In 1997, Campus Examination Operations actively began working the Revenue Protection Strategy.

IRM 4.19.14, Liability Determination, Refundable Credits Strategy, contains information on examination procedures relative to refundable credits, including the Earned Income Tax Credit (EITC) and Non-EITC programs.

This IRM is used by Taxpayer Services (TS) and Small Business Self-Employed (SB/SE) Campus Examination to review and process taxpayers’ correspondence received in response to examination notices. Other IRM sections will be referenced throughout this IRM to provide specific guidance for individual topics. Examination employees are responsible for researching and utilizing information contained in all reference materials. Legal citations, form and letter references, and IRM references are reviewed and updated as necessary.

IRC 32: Earned Income Tax Credit

IRC 24: Child Tax Credit/Additional Child Tax Credit/ Credit for Other Dependents

IRC 25A: American Opportunity and Lifetime Learning Credits

IRC 23: Adoption Expenses

IRC 36B: Premium Tax Credit

IRC 21: Child and Dependent Care Credit

IRC 34: Certain Uses of Gasoline and Special Fuels

Various sections of the Protecting Americans from Tax Hikes Act of 2015 (PATH), Public Law 114-113. See IRM 4.19.14.2.2, Protecting Americans from Tax Hikes Act 2015 (PATH).

Policy Statement 1-236: Fairness and Integrity in Enforcement Selection. See IRM 1.2.1.2.36.

Disaster Tax Relief and Airport and Airway Extension Act 2017. See IRM 4.19.14.2.3, Disaster Tax Relief and Airport and Airway Extension Act 2017.

Tax Cuts and Jobs Act of 2017 (TCJA). See IRM 4.19.14.2.4, Tax Cuts and Jobs Act of 2017 (TCJA), for more information.

Families First Coronavirus Response Act (FFCRA). Authorized paid sick and family leave credits for eligible self-employed individuals. See IRM 4.19.14.2.5, Families First Coronavirus Response Act (FFCRA), for more information.

Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES ACT). This Act created IRC 6428, establishing the Recovery Rebate Credit for individuals for tax year 2020. See IRM 4.19.14.2.6, Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), for more information.

The American Rescue Plan Act of 2021 (ARPA). See IRM 4.19.14.2.7, The American Rescue Plan Act of 2021 (ARPA), for more information.

Inflation Reduction Act of 2022. See IRM 4.19.14.2.8, Inflation Reduction Act of 2022.

Director, TS Return Integrity & Compliance Services (RICS).

Director, SB/SE Campus Examination Operations.

Director, RICS, Refundable Credits Program Management.

Manager, Exam Policy and Coordination.

Headquarter Analysts in both TS and SB/SE provide campus guidance on workload selection and delivery-related issues.

The Refundable Credit Examination audit inventory is primarily selected systemically using risk-based scoring criteria. TS’s Refundable Credit Program Management (RCPM) headquarters staff has primary responsibility for developing and maintaining these criteria. They also have primary responsibility for developing the TS Examination work plan, which outlines the volumes and timeframes of audits initiated based on the available scored returns and resources. The work plan is meant to be used as a guide only and may be adjusted as warranted based on resource limitations and legislative changes. TS Refundable Credits Examination Operations (RCEO) and SB/SE Campus Operations employees conduct audits.

Acronyms used in Exam are listed below:

A listing of acronyms can also be found on the Acronyms Database.

IRM sections containing helpful information on refundable credits programs:

The Taxpayer Bill of Rights (TBOR) lists rights already existing in the tax code, explaining them in plain language and grouping them into ten fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. For additional information about TBOR, see IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights, Pub 5170, Taxpayer Bill of Rights (Brochure), and on the Taxpayer Advocate website.

