Purpose: IRM 4.71.21, Employee Plans Examination of Returns, Examination Procedures for Plans in U.S. Territories, gives the basic examination procedures to help Employee Plans (EP) examiners and their managers to apply uniform techniques and procedures when examining plans in U.S. Territories.

Audience: This IRM provides procedures for examiners, managers, and support staff in EP Examinations.

Program Owner: Director, EP Examinations sets the program for the EP Examinations program.

Program Authority: EP Examinations’ authority to conduct examinations, resolve issues and determine tax liability is derived from Title 26, Internal Revenue Code, Subtitle F – Procedure and Administration, which includes but is not limited to:

The IRS is implementing Taxpayer Digital Communications Secure Messaging (TDC SM) as a more efficient way for taxpayers and their authorized representatives, if applicable, to exchange information and documents with the IRS. Taxpayers/representatives will use the TDC SM platform by invitation only. The procedures apply to all compliance activity types (cases) that include taxpayer contact with a start date on or after June 22, 2022.

You must offer TDC SM to all taxpayers and their representatives with the initial contact letter. TE/GE has revised many initial contact letters to include language that advises taxpayers and their representatives of the availability of TDC SM to communicate securely with you. The revised letters use selectable paragraphs that you must choose. Use the TDC SM paragraph with the initial contact letter and suggest that irs.gov/TEGEConnect be visited to enroll and get started.

For cases with start dates before June 22, 2022, where employees have already issued the opening letter initiating contact to the taxpayer/representative, those employees will consult with their manager to determine whether offering TDC SM is appropriate for facilitating efficient and effective issue resolution and/or timely case closure. If you and your manager think TDC SM would be beneficial, invite the taxpayer and their representative to use TDC SM to bring your case to conclusion. Include the following language with the request for information (e.g., Information Document Request):

While you can always reach me via the telephone number, fax number, and mailing address shown above, the IRS now has an easier method of communicating with taxpayers: IRS Secure Messaging. With this service, you (and your authorized representative, if applicable) will be able to quickly and easily communicate with me about your case. Please visit irs.gov/TEGEConnect for more information about secure messaging.

If contacting the taxpayer/representative by telephone, you should discuss the availability of TDC SM. You can review the Publication 5295 with the taxpayer/representative, or send by fax or mail if necessary. You can also send the publication by secure email, an option currently available through October 31, 2023, per interim guidance NHQ-01-1121-0004.

Taxpayers/representatives participating in the TDC SM must consent to receive and send information and documents via the TDC SM platform. Secure from the taxpayer and their representatives electing to participate with the TDC SM platform a signed Form 15314, TE/GE Secure Messaging Taxpayer Agreement Authorization of Disclosure to Designated Users. When returned, submit the signed form to the BSP shared mailbox (*TEGE TDC TP Provisioning) for taxpayer and representative account creation. Once established, the system will notify the taxpayer and their representative through email with instructions on how to access their TDC SM account. You will send a welcome message to the taxpayer and their representative.

Document your invitation to the taxpayer and their representative to use TDC SM and their response in your CCR.

Upon closure of your case, send a message to the taxpayer that you are closing your case and future communications within TDC SM will not be possible for this case and follow procedures to close the case within TDC SM.

Bona Fide Resident: a person who satisfies both of the following requirements under IRC 937(a):

Competent Authority: a tax treaty requires the designation of a Competent Authority for each country that is a party to the treaty.

Control Test: one or more U.S. persons must have the authority to control all substantial trust decisions. U.S. persons include:

Court Test: a U.S. court must be able to exercise primary supervision over the trust’s administration. Only a court within the geographical U.S. is considered a court within the U.S.

Domestic Corporation: a domestic corporation is a corporation that conducts its affairs in its home country. It may carry out activities in other states or regions of the country where it incorporates.

Dual Qualified Plan: a U.S. sponsor’s plan with a trust in the U.S., may operate in Puerto Rico and cover Puerto Rico employees. The Dual Qualified Plan must satisfy both the requirements of IRC 401(a) and Puerto Rico Code (PRC) section 1165(a). The sponsor of a dual qualified plan may request under the IRS’ determination letter program a plan document review for compliance with applicable rules under IRC 401(a).

