Purpose: This IRM section describes the execution phase of the LB&I Examination Process. Specifically, IRM 4.46.4:

Audience: All LB&I personnel

Policy Owner: Assistant Deputy Commissioner Compliance Integration (ADCCI)

Program Owner: The LB&I Policy Office within ADCCI.

Primary Stakeholders: LB&I executives, senior managers, frontline managers, examiners, program analysts and paraprofessional staff.

The audit steps for each issue selected in the examination plan are implemented during the execution phase. Issue teams will develop each issue by gathering the relevant facts through continued mutual transparency and cooperation with the taxpayer. The depth and the scope of each issue examined is a matter of professional judgment. The documents examined and the conclusions reached must be recorded in the workpapers.

A cooperative and transparent taxpayer will assist in the factual development of each issue as described in Publication 5125, LB&I Examination Process. The primary method of obtaining information is through issuing Form 4564, Information Document Request (IDR). IDRs are required to be issue-focused and contain a statement of the issue. A discussion with the taxpayer and/or their representative is required to confirm an understanding of the items requested and to set a reasonable response date for the request.

Each issue team will conduct continuous, interactive discussions to ascertain whether to continue or modify examination procedures and to resolve any factual or legal differences as IDR responses are reviewed.

The progress of the examination will be collaboratively monitored by the case manager and the issue manager(s). Penalties should be considered concurrently with the development of the substantive issues, and the assertion or non-assertion of any applicable penalties should also be fully explained and documented in the workpapers and/or penalty lead sheets. A penalty lead sheet (currently SAIN 011) is used to approve penalty assertions and for the non-assertion of a substantial understatement penalty when it is statutorily applicable under IRC 6662(d) and for the non-assertion of the erroneous claim for refund or credit penalty when a substantial portion of the claim for refund or credit is disallowed. Managerial approval of penalties must be documented in writing by the immediate supervisor of the employee asserting a penalty, or such higher-level official as the Secretary may designate. The case manager is designated as such higher-level official. Refer to IRM 4.46.4.12.2.

For potentially unagreed issues, the issue team is required to solicit an acknowledgment of facts by attaching a draft Form 886-A, Explanation of Items, to the acknowledgment of facts (AOF) IDR to request the taxpayer’s concurrence on the facts. The issue team should resolve any factual differences and/or document all disputed facts. The issue team will then apply the law to the complete set of facts in a fair and impartial manner when preparing the final Form 886-A. The issue manager should ensure that all relevant facts, including additional and/or disputed facts, are appropriately considered before signing and issuing the Form 5701, Notice of Proposed Adjustment (NOPA).

Before issuing a NOPA, the issue team must discuss LB&I’s tax position with the taxpayer and explain the law applied in making each determination. The issue team should also work with the taxpayer to set a NOPA response date. If an agreement is not reached, then the issue team will set a reasonable response date. A standard response time can be established in the examination plan for all NOPAs.

The NOPA must be signed by the issue manager prior to issuing to the taxpayer.

In addition to the audit steps outlined in the exam plan, the issue team(s) may consider other appropriate examination techniques used to gather evidence:

Refer to IRM 4.46.3.8.1.2.1, Examples of Audit Steps.

Additional balance sheet analysis information can be found in IRM 4.10.4.3.4.1, Balance Sheet Analysis (Corporations and Other Business Returns), and IRM Exhibit 4.10.3-3, Balance Sheet Examination Techniques.

Additional information about analyzing Schedules M-1, M-2 and M-3 can be found in IRM 4.10.4.3.4.2 , Schedules M-1, M-2, and M-3 (Corporation and Other "Business" Returns).

LB&I examiners must consider the various legal authorities and guidance available to them when developing and resolving issues. Some of these include:

IRM 4.10.7, Examination of Returns, Issue Resolution, provides a detailed explanation of each of these sources and the format for citing them in reports.

The use of IRS contracted subscription internet services is recommended to perform electronic tax research (e.g., Westlaw, Bloomberg Tax or Accurint).

During the execution phase, examiners must develop issues using the appropriate examination techniques and determine the correct tax liability. Where appropriate the issue team should consult with a subject matter expert (SME), Counsel and/or other technical experts. Based on the facts and circumstances, examiners must also correctly research, interpret and apply the law in a fair and impartial manner and consider congressional intent.

The issue team is strongly encouraged to consult with an SME as technical questions arise. See IRM Exhibit 4.46.1-1, Glossary of LB&I Terms, for the definitions of the terms "subject matter expert" and "practice network" .

If a case involves a tax-exempt entity engaging in a prohibited tax shelter transaction (listed transaction, confidential transaction, or transaction with contractual protection), the case manager should ensure the case is referred to TE/GE on Form 5666, TE/GE Referral Information Report.