The Patient Protection and Affordable Care Act (known by the short title Affordable Care Act (ACA)) increased the adoption expense credit for adoption assistance programs and made the credit fully refundable in the year it was claimed. Effective TY 2012, the Adoption Credit became a nonrefundable credit. The Adoption Credit was nonrefundable for most years but was refundable in 2010 and 2011. See IRM 4.19.15.5, Adoption Credit and Qualified Adoption Expenses (QAE), for additional information on Adoption Credit procedures.

The Patient Protection and Affordable Care Act (ACA) provides low to moderate income Americans with the ability to obtain the Premium Tax Credit (PTC) to pay for health insurance purchased on federal or state health care marketplaces. The IRS helps administer this program by providing tax and family size information to the marketplaces to estimate the amount of allowable PTC, and by requiring taxpayers to calculate and claim the correct amount of PTC on their annual tax return.

The Advance Premium Tax Credit (APTC) is an amount paid to an insurer on behalf of the taxpayer to assist in paying part or all of the premiums for health insurance coverage obtained through the Marketplace. Eligibility for APTC is determined by the Marketplace and is based on the taxpayer’s estimate of their yearly earnings at the time of enrollment. Taxpayers can receive the PTC in two ways:

Regardless of the method chosen to receive the credit, individuals must file a tax return to reconcile the credit. Any individuals who receive the benefit of advance payments of PTC to their insurer must also correctly report this amount on their return. The allowable PTC will be recalculated based on information reported on the tax return and Form 8962, Premium Tax Credit (PTC). If the actual allowable PTC is more than APTC, the difference is refunded to the taxpayer. Some taxpayers may have to repay some or all of the advance payment of PTC. The American Rescue Plan Act of 2021 (ARPA) suspends the requirement to repay excess APTC for tax year 2020. See IRM 4.19.15.41, Premium Tax Credit - IRC 36B, for additional information on PTC procedures.

This subsection covers the various tax law changes impacting refundable credits:

Qualified individuals whose earned income in 2017 is less than the earned income in 2016 may elect to use their 2016 earned income when figuring EITC. The taxpayer must have lived in the designated disaster area when the disaster occurred. See IRM 21.6.3.4.2.7.4(6), Earned Income Tax Credit (EITC) - Earned Income.

This subsection contains provisions of the tax reform legislation related to correspondence examination. It applies to the tax years beginning after December 31, 2017, and before January 1, 2026.

The Families First Coronavirus Response Act (FFCRA), enacted March 18, 2020, authorized paid sick and family leave. Sections 7002 and 7004 of the FFCRA are the Self-Employed Sick and Family Leave Credit (SFLC/SE) provisions. These sections allow refundable sick and family leave equivalent credits for an eligible self-employed individual based on the individual's average daily self-employment income (an amount equal to the net earnings from self-employment for the taxable year or prior taxable year divided by 260) and the number of days during the taxable year that an individual is unable to perform services as a self-employed individual due to certain reasons related to COVID-19. The applicable dates for FFCRA are April 1, 2020, through December 31, 2020. The credits provided by the FFCRA are separate and distinct from those provided by the American Rescue Plan Act (ARPA). Among other differences, ARPA made changes with respect to paid leave definitions, credit amounts, and credit limits.

An eligible self-employed individual is defined as an individual who regularly carries on any trade or business within the meaning of section 1402 of the Internal Revenue Code, and would be eligible to receive qualified sick leave wages or qualified family leave wages under the Emergency Paid Sick Leave Act (EPSLA) or Emergency Family and Medical Leave Expansion Act (Expanded FMLA) if the individual were an employee of an Eligible Employer (other than themselves/the self-employed individual) that is subject to the requirements of the EPSLA or Expanded FMLA. Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”

An individual regularly carries on a trade or business for the purpose of being an eligible self-employed individual for the qualified sick leave equivalent credit and/or the qualified family leave equivalent credit if they carry on a trade or business within the meaning of Internal Revenue Code (IRC) 1402, or is a partner in a partnership carrying on a trade or business within the meaning of IRC 1402. IRC 1402(c) defines trade or business and includes exceptions to this standard for purposes of IRC 1402.

