This IRM provides an overview of the responsibilities that examiners should understand and apply in the performance of their duties in executing discrepancy adjustment compliance activities.

TE/GE established the discrepancy adjustment program to reduce the number of income tax referrals to LB&I and SB/SE for minor adjustments to income.

Discrepancy adjustments applied using these procedures aren’t an examination or inspection of the taxpayer’s books and records per IRC 7605(b).

The discrepancy adjustment program allows TE/GE examiners to adjust certain line items on related income tax returns for issues they find in TE/GE examinations. Discrepancy adjustments are prepared for income tax adjustments to:

Discrepancy adjustments fall within the scope of Rev. Proc. 2005-32, IRB 2005-23 1206.

Discrepancy adjustments fall within the scope of Rev. Proc. 2005-32. Discrepancy adjustments do not constitute examinations, inspections, or re- openings under IRC 7605(b). See Policy Statement 4-3, IRM 1.21.5.1(4) and IRM 1.21.5.1(5), Policy Statement 4-3, Cases closed by District Directors or Service Center Directors will not be reopened except under certain circumstances.

Examinations are conducted according to Policy Statement 1-236 (IRM 1.21.2.36), Fairness and Integrity in Enforcement Selection, and the Taxpayer Bill of Rights per IRC 7803(a)(3). The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see Taxpayer Bill of Rights.

Under Policy Statement 4-117 (IRM 1.2.1.5.34), examiners and managers:

IRC 6201 Assessment Authority, which falls under Chapter 63 - Assessment.

The Directors, EO/GE and EP, are the executives responsible for providing policy and guidance for field employees and ensuring consistent application of policy, procedures and tax law to effect tax administration while protecting taxpayers’ rights. See IRM 1.1.23, Tax Exempt and Government Entities Division, for additional information.

The Directors, EO Examinations, GE, and EP Examinations report to the Directors, EO/GE and EP respectively, and are responsible for the delivery of policy and guidance that impacts the field examination process. See IRM 1.1.23, Tax Exempt and Government Entities Division, for additional information.

All examiners must perform their professional responsibilities in a way that supports the IRS Mission. This requires examiners to provide top quality service and to apply the law with integrity and fairness to all.

Examiners and their managers should thoroughly acquaint themselves with the examination procedures and information contained in this IRM, as well as other resources.

Two review groups make sure examiners conduct compliance activities per technical, procedural, and administrative requirements:

In order to ensure consistent level of managerial engagement in the process of making key strategic decisions during an exam, the examiner submits requests for approval by their manager through RCCMS.

The IRS is fully committed to protecting the privacy rights of taxpayers and employees.

This manual uses the following acronyms and references the following forms.

TE/GE established the discrepancy adjustment program to reduce the number of income tax referrals to LB&I and SB/SE for minor adjustments to income.

) Discrepancy adjustments applied using these procedures aren’t an examination or inspection of the taxpayer’s books and records per IRC 7605(b).

The discrepancy adjustment program allows TE/GE examiners to adjust certain line items on related income tax returns for issues they find in TE/GE examinations. Discrepancy adjustments are prepared for income tax adjustments to

Discrepancy adjustments fall within the scope of Rev. Proc. 2005-32, IRB 2005-23 1206.

The following are examples (not considered all inclusive) of TE/GE issues that can result in discrepancy adjustments:

The following are examples of EP issues that can result in discrepancy adjustments:

The following are examples of EO issues that can result in discrepancy adjustments:

When you determine a possible discrepancy adjustment exists, research IDRS.

Get an AMDISA print to determine if an EFU established a Form 1040 or 1120 return on AIMS.

Get and review BMFOLT (Form 1120) or IMFOLT (Form 1040) transcripts for each affected income tax return to determine whether the:

Get and review the following IDRS prints to analyze the return:

Save all IDRS research in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention.

Get your manager’s approval before starting a discrepancy adjustment and document concurrence on the case chronology.

If a discrepancy adjustment is warranted, establish the tax return on AIMS through RCCMS by following the steps of IRM 4.70.15.4.2.1, Establishing Form 1040 or IRM 4.70.15.4.2.2, Establishing Form 1120.

