prepared.
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Pre-contact analysis is a study of available information to tentatively establish the scope and depth of the examination, which includes a review of all related returns, any historical information, the administrative file, and consultation with specialist supervisors. It is recorded in the form of a general outline of observations regarding size, dispersion, and diversification of the case; probable examination expertise and staffing requirements; and matters to be discussed or clarified at the pre-examination conference. When supplemented by information gained at the pre-examination conference, it will form the basis for construction of the examination plan.
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The Case Manager should become thoroughly familiar with the organization's operations by reviewing the following documents to determine staffing requirements, specialists needed and the general approach to the examination:
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Returns;
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Prior RAR's including specialists' reports;
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Historical information and/or planning file;
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Administrative file;
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Any computer generated analyses, if available;
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Reports made to other government agencies, if available;
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Any pertinent media coverage, such as newspaper articles, books, magazine articles, radio or television broadcasts; and
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Other data pertinent to the current examination cycle.
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Upon completion of this preliminary review the Case Manager will identify the following:
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Those audit areas which should take priority in the examination;
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The overall scope and approach to the examination;
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The specialists and nonspecialists needed for the team; and
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An initial estimate of time.
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The Case Manager will provide all Specialist Managers who will be involved in the examination
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The date, time and place of planning meeting(s);
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The scheduled starting date of the examination; and
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A description of data available for review.
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All Specialist Managers who will be involved in the examination will provide the Case Manager with a written narrative which includes:
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A list identifying each issue area recommended for inclusion in the examination plan;
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A description of the audit procedures to be performed; and
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An estimate of the time necessary to complete this portion of the examination.
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A meeting or meetings involving the Case Manager, Team Coordinator and team members should then be held to discuss the Case Manager's review and specialist's recommendations and to decide those audit areas which will be included in the examination plan.
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This phase can be best described as preliminary audit work involving the pre-examination conference, review of corporate minutes, and an overview of the organization's accounting system. The results should serve as a basis for:
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Identifying the procedures necessary to examine the organization;
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Identifying unusual items or issues not apparent during the pre-contact analysis in stage one; and
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Modifying decisions reached during the pre-contact analysis.
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In seeking commitments from the organization in the pre-examination conference, the Case Manager should make certain that the individual he or she is dealing with has the authority to provide information and enter into agreements regarding examination procedures. Therefore, the Case Manager should obtain the names and titles of those who will attend the conference for the organization. If the listing does not include officials authorized to make commitments, the Case Manager should explain why their presence is needed and request that they be invited. At a minimum, the Case Manager and Team Coordinator should attend the pre-examination conference. If appropriate, the Computer Audit Specialist and any other specialists should attend the meeting.
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The Case Manager is responsible for making all arrangements authorizing discussion and exchange of information between team members and taxpayer personnel of the principal organization and entities over which the taxpayer has control. The pre-examination conference is the proper time to make these arrangements, the results of which should be documented in the "Taxpayer Information Section" of the examination plan.
Note:
Refer to IRM 11.3,2, Disclosure to Persons with a Material Interest.
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The pre-examination conference is the first formal meeting with authorized employees or corporate officers of the taxpayer. The main purpose of the meeting is to reach an agreement on coordination and accommodations and to discuss the scope and depth of the examination, including the following:
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From the Case Manager's viewpoint, the purpose of the conference is to obtain agreements and reach understandings with the taxpayer, which will permit the best utilization of Service personnel; and
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From the taxpayer's viewpoint, the purpose of the conference is to reach agreements with the Case Manager so the examination causes the least possible impact on the taxpayer's resources and operations.
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Commitments made by the Case Manager regarding team activities should be realistic and every effort should be made to honor them.
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The pre-examination conference should accomplish the following:
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Verification of the organization's size, dispersion, any and all related entities, and diversification;
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Tour of local facilities, if desirable;
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Address where books and records are maintained;
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A thorough discussion of the accounting system, including verification of compliance with Rev. Proc. 98-25, 1998-1 C.B. 689 and/or any existing record retention agreements See IRM 4.47.2, CAS Technical and Procedural Information;
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A discussion of independent management authority delegated to divisions, subsidiaries, plan administrators, and others;
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Arrangements for review of return workpapers, audit reports, and other information to be available at start of examination;
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Arrangement for flow of communications from Case Manager and team to organization and vice versa;
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To the extent possible, arrangements for when and where each team member will begin work;
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Agreements as to accommodations for the team including such items as locked file cabinets, desks, chairs, telephone and office machines;
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Agreement that issues will be raised, discussed and resolved as the examination progresses;
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Agreement the organization will prepare its protest to identified unagreed issues during the course of the examination;
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Agreement to identify the need for an early submission of technical advice request;
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Confirm implementation of agreements reached during the previous examination; and
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Agreement regarding security of IRS and organization documents maintained on the organization's premises during the examination.