A self-employed individual may receive both qualified sick and family leave equivalents and qualified sick and family leave wages. If a self-employed individual is entitled to a refundable credit for the qualified sick or family leave equivalent amounts and also receives the qualified sick or family leave wages as an employee, the equivalent amounts are reduced (but not below zero) to the extent that the sum of the equivalents and wages do not exceed a certain amount described in the FFCRA.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted March 27, 2020. The CARES Act created IRC 6428, entitled 2020 Recovery Rebates for Individuals. The Recovery Rebate Credit (RRC) is a refundable credit allowed against tax for tax year 2020. The RRC can be advanced to taxpayers during 2020. The advance payment of the RRC is referred to as an Economic Impact Payment (EIP).

The IRS began issuing the first Economic Impact Payments on April 10, 2020. Qualifying individuals are eligible for a payment amount of up to $1,200 ($2,400 for Married filing joint). There is an additional payment of up to $500 for each qualifying child. The EIP is subject to Adjusted Gross Income (AGI) limitations.

Individuals’ eligibility for the EIP was based on a posted tax year 2019 return (including through the Non-Filers Tool) or 2018 return, if 2019 was not filed. For taxpayers who had not filed a 2019 or 2018 return, eligibility was based on:

IRC 6428 requires written notification to taxpayers not later than 15 days after payment issuance. Notice 1444, Economic Impact Payment 2020, was created to inform taxpayers about the CARES Act and the amount of payment they received or should have received.

The IRS began issuing the second Economic Impact Payments in December 2020. Qualifying individuals are eligible for a payment of up to $600 ($1,200 for Married filing joint). There is an additional payment of up to $600 for each qualifying child. The second EIP is also subject to AGI limitations.

Individuals’ eligibility for the second EIP was based on a posted tax year 2019 return (including returns filed through the Non-Filers tool on irs.gov by November 21, 2020). For taxpayers who had not filed a 2019 return, eligibility was based on:

Notice 1444-B, Your Second Economic Impact Payment, informs taxpayers about the amount of the second EIP they were issued.

The first and second Economic Impact Payments are posted to the taxpayer’s 2020 module.

Taxpayers can claim the Recovery Rebate Credit on their tax year 2020 return. If taxpayers received less Economic Impact Payments than they were entitled, the remaining credit will be allowed on the tax year 2020 return.

For more specific EIP and RRC information regarding eligibility, tax module indications, and refund inquiries, refer to IRM 21.6.3.4.2.13, Economic Impact Payments (EIP). and IRM 21.6.3.4.2.14, Recovery Rebate Credit (RRC).

The American Rescue Plan Act (ARPA) was enacted on March 11, 2021.

This subsection also contains provisions of COVID-19 recovery legislation related to correspondence examination. It applies to tax year 2021 beginning after December 31, 2020, and before January 1, 2022.

Title IX, Subtitle G specifically outlines changes to refundable credits.

Unemployment Compensation Exclusion (UCE) - The ARPA allows the taxpayer to exclude $10,200 (if MFJ - $10,200 per spouse is allowed) of unemployment compensation from income for tax year 2020. For taxpayers who filed their TY 2020 returns, and included Unemployment Compensation, accounts were corrected systemically through internal recovery efforts.

The Inflation Reduction Act of 2022 extended the Premium Tax Credit modifications made by Section 9661 through 2025. See IRM 4.19.14.2.7.6, Premium Tax Credit (PTC).

Cases must move to the next status based on established time frames. See IRM 4.19.13.2.4, Standard Suspense Periods for Correspondence Examination, for applicable EITC time frames. The chart below explains the letter and AIMS status update process:

The following table is for use with the EITC Qualifying Children (QC). See Exhibit 4.19.14-1, Examples of Acceptable Documentation for EITC claims (not all-inclusive), for the types of documentation needed to establish the relationship or residence of a qualifying child. In addition, the examiner should consider all documentation submitted, even if it is not listed and use their judgment when considering the weight of the evidence to determine eligibility for the credit.