You must ensure the statute of limitations date on any Form 1040 or 1120 is correct and protected as necessary. Secure consents to extend the statute as needed.

Verify that the correct statute of limitations date is shown on RCCMS and AIMS.

The filing of Form 1040 starts the income tax statute for IRC 72(t), 10 percent additional tax on early distributions (Form 5329, Part I and Part II), but not the excise tax imposed under IRC 4973 and IRC 4974. The filing of Form 5329 either attached to the Form 1040 or filed separately, starts the excise tax statute for the tax line item for which an entry has been made. The filing of Form 5329 for a specified period on which an entry has been made with respect to IRC 4973 or IRC 4974 (including a return on which an entry has been made showing no liability for such tax for such period) shall constitute the filing of a return for all tax amounts required to be reported for the tax period.

When the statute of limitations is 270 days or less, as indicated by a red exclamation point (!) in RCCMS, complete the RCCMS Statute Validation Process:

You may propose adjustments on returns with short statutes if the adjustments are significant.

You may accept Form 872 by efax or email if you have contacted the taxpayer by phone or in-person and the case chronology:

Document the case chronology for all the actions you took to verify and update the statute.

Add discrepancy adjustment returns on WebETS when you establish the returns on RCCMS and AIMS.

Charge any nominal time spent on the discrepancy issue before you establish the related return on RCCMS and AIMS.

Use the appropriate activity code, which depends on the type of return to which the adjustment applies. See Document 6476 (EP) or Document 6379 (EO), or Document 11308 (GE) for the list of Activity Codes.

Verify the AIMS generated activity code within RCCMS and ensure it agrees with the activity code used on WebETS before you close the case.

Use the same project code as that on the related examination. If no other code is warranted, use "0000" .

For EP, don’t use a plan indicator on WebETS for the discrepancy adjustment case.

IRM 4.70.11.3.1, Case Suspension for Federally Declared Disaster, or Terrorist or Military Action, should be considered before issuing a discrepancy adjustment package.

When possible, mask the first five digits of a taxpayer's SSN on letters, forms, notices, workpapers and emails.

Use Form 4549-E to communicate the discrepancy adjustment to the taxpayer and to request taxpayer agreement with the proposed discrepancy adjustment. Type in the Form 4549-E (ITG) "Other Information" section on page two the following comments:

The discrepancy adjustment package includes:

Prepare Form 4549-E as the basic report form for discrepancy adjustments. Include the following comments in the “Other Information” section on page two:

Use Form 886-A for your write-up of the issues. Organize the report as follows:

Address penalties and interest in both the work papers and the Form 886-A. See IRM 4.70.15.4.6 Penalties and IRM 4.70.15.4.7 Interest.

Mail the discrepancy adjustment package to the taxpayer by Certified Mail at the "last known address" .

If the discrepancy adjustment is for a joint return:

If a Form 5500 unagreed revocation has corresponding discrepancy adjustments, you issue the 30-day letters for both the discrepancy adjustment and the proposed revocation at the same time.

Update AIMS and RCCMS to status code 13 after you issue Letter 3605.

Determine whether to propose the assessment of penalties on the discrepancy adjustments. Include a brief discussion in the work papers on which penalties apply, whether you are proposing them, a computation of the penalty, as well as a statement as to whether reasonable cause or First Time Abate (FTA) applies or was considered. See IRM 20.1, Penalty Handbook for a discussion of penalties.

Managerial approval is required (in writing) before certain penalties can be assessed. See IRC 6751(b)(1).

When you impose penalties on a Form 1040 or Form 1120 discrepancy adjustment:

Every notice IRS sends to an individual that includes an amount of interest due must also include both, a:

If the IRS doesn’t provide a notice to the taxpayer who has timely filed their tax return, specifically stating the taxpayer’s liability within a "specified period of time" , the IRS must suspend the interest. (See IRC 6404(g)). The "specified period of time" is 36 months for notices provided after November 25, 2007. (See 26 CFR 301.6404-4(a)).