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The Case Manager should ensure:
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The communications agreement identifies those individuals of the organization who are authorized to furnish information to team members and those with whom issues may be discussed;
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Organization personnel designated to furnish information to team members are those best qualified to give complete first hand information; and
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The roles of Case Manager, Team Coordinator and team members are fully explained. This should include information as to who has authority to secure information and discuss issues.
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Shortly after concluding the pre-examination conference, the Case Manager will summarize, in writing, all pertinent information developed and agreements reached. The taxpayer information section of the examination plan will be used for this purpose. Form 4764 may be used for the examination plan.
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A copy of the taxpayer information section should be furnished to the organization. The Case Manager should deliver this document personally since it will provide an opportunity to:
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Review the document with the organization;
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Again point out the examination plan is subject to change when necessary; and
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Solicit the organization's signature as an acknowledgment of receipt and the agreements and information are correctly stated. In the event the organization declines to sign, the Case Manager should document delivery of the plan and the fact that its accuracy was orally acknowledged.
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The Case Manager should, at this point, make specific assignments to each of the team members. Each member should be given a written set of instructions identifying what is expected of him or her and the specific areas of responsibility. Form 4764 may be used for this purpose. It should also be made clear to all of the team members that the instructions are a guide and are flexible.
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After completing this preliminary examination work, the Team Coordinator, team members and any requested specialists will submit the following to the Case Manager:
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A list of specific areas to be examined;
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Proposed audit procedures to be used for each area; and
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A time estimate for each specific area.
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The proposed procedures and time estimates are subject to the approval of the Case Manager.
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The examination plan usually contains three sections, each serving distinctly different purposes, but each complementing the other two sections. Form 4764 or Form 4764-A may be used.
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The first section, Taxpayer Information Section, is devoted to management information that can be furnished to the organization. Information contained in this section should be of such content that it will aid and assist the organization in preparing to accommodate the needs of the examiners, e.g., space, equipment, files, and records. This section contains the overall plan of examination. A copy is furnished to the organization.
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The second section, Service Management Information Section, should contain the Case Manager's instructions to team members and information of a general management nature. It is not intended for and would be of little use to the organization. However, a copy of this section may be furnished to the organization upon their request.
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The third section, Examination Procedures Section, contains each team member's assignment and plan for the procedures to be used in accomplishing the assignment. It is not intended for use by the organization.
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The examination plan is not a static tool. Successful Case Managers revise and reschedule throughout the examination to take advantage of the additional information and feedback obtained. The Case Manager has final responsibility for deciding if the change is justified. All changes to examination procedures will be documented.
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This section includes the following:
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Name of organization;
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Years to be examined;
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Names of Case Manager, Team Coordinator, team members, and official telephone number of Case Manager;
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Communication agreement for records requests, issue discussion and closing conferences;
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Broad scope of the examination for each year, e.g., entities, subsidiaries, activities and plans to be included;
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Broad description of team member's individual assignments with schedule beginning dates and estimated completion dates;
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Schedule of participants at the pre-examination conference;
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List of records to be made available specifying dates, locations, and methods of request;
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Other pertinent matters agreed to at the pre-examination conference; and
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Notice to organization that the plan is general and will be modified as required to meet examination needs.
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This section contains the following information:
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A brief description of the organizational structure and summary of organizational acquisitions, mergers, or terminations. This should include information regarding location of exempt and business activities, types of plans maintained, exempt functions, and location of books and records;
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A list of all entities and plans of the organization and for entities and plans not to be examined, an explanation for non-examination;
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Instructions to team members regarding: workpapers, e.g., size and format; indexing of workpapers and final reports; procedures for requesting information from the organization including routing of information document requests; procedures for requesting conferences with organization; development of examination procedures, raising issues, and preparation of the reports; and procedures for monitoring time;
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Information regarding practices and issues common to this type of organization;
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Information regarding special examination features, e.g., the requirements of Rev. Proc. 75-50, 1975-2 C.B. 587 concerning examination of private schools; and
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Examination assignments for each team member with an estimate of staff days for completion of assignment.
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