Complete Master File research of all TIN’s listed on DDBOL.

There are templates located on irs.gov on the Letter or audit for EITC site, which the taxpayer can use to secure the correct information requested from the school, healthcare provider or childcare provider to verify the qualifying child’s residency to claim the EITC. The templates must be pasted on the organization’s letterhead.

Beginning with tax year 2021 and subsequent tax years, a taxpayer may be allowed self only EITC with children who would be EITC qualifying children (QC), except they do not have a valid SSN for the EITC.

Prior to tax year 2021, all EITC qualifying children must also have a valid SSN, for a taxpayer to be eligible for the EITC.

Taxpayers must meet the following requirements.

If the taxpayer is married filing a joint return, either taxpayer must meet the applicable age requirement at the end of the tax year. It does not matter which spouse meets the age test, as long as one of the spouses does.

See IRM 21.6.3.4.2.7.1.1, Earned Income Tax Credit (EITC) - Taxpayer with No Qualifying Child or Children.

The Form 1040 Schedule C , Profit or Loss from Business (Sole Proprietorship), is used to report business income and expenses.

The purpose of the correspondence examination is to determine whether the taxpayer has substantiated they are engaged in a business when the facts and circumstances of the case are considered.

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When the taxpayer is being examined for the profit or loss reported on Schedule C, Form 11652, Questionnaire and Supporting Documentation Form 1040 Schedule C (Profit or Loss from Business), will be sent as an enclosure with the CP 75 or Letter 566-S, Initial Contact Letter.

Examiners should use Form 11652 as a guide to manage the outcome of the Schedule C examination when considering the response received to the examination query letter.

Form 11652 assists the taxpayer with substantiating their Schedule C business. Descriptive information is requested for the business that is not required to be reported on the Schedule C. This information includes:

The taxpayer is requested to select or fill-in the type of business records that are created, received, and/or maintained for income and expenses on the Form 11652. The record types listed include:

Form 1099-K, Payment Card and Third Party Network Transactions, may be issued to some Schedule C taxpayers if they received payments by a payment card. Payment cards include credit, debit, and gift cards. There is no reporting threshold for payment card transactions.

The taxpayer is instructed to send in the records they selected or indicated they maintained on Form 11652. For example, taxpayers may submit Form(s) 1099, receipts from suppliers, invoices to customers, mileage logs, or bank account statements.

If the taxpayer fails to provide any documentation to substantiate the business or to support information they provided on Form 11652, but indicates business records exist, ask the taxpayer to submit these records for verification. If the taxpayer indicates records have been lost or destroyed, inform the taxpayer that they are allowed to re-create records for the examination, which includes but is not limited to, requesting replacement records from banks, suppliers, or payers.

It should be noted that a business license alone would NOT substantiate Self Employment (SE) income. The taxpayer would have to provide additional records noted above to validate the Schedule C.

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An ordinary expense is one that is common and accepted in the business. A necessary expense is one that is helpful and appropriate for the business.

Throughout the Schedule C examination, examiners should use judgment based on substantiation received and taxpayer statements, to limit or expand the examination scope. Refer to IRM 4.19.13.3.1, Standard 1 - Adequate Consideration of Significant Issues.

Refer taxpayers to Pub 334, Tax Guide for Small Business (For Individuals who Use Schedule C), and Pub 583, Starting a Business and Keeping Records, for additional information. The taxpayer may also reference the Small Business and Self-Employed Tax Center on irs.gov.

The following guidelines are used to determine if the taxpayer’s activity qualifies as a business:

Follow the procedures for working responses to Schedule C Classifier identified issue(s).