Suspension of interest under IRC 6404(g):

IRC 6404(g) does not apply to:

For timely filed Forms 1040 covered by the 36-month notification deadline, interest will be suspended beginning on the day after the close of the 36-month period and ends 21 days after the notice is provided. “Notice” is considered to be made when the 30-Day letter package is mailed. The suspension period begins 36 months after the later of (1) the date on which the return is timely filed, or (2) the due date of the return without regard to extensions.

IRC 6404(g) applies only if the “30-day letter” package (or similar notice) is mailed to the taxpayer after the specified period has expired.

If IRC 6404(g) applies, interest should be calculated on Form 4549-E (ITG) or Form 4549-T (TEB) from the original due date of the Form 1040 return through the 36 month period.

If IRC 6404(g) does apply and interest is being suspended:

If IRC 6404(g) does not apply, interest should be calculated on Form 4549-E (ITG) or Form 4549-T (TEB) from the original due date of the return through 30 days after issuing the 30-day letter. In the "Other Instructions" section of the RCCMS 3198-A checksheet and in the "Other Information" section of Form 4549-E (ITG) or Form 4549-T (TEB), include the following: "IRC 6404(g) does not apply" .

If the taxpayer submits information that changes the discrepancy amount or penalties (but doesn’t eliminate it):

If the taxpayer submits information that doesn’t change the original report:

If you and your manager determine that IRS needs to inspect the books and records in more detail to resolve an income tax issue, refer the case to the appropriate EFU. See IRM 4.70.15.2, Referrals to an Examination Functional Unit (EFU).

If the 30-day Letter is returned as undeliverable, try to get the correct address.

If the taxpayer disagrees with the proposed adjustments, inform the taxpayer of their:

Encourage a taxpayer who doesn’t agree with the proposed adjustment to file a valid written protest for the case to go to Appeals.

If there’s less than one year on the statute of limitations, request a statute extension on Form 872. See IRM 4.70.12.3.8.10, Securing Consents for Form 1040 and Form 1120, for special instructions.

If the taxpayer files a protest to Appeals, see IRM 4.70.15.7.1.1, Protest to Appeals.

If the formal written protest doesn’t comply with the requirements in Pub 5, you may, with managerial approval return the protest to the taxpayer and grant them additional time to perfect the protest.

If the taxpayer doesn’t submit a valid protest, close the case to Mandatory Review to issue a 90-day letter.

If the protest is valid and changes the report, but doesn’t eliminate the income tax adjustment, mail a revised report to the taxpayer. For EP, examiner will issue the revised report and create an individually designed cover letter giving the taxpayer an additional 15 days. For EO, mail the revised report (e.g. Form 4549-E) with Letter 3619, EO 30-Day Letter for Discrepancy Adjustment - Revised Proposed Adjustments.

When closing a discrepancy adjustment to Appeals, save the final RAR and all supporting documentation for the discrepancy adjustment (e.g., loan documents and taxpayer generated documents) in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention. Use RCCMS subfolders to organize document groupings when warranted.

Follow these steps to save RGS file and upload to the RCCMS Office Documents folder:

To extract RGS information in an email (the NFORWARDI1.ZIP file):

If interest is being suspended per IRC 6404(g), follow steps in IRM 4.70.15.4.7, Interest.

Prepare Workpaper Summary Sheet (i.e., Form 5773, 5773-A, 4318, etc.) along with any supplemental workpapers and all other relevant documents. Ensure the workpapers:

Save all IDRS research in the RCCMS Office Documents folder, following the RCCMS Naming Convention.

Get a current AMDISA print and save in the RCCMS Office Documents folder before you close the case.

Secure a current IMFOLT print (Form 1040) or BMFOLT print (Form 1120) immediately before you close the case to Appeals or Mandatory Review to ensure that the Service Campus has not already made the assessment for the discrepancy adjustment. Review the IMFOLT/BMFOLT print to identify if payment was made to determine which ARDI code to use in the RCCMS closing record. Save these in the Office Documents folder in RCCMS, using the TE/GE RCCMS Naming Convention.