To prepare a referral to TE/GE:

The Information Document Request (IDR) Process will be used for all LB&I examinations. The IDR Process is a structured process used when gathering information during an examination. It is intended to encourage collaboration between the taxpayer and the IRS to discuss and determine the necessary information for proper issue development.

General procedures and enforcement procedures are part of the IDR Process found in Exhibit 4.46.4-1 and Exhibit 4.46.4-2.

The issue manager is responsible for ensuring that the issue team is held accountable for the development of their respective issue(s). In addition, the issue manager must keep the case manager informed of the progress of the issue(s) and must inform the case manager of any potential impact the issue(s) may have on the case timeline. Any conflicts between the issue manager and the case manager about the development of an issue should be elevated to senior management.

The issue manager has primary responsibility for managing the issue(s) as described in IRM 4.46.1, LB&I Examination Process, General Information and Definitions.

In addition to the case manager responsibilities described in IRM 4.46.1, the case manager will support the issue manager in developing the issue(s).

Each issue will be risk assessed and evaluated as facts are developed. Information provided by taxpayers such as presentations, IDR responses or tax workpapers will be considered by the issue team for purposes of continuing, expanding, narrowing or dropping the issue(s).

Issue development should be monitored and documented contemporaneously. Methods to monitor include:

The issue team will consult with SMEs and Counsel as needed.

To facilitate early issue resolution, NOPAs will be issued as soon as a tax determination is made or by the milestone date, whichever is sooner. NOPAs should not be held until the end of the examination.

The issue team must advise the taxpayer when a determination is made, or that no adjustment will be proposed and the issue is closed.

The case manager and team coordinator will monitor various aspects of the examination, and solicit the issue team’s participation as needed. Monitoring the progress of the examination is essential as the case manager must respond to changing circumstances.

The case manager will collaborate with issue managers on the progress and development of the issues. When changes are made that impact the ECD, the case manager will discuss changes with the issue managers and the taxpayer.

If extending an issue timeline requires extending the case timeline and the ECD, the issue manager will explain to the case manager the reason for extending the issue timeline and will also prepare a revised issue timeline with a written explanation. Once that issue manager and the case manager agree that extending the ECD is appropriate, they will follow practice area policy for requesting approval to extend the ECD and, if necessary, the statute of limitations.

Examiners must use their professional judgment to determine which issues will continue to be examined or modified in scope. A change of issue team members or availability may necessitate a change in scope. New information discovered by LB&I during an examination may necessitate expanding or modifying the examination plan, including the addition of new issues to the examination plan.

When a new issue(s) is discovered during the examination, the case manager will follow LB&I policy to add new issue(s) to the examination plan.

New information provided by the taxpayer that could result in a refund will require a valid informal claim if there is nexus with an issue identified for examination; otherwise, a formal claim is required if the information is provided after the initial period to submit informal claims. Also see IRM 4.46.3.7, LB&I Claims Process.

The exam team will collaborate with the taxpayer to appropriately modify an existing timeline or establish an issue team and timeline when adding a new issue.

To ensure consistency and obtain additional technical expertise, Counsel and other technical experts should be consulted. This will enable the issue team to make the most effective and efficient decision for the government.

Materiality and compliance considerations will be evaluated when conducting the risk analysis for each issue. As soon as a determination is made, the issue team will timely inform the taxpayer whether an issue is being added, continued, expanded, narrowed, or dropped.

As new information is received, such as responses to IDRs, the issue team will risk-assess each issue on a continuous basis. The issue team will analyze the information and determine whether to continue or modify the examination procedures and issue timeline.

The issue team will keep the taxpayer informed of the status of each issue through discussions and/or scheduled meetings. These discussions should be interactive and provide the taxpayer an opportunity to submit additional supporting documentation, clarify any facts and explain their tax position. These interactive discussions should promote an efficient examination.

All parties should work together to resolve issues at the earliest appropriate point in the execution phase of the examination.

Obtaining a written acknowledgment of facts was derived from a best practice of issuing a draft Form 886-A. This process will be used by LB&I issue teams on all potentially unagreed issues, unless an exception is met.

The purpose of issuing the pro-forma AOF IDR is to ensure the issue team has considered all the relevant facts before making a final tax determination on the issue. This may avoid subsequent delays in the examination and minimizes the possibility that a case will be returned from Appeals.

LB&I requires that all information, including all relevant facts and supporting documentation, be submitted to LB&I for consideration in the development of an issue. The taxpayer is responsible for ensuring the relevant facts have been provided to LB&I, so that the law may be applied to the full set of facts.