If documentation is received that substantiates the business after the issuance of the Statutory Notice of Deficiency (SNOD) and the case is open, process the case as outlined below:

If the taxpayer responds with request to remove Schedule C income and Schedule C income is not an issue on the original examination, process the case as outlined below:

If the taxpayer responds with a request to remove Schedule C income on a Claim, process the case as outlined below:

If documentation is received that substantiates the business on Reconsideration, process the case as outlined below:

If the taxpayer responds with a request to remove income on Reconsideration and the Schedule C was not an issue on the original examination, process the case as outlined below:

Following are guidelines to determine if the taxpayer qualifies for "Single" filing status:

Following are guidelines to determine if the taxpayer qualified for "Married Filing Jointly" filing status:

Following are guidelines to determine if the taxpayer qualifies for "Head of Household (HOH)" filing status:

Following are guidelines to determine if the taxpayer qualifies for the "Qualifying Surviving Spouse with Dependent Child" filing status.

Additional information regarding filing status can be found in Pub 501, Dependents, Standard Deductions, and Filing Information, Pub 519, U.S. Tax Guide for Aliens, and Pub 555, Community Property.

Prior to tax year 2021, taxpayers whose filing status is married filing separate or deemed to be married filing separate are not entitled to EITC with or without Qualifying Child(ren). See IRM 4.19.13, General Case Development and Resolution, for Audit Reconsideration procedures.

Beginning with tax year 2021, married taxpayers who do not file a joint return (i.e., MFS or HOH and considered unmarried) may qualify for the EITC if they meet the following criteria:

The Tax Cuts and Job Act (TCJA) amended IRC 151, Allowance of Deductions for Personal Exemptions, and is effective for tax years 2018 through 2025. Section 11041 of the TCJA suspended the deduction for personal exemptions by reducing the amount of the deduction to zero for tax years 2018 through 2025.

The requirements for claiming dependents prior to tax year 2009, can be found in Pub 501, Dependents, Standard Deduction, and Filing Information.

For requirements to claim dependents for tax year 2009 and subsequent, see below. The tax examiner can consider other supporting documentation not in the list below and should exercise judgment and use internal research when verifying documents sent in by the taxpayer.

IRC 152 defines a dependent as a qualifying child (QC) or a qualifying relative (QR). There are five dependency tests that apply to determine whether an individual is a QR. The tests for determining whether an individual is a QC are different. An individual that is a QC of any taxpayer cannot be a QR of a taxpayer. The definition of a qualifying child is also relevant for determining whether a taxpayer may claim Head of Household (HOH) filing status, the Child Tax Credits, Child and Dependent Care Credit, and the Earned Income Tax Credit.

See the table below for the QC dependent eligibility requirements.

See the table below for the QR dependent eligibility requirements.

Additional information regarding Personal Exemptions and Dependents can be found in Pub 501 and Pub 17, Your Federal Income Tax (For Individuals).

When dependents are disallowed, consider all related credits.

There is a Special rule for children of divorced or separated parents. This rule also applies to parents who never married. The custodial parent is the parent having custody for the greater part of the calendar year. The noncustodial parent is the parent who is not the custodial parent.

A child may be treated as the QC of the noncustodial parent for purposes of claiming the QC as a dependent, and for the child tax credit, the additional child tax credit, and the credit for other dependents (but not the EITC, dependent care credit, or HOH), if all of the following applies:

The following tests must also be met for the noncustodial parent to claim the child as a dependent:

Additionally, a married filing joint status is allowed for the taxpayer and their spouse if they meet the following requirements.

See IRM 4.19.13.30, Campus Exam Closing Actions.

For tax year (TY) 2020, a taxpayer can elect to use their TY 2019 earned income (PYEI) to calculate the Earned Income Credit or Additional Child Tax Credit if their TY 2019 earned income is more than their TY 2020 earned income. The taxpayer can apply the election to either credit or both credits, even if they did not have earned income for the current year.

For tax year (TY) 2021, a taxpayer can elect to use their TY 2019 earned income (PYEI) to calculate the Earned Income Credit if their TY 2019 earned income is more than their TY 2021 earned income. The taxpayer can make the election even if they did not have earned income for the current year.