Complete the RCCMS closing tabs per IRM 4.70.15.13.1, Completion of RCCMS Tabs.

Prepare the RCCMS 3198-A checksheet, identifying the case as "Forward to Appeals" or "Mandatory Review" , and notate: "Unagreed Discrepancy Adjustment" , and save it in the RCCMS Office Documents folder.

If there’s less than one year on the statute of limitations, see IRM 4.70.12.3.7, Statute of Limitations and Statute Control Procedures and IRM 4.70.12.3.8, EP Statute Control Procedures, for special instructions.

Close the case fully electronically.

If the taxpayer or POA submits a valid protest to Appeals, see IRM 4.70.15.7.1.1, Protest to Appeals.

If the taxpayer or POA doesn’t submit a valid protest to Appeals, close the case to Mandatory Review on RCCMS.

Update the case to status code 20 on AIMS and RCCMS if the case is closed to Mandatory Review.

Close the case to Mandatory Review for issuance of a statutory notice of deficiency in these situations:

Update the Revenue Agent Report (RAR) to state that the taxpayer failed to respond. Save a copy of the RAR in the Office Documents folder in RCCMS.

A failure to reply to a 30-day letter is considered an unagreed case for processing purposes. Notate: "Unagreed Discrepancy Adjustment" in the "Mandatory Review" section of the RCCMS 3198-A Checksheet, item SH-M 4.0 Mandatory Review: Other (Specify).

Copy the RGS information to an email to include or associate with your case. Ensure any passwords you used to encrypt the file is noted on the CCR.

Follow these steps to save the RGS file and upload to the RCCMS Office Documents folder:

If interest is being suspended per IRC 6404(g) as described in IRM 4.70.15.4.7, Interest.

Prepare Form 5773 or Form 5773-A, Form 4318 etc. (or equivalent) along with any supplemental workpapers and all other relevant documents. The workpapers should:

Save all IDRS research discussed in IRM 4.70.15.4.1, IDRS Research, in the RCCMS Office Documents folder, following the TE/GE RCCMS Naming Convention.

Get a current AMDISA print and save it in the RCCMS Office Documents folder before the case is closed.

Secure a current IMFOLT print (Form 1040) or BMFOLT print (Form 1120) immediately before you close the case to Mandatory Review to ensure that the Service Campus has not already made the assessment for the discrepancy adjustment. Save these in the Office Documents folder in RCCMS, following the TE/GE RCCMS Naming Convention.

Save a copy of Form 5773 / Form 5773-A, Form 4318, etc (or equivalent), supplemental workpapers, and all other forms and letters prepared by the examiner within RCCMS, following the RCCMS Naming Convention.

Complete the RCCMS closing tabs. Use disposal code 604 Unagreed - Without Protest, on RCCMS.

If there’s less than one year on the statute of limitations, request a statute extension on Form 872.

Complete the following before you transfer a case to Mandatory Review:

Close the case fully electronically.

The group manager will update the case to status code 20 and close the case to Mandatory Review.

The TE/GE Closing Group makes tax assessments, penalty assessments, and adjustments for prepayment credits related to discrepancy adjustments from the amounts that are listed by the examiner on the Individual/Business (1 of 3) Tab of the RCCMS closing record. Therefore, be careful to input the correct amounts.

If the case is partially agreed, indicate that the file is a partial agreement on top left corner of the General Tab of the RCCMS Closing record. Close the file to Mandatory Review with the words "discrepancy adjustment — partial agreement" typed in the remarks section of the RCCMS 3198-A checksheet.

Validate cases for closure in the RCCMS closing record using the table below.

Use Letter 2656 (for EP) or Letter 5332 (for EO) as the closing letter when you drop the discrepancy adjustment issue because of the taxpayer’s response to the 30-day letter. See Employee Plans Examination Exhibits for an example of Letter 2656.

The 30-day letter is the final letter for agreed cases.

Complete the following before you close a case:

Close all cases fully electronically to increase efficiency and reduce the need to mail paper case files. Consult with your manager on cases with unique circumstances that might justify closing with a paper case file.