Employee Retirement Income Security Act (ERISA): a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

ERISA Section 1022(i)(1): a qualified trust is located in Puerto Rico and all of the participants are Bona Fide Residents of Puerto Rico. ERISA Section 1022(i)(1) qualified trusts are treated as exempt under IRC 501(a) as if they’re part of a qualified plan under IRC 401(a). The effect is to exclude the U.S. trust income that the Puerto Rico trust earned from U.S. taxation, even though the plan doesn’t satisfy IRC 401(a).

ERISA Section 1022(i)(2): provides that Puerto Rico plan trusts are treated as exempt under IRC 501(a) if their sponsors make a prospective and irrevocable election for the plan to comply with all of the IRC 401(a) qualification provisions, except for the Trust Situs requirement. The plan sponsor can either:

Fixed or Determinable Annual or Periodic Income (FDAP): U.S. Source Income that isn’t effectively connected (per IRC 864(c)) with a U.S. trade or business. Pension distributions nonresident aliens receive are generally FDAP income under IRC 871(a) and IRC 861(a)(3).

Foreign Person: includes:

Form 499R-2/W-2PR: a Puerto Rican form used to report Puerto Rico employment tax.

Form 1042-S: information report sent by the withholding agent to the payee (a Foreign Person that received income subject to withholding under IRC 1441).

The Hacienda: the Puerto Rico Department of Treasury which oversees Puerto Rico’s administration of the tax laws and its determination letter program.

Mirror Code System of Taxation: The territory adopts the IRC as if it were the territory’s code, except that the name of the territory is substituted for the U.S. and vice versa. The territories that use a Mirror Code System of Taxation are the USVI, Guam and CNMI.

Plan Sponsor: A designated party, usually a company or employer, that establishes a retirement plan, such as an IRC 401(k) plan established for the benefit of the organization's employees.

Residual Tax Liability: generally, Bona Fide Residents of the USVI don’t have to file with the U.S. for any tax year in which they are a Bona Fide Resident during the entire tax year, if they:

26 U.S. Code Section 933: most residents of Puerto Rico are U.S. citizens, but aren’t subject to U.S. federal income tax, except on income from non-Puerto Rico sources.

Tax Coordination Agreement: Tax treaties or agreements allowing the Competent Authorities of the U.S. and the tax department of the relevant territory to:

Trust Situs: The location where the trustee performs his or her duties of managing the trust.

U.S. Citizen: The term United States Citizen means:

U.S. Source Income: U.S. Source Income generally includes income effectively connected with either:

United States Virgin Islands Bureau of Internal Revenue (BIR): BIR is the Virgin Islands Department of Treasury which oversees the administration of the tax laws in the U.S. Virgin Islands.

Worldwide Source Income: U.S. Citizens and resident aliens must report income from all sources within and outside of the U.S.

Treatment of U.S. Territories under Title I of ERISA. For purposes of ERISA Title I, the term United States includes the U.S. territories.

Territory Tax System and Relationship to the U.S. Tax Code. The U.S. territories of American Samoa, Guam, the CNMI, Puerto Rico, and the USVI are generally treated as foreign for U.S. tax purposes, unless otherwise specified in the Code or related statutes.

Tax Coordination Agreements and Mutual Agreement Procedures. The IRS has entered Tax Coordination Agreements with each of the five major U.S. territories allowing the IRS and the five territorial tax departments to do the activities in IRM 4.71.21.4 (3).

Include and mail the following documents to the taxpayer with your initial contact letter:

Take the following actions during an examination initial telephonic contact or interview:

Retirement plans adopted by employers in Puerto Rico are generally similar to qualified plans adopted by employers in the U.S. (e.g., defined benefit, stock bonus, and profit-sharing plans).