Examiners should verify the taxpayer’s reported 2019 earned income on the current year’s return, by reviewing the TY 2019 tax return using CC TRDBV, CC RTVUE or the Employee User Portal (EUP), and if necessary, obtain the amended TY 2019 return. Examiners can use CC TXMOD to view changes to the tax return. See IRM 21.6.3.4.2.7.4, Earned Income Tax Credit (EITC) - Earned Income, to assist with the earned income determination.

The following reports allow the sites to identify pre-refund cases where the refund was held with a TC 810 and may have been processed incorrectly. Examiners will follow these procedures for correct resolution of the cases.

The reports are to be worked within fourteen days of posting to Control "D" to ensure that taxpayer refunds are issued timely. The reports are important because they detect taxpayer refunds held for excessive periods or detect EITC Recertification indicators not released timely.

The reports should be annotated to reflect the status of the cases, and necessary actions taken as outlined below. The reports follow the monthly AIMS reporting cycle, but do not generate a report in January. The annotated reports should be retained for six months.

The sites are required to send a summary confirmation via e-mail detailing the results or trends for each report to their respective TS Headquarter (HQ) Analyst.

In addition, HQ may randomly ask the sites to provide copies of the annotated reports.

The following table explains procedures which should be followed for working the EITC Reports numbers 1, 2, 3, 4 and 5.

The 2-year ban applies when it is determined that a taxpayer recklessly or intentionally disregarded the EITC, CTC/ACTC/refundable CTC/ODC or AOTC rules and regulations when claiming the credit(s), the credit(s) are denied in a statutory notice of deficiency, and the deficiency is assessed. The 2-year ban should be considered by the technician on every EITC, CTC/ACTC/refundable CTC/ODC or AOTC deficiency case. The CET must consider a variety of facts when determining whether the 2-year ban should be imposed. A taxpayer’s failure to respond adequately or not respond at all does not in itself indicate that the taxpayer recklessly or intentionally disregarded the rules and regulations.

Upon receipt of correspondence from the taxpayer, the CET must do the following,

If the 2-year ban will not be asserted for the applicable credits, the CET must provide the reason for the decision to not assert the ban for each credit on Form 4700, Examination Workpapers.

If the 2-year ban will be asserted for the applicable credits, the CET must clearly provide the reason for the decision to assert the ban for each credit on Form 4700. The CET must also clearly provide the reason for assertion of the 2-year ban on Form 886-A, Explanation of Items.

Prior to communicating the ban to the taxpayer or taking steps in RGS to assert the ban, the CET must request supervisory approval to assert the ban. See IRM 4.19.13.7.1.1, Supervisory Approval of Bans.

The supervisor must review the entire case file and ensure the following:

Once approval is received from the supervisor, the CET will do the following:

The systemic 2-year CTC/ACTC/refundable CTC ban cases are identified with Tracking Code (TC) 6693. When TC 6693 is present, Automated Correspondence Exam (ACE) will insert RGS paragraph 7312 on the CTC issue and systemically set Items 51, 52, or 53 on Form 5344 to set reason code 182 and the CTC/ACTC/refundable CTC 2-year ban at closing.

When the case closes and the ban is being imposed, Master File will mail CP 79A to the taxpayer explaining that the 2-year ban was applied and what they need to do in the future.

Recertification indicators to identify the 2/10 year bans are found on IDRS CC ENMOD and IMFOLE.

The following table provides a starting point to help determine if the 2-year ban is appropriate. All decisions must be made on the facts and circumstances of the case. This table is not all-inclusive.

The 10-year ban applies when it is determined that a taxpayer fraudulently claimed EITC, or for tax years after 2015, fraudulently claimed the EITC, CTC/ACTC/refundable CTC/ODC or AOTC, the credit(s) are denied in a statutory notice of deficiency, and the deficiency is assessed. See IRM 25.1, Fraud Handbook, and IRM 4.19.10.3, Fraud Development and Referrals, for procedures.

The 10-year ban should be considered when the technician identifies a return which has indicators of fraud. If the Manager/Team Leader concurs, the tax examiner will initiate a Form 13549, Campus Fraud Lead Sheet, (signed by the manager) for each tax year and refer the case to the Functional Fraud Coordinator (FFC) or Campus Fraud Coordinator/Exam Fraud Coordinator (EFC) for further evaluation. Some examples of fraud indicators may include:

If the FFC or CFC/EFC determines there is no fraud potential, the FFC or CFC/EFC will return the case through the manager annotating the reason for rejection within 21 days. However, the manager and tax examiner should consider asserting the 2-year ban if it applies on the returned case.

The TS Fraud program is centralized in Austin, and the SB/SE Fraud program is centralized in Brookhaven.

The 10-year ban is set when the following posts to Master File:

When the case closes and the ban is imposed, Master File will mail a CP 79B to the taxpayer explaining to the taxpayer that the 10-year ban was applied and what they need to do in the future.

Initial Criteria

Filters

Beginning with tax year 2018, TS Correspondence Exam will accept Form 14086, Qualifying Children Residency Statement - Third Party Affidavit, as an option for project codes (PC) 1031 and 1032, allowing taxpayers to verify the residency of qualifying children that have been claimed for EITC.

The taxpayer can submit Form 14086 instead of the documents listed on Form 886-H-EIC to verify the residency requirements for each child the taxpayer claims on their return for EITC. The taxpayer is not required to use Form 14086.

PC 1031 is used for post-refund audits. PC 1032 is used for pre-refund audits.

The Filer Bridge is used to issue the initial contact letter, Letter 566-S, and Form 14086.

All fields on Form 14086 must be completed fully. If Form 14086 is incomplete, it will not be accepted.

Documents must be for the same year under examination.

Below are possible reasons for rejecting Form 14086 (not all inclusive):

Use the Exam Project Code Search tool when answering taxpayer calls regarding PC 1031 and PC 1032.

DDB identifies potentially non-compliant taxpayers claiming Premium Tax Credit (PTC) for compliance treatments. The programming determines the appropriate treatment for returns identified, either Automated Questionable Credit (AQC) processing, Exam audit or non-treatment. Returns are identified in pre-refund environment to ensure revenue protection. The programming has ACE/Batch integration to provide data on the error conditions to aid with report writing capabilities. Additional functionalities include storing data on rule breaks for scored and selected returns, developing and retrieving reports through Business Objects, and populating data in CC DLITE on the PTC error codes.

Error Codes

These are the PTC Flags.

CC DLITE uses the DDB FAST (Filing Analysis Summary Table) which houses a consolidated view of taxpayer data and all filters fired across DDB compliance Projects. DLITE entered without a tax period provides a summary screen. DLITE entered with a tax period provides an at-a-glance view of many aspects of the taxpayer’s tax return and project scoring details. See IRM 2.3.85, Command Code DFAST and DLITE. DDB FAST is loaded nightly; CC DLITE will be current the following morning.

Using CC DLITE, the tax examiners will be able to access DDB for the Classification Viewer Sheet.

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The table below provides a description of each Non-EITC DDB rule that will be displayed on IDRS using Command Code DLITE.

The Pick-up Program consists of returns selected for audit because the prior year audit is still open at the time the subsequent return is filed. DDB systemically selects the subsequent return for audit when filed, if the prior audit is still open at the time of filing, and the return fires a DDB rule. Refer to IRM 4.19.14.4, Program Description, for a list of the specific project codes.

The examination is a full-scope audit and includes the disallowance of all dependents claimed on the return and any other tax credits and benefits claimed that are attributable to the dependent, such as Child Tax Credit, Child and Dependent Care Credit, Education Credit or Head of Household filing status.