There are three types of retirement plans covering residents of Puerto Rico that provide tax-favored benefits under U.S. law:

A Puerto Rico trust is considered a foreign trust under IRC 7701(a)(31)(B) and the corresponding regulations.

If a Puerto Rico trust doesn’t meet the requirements of either ERISA section 1022(i)(1) or (i)(2), it’s taxable in the U.S. on certain U.S. source income and subject to withholding under IRC 1441.

A Puerto Rico retirement plan must qualify under IRC 401(a) for the trust to be tax-exempt if any of the following apply:

Unlike U.S. plans, all plans intending to qualify under PRC section 1081.01(a) must apply for a determination letter under the program administered by the Hacienda.

Excise taxes that apply to plans qualified under IRC 401(a) (for example, excise tax under IRC 4971, IRC 4975, etc.) also apply to Dual Qualified Plans and ERISA section 1022(i)(2) plans.

IRC 402(d) allows participants in ERISA section 1022(i)(2) plans (but not section 1022(i)(1) plans) to enjoy the favorable tax treatment permitted under IRC 402 for qualified plan participants.

An individual who is a Bona Fide Resident of Puerto Rico for the entire taxable year, generally, may exclude Puerto Rico source income from gross income (IRC 933(1)).

EP began auditing U.S. Virgin Island (USVI) plans in fiscal year 2010, as part of a Memorandum of Understanding entered between the IRS, TEGE and the USVI Bureau of Internal Revenue (BIR).

Employers in the USVI generally adopt retirement plans similar to those adopted by U.S. employers (such as defined benefit, stock bonus, and profit-sharing plans). IRC 401(k) plans are the most common.

The IRS has concurrent jurisdiction with the BIR over USVI plans because of:

USVI plan sponsors may submit requests for determination letters to IRS EP Rulings and Agreements (R&A) using the same procedures that apply to U.S. plan sponsors.

All USVI plans (whether or not they have a favorable determination letter) come under the IRS’s jurisdiction, as well as that of the BIR.

BIR examiners conduct most of the audits of USVI plans.

Generally, any income tax adjustments and closing agreement sanctions are payable to the BIR, as opposed to the IRS.

If you discover a funding deficiency, the plan sponsor must correct it. However, neither the IRS nor the BIR is entitled to collect excise taxes under IRC 4971. See IRM 4.71.21.7.1, Income and Excise Tax Related to USVI Plans, for an explanation.

Follow the procedures in 4.70.12, Planning the Examination, with one additional requirement. Your group manager contacts the BIR as a courtesy to allow them the opportunity to assign a trained examiner to conduct the audit jointly after the required waiting period.

Request the same records you’d request for the same type of plan maintained by a domestic plan sponsor.

Use the same interview questions as those for the same plan type maintained by a domestic plan sponsor.

Auditing techniques and audit scope depend on the type of audit. Approach both the same as you would for a plan maintained by a domestic plan sponsor.

Follow the procedures in IRM 4.70.14.2.1, Agreed Resolution , when you close an agreed case.

Before you close the examination, have a closing conference with the taxpayer or taxpayer's representative (POA) either in person or by telephone. In the closing conference, inform and discuss with the taxpayer and/or POA:

Document the case chronology record (CCR) that you held the closing conference and what you discussed.

Complete any RCCMS field that appears in red when you "Validate for Close" in RCCMS.

Complete all of the appropriate RCCMS closing actions, making sure the "Update AIMS" box is checked.

For surveyed returns, follow the procedures in IRM 4.70.12.3.11, Decision to Survey a Return.

For unagreed Form 5500 examinations, follow the procedures in IRM 4.70.14.2.4.

Save all workpapers, forms and letters you generated in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention. Examiners can now find and directly access all relevant Employee Plans Examination Exhibits (including the RCCMS Naming Convention) at the IRM/IGM page on the TE/GE Connect site.

Scan documents received from the taxpayer or POA into the RCCMS Office Document Case File Folder using the TE/GE RCCMS Naming Convention.

Refer to Document 6476, EP Information Systems Codes for the applicable disposal codes to be utilized at case closing for all types of closures.