The tax examiner must perform research on the prior year audit. A review of the prior year workpapers/audit information helps the tax examiner to identify which child(ren) was disallowed previously and if they are the same child(ren) claimed on the Pick-up return. Similarly, knowing whether the prior year return was adjusted due to lack of documentation, no response, or undeliverable assists the tax examiner with how to conduct the examination. The review of the prior year workpapers and CEAS notes can affect the determination made in the year under examination.

The Electronic Fraud Detection System (EFDS) will systemically send weekly files to DDB to filter cases and open selected Exam cases on AIMS and push files to RGS/CEAS.

For the automated project codes 0173, 0584, and 1304, DDB will also send a file to systemically generate the CP 75D/75A notice as the initial contact letter (ICL).

All other QRP project codes require the manual preparation/issuance of the ICL. Filer Bridge may be used to generate the ICL for TS cases.

DDB will send a reject file back to EFDS weekly. A TC 971 AC 136 will be posted on the account of all L freeze rejects (TC 42X). The TC 971 AC 136 will cause the case to reject out of Batch to consider incorporating additional issues. See IRM 4.19.14.9.7, EFDS Referral/Open Exam, procedures for further instructions.

Dependents, Filing Status, Health Coverage Tax Credit (HCTC), and American Opportunity Tax Credit (AOTC) may be additional examination issues on QRP cases. See IRM 4.19.14.2, Tax Law Changes, for tax law changes to refundable credits. See IRM 4.19.15.29, Health Coverage Tax Credit – IRC 35, for more information on HCTC and IRM 4.19.15.3.1, American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit, for more information on AOTC.

All statutory adjustments apply when adjusting dependents or income.

Source codes identify a type of case, and the Project Code identifies the examination issues.

Cases identified as Adoption Credit cases should identify this credit as an exam issue and include the Form 886-H as an enclosure with applicable letters and reports. The Adoption Credit should be disallowed in full, pending receipt of supporting documentation outlined on the Form 886-H. Procedures for making a determination on Adoption Credit are outlined under IRM 4.19.15.5, Adoption Credit and Qualified Adoption Expenses (QAE).

EITC and Non-EITC QRP cases are full scope audits including the Filing Status, and if present, Education Credit/American Opportunity Credit (AOTC), Premium Tax Credit (PTC) and/or Additional Child Tax Credit (ACTC).

Procedures apply to EITC and Non-EITC cases unless specified. Enclosures are based on examination issues as outlined in the table below.

Several Project Codes (PC) have miscellaneous issues that can be by themselves or in combination with other credits. An asterisk indicates the enclosure is only included when it is identified as an exam issue on the case in question. No asterisk indicates it is always an enclosure for this PC, as the exam issues are consistent.

PC 0611 requires additional information to identify all examination issues included on the ICL. Wages claimed on the return can be found using RTVUE. Verified wages and withholding can be determined using the amounts found on IRPTR.

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After ICL mail out, all QRP project codes should follow existing RPS examination process letters and time frames as outlined under IRM 4.19.13.2.4, Standard Suspense Periods for Correspondence Examination, for issuing the ICL, 30 day Letter 525 and Letter 3219, Statutory Notice of Deficiency.

Cases requiring manually prepared ICL, Letter 525 and first exam report should be introduced to RGS Batch for Aging and Closing as soon as possible.

Taxpayers with more than one tax year open (multi-year) should be bundled together and move through the examination process and AIMS status update as one package.

Refer to IRM 4.19.14.9.2, QRP Source Code and Project Codes, for additional information on identifying exam issues.

PC 0584, PC 0390, PC 0611, PC 1009, PC 1082, and PC 1303 will be full scope EITC audits and PC 0263, PC 1107, PC 1162, PC 1166, and PC 1322 will be full scope Non-EITC audits to include, AOTC and Education credits, HCTC, dependent(s) and filing status.

The following is an insert paragraph for the Form 886-A for the QRP issues not addressed on Form 886-H-EIC and Form 886-L, Form 886-H-DEP, Form 14824 or Form 886-H-HOH, and Form 886-H-AOC.