The issue team should collaborate with the taxpayer to develop all relevant facts before issuing a NOPA. The issue team is expected to conduct on-going interactive discussions throughout the execution phase to resolve any factual disputes and discuss tax positions on issues examined.

The acknowledgment of facts pro-forma IDR (Exhibit 4.46.4-3) will include a draft Form 886-A as an attachment. The draft Form 886-A will contain all sections as outlined in IRM 4.46.6.10, Explanation of Items: Form 886-A. This process will allow the issue team to address any additional or disputed facts identified by the taxpayer before completing the final Form 886-A and issuing a NOPA.

The taxpayer’s response to the AOF IDR must be documented in the case file.

Although an AOF IDR is not required for agreed issues, a draft Form 886-A may be issued as a best practice.

The taxpayer must be informed that the case will be returned for additional development if the taxpayer provides materially new information after a case is closed to Appeals. See IRM 8.7.11.6.3, Returning a Case to LB&I.

The issue team will strive to include all relevant facts in the draft Form 886-A; however, an issue team is not limited to the information contained in the draft Form 886-A when preparing the final Form 886-A. If additional information is included when the NOPA is issued, the taxpayer still retains a right to respond to that information in a written protest.

The issue manager will review the taxpayer’s response to the acknowledgment of facts to assess the strengths and weaknesses of each side’s position and to determine if the issue can be resolved at the examination level. In addition, the issue manager will ensure that all additional or disputed facts identified by the taxpayer in their AOF response are considered or addressed in the final Form 886-A/NOPA.

If the taxpayer does not respond by the agreed upon date, the examination should not be delayed. The issue manager will discuss the lack of response with the taxpayer and will issue the NOPA if the taxpayer does not intend to respond.

The AOF IDR may not be appropriate for all potentially unagreed issues in certain circumstances. The following should be considered when determining not to issue an AOF IDR:

The AOF IDR may not be required for a NOPA assessing penalties. The issue manager, in consultation with the case manager, will apply the guidance discussed in this section to determine if it is appropriate to issue the AOF IDR on the assertion of penalties.

The Service maintains an ongoing effort to develop, monitor and revise programs designed to assist taxpayers in complying with legal requirements and avoiding penalties. As indicated in Policy Statement P-20-1, the Service uses penalties to encourage voluntary compliance.

Policy Statement P-20-1 also states that the IRS administers a penalty policy that is designed to:

For LB&I cases, all adjustments are proposed on Form 5701, Notice of Proposed Adjustment, which is generally accompanied by Form 886-A, Explanation of Items. Form 5701 provides a summary of the proposed adjustment. Form 886-A provides a detailed explanation of the adjustment.

When issuing a NOPA, the tax determination for that issue is based on applying the law to the relevant facts developed during the examination. NOPAs will be issued as soon as a tax determination has been made but no later than the milestone date set in the issue timeline.

For those examined issues, which are known to be agreed through discussions with the taxpayer, it is still important to develop an effective Form 886-A to provide an understanding of the audit trail. An effective Form 886-A will also assist future audits to understand what was examined and the law applied to reach the conclusions. See IRM 4.46.6.10, Explanation of Items: Form 886-A.

For issues identified through affirmatives, informal or formal claims that are accepted without examination, the team coordinator should incorporate the accepted issues into the revenue agents report. If appropriate, the accepted issues may be grouped together on one Form 5701. See IRM 4.46.3.7.4, Grouping of Claims and Affirmative Issue(s). If the explanation of the adjustment is longer than the space provided on the Form 5701, then one brief Form 886-A can be used to explain each accepted affirmative and claim issue.

The issue manager will review the Form 886-A and Form 5701 for accuracy and completeness before signing the Form 5701. In certain circumstances, senior manager approval may be warranted.

For issues that are potentially unagreed, the issue team must solicit an acknowledgment of the facts (see IRM 4.46.4.11) before issuing a NOPA. The issue manager should review the Form 886-A to ensure that the taxpayer’s additional and/or disputed facts are included and appropriately considered. The issue manager should also assess the strengths and weaknesses of both side’s position and determine if the issue can be resolved at the examination level.

Discuss the issue related to the IDR with the taxpayer.

Discuss how the information requested is related to the issue under consideration and why it is necessary.

After this consultation with the taxpayer, determine what information will ultimately be requested in the IDR.

Ensure the IDR clearly states the issue that is being considered and that the IDR only requests information relevant to the stated issue. An IDR issued at the beginning of an examination that requests basic books and records and general information about a taxpayer’s business is not subject to this requirement. Once this initial IDR has been issued, subsequent IDRs must state an issue to be in compliance with this requirement.

Only one issue should be addressed on each IDR.

Utilize numbers or letters on the IDR for clarity.

Ensure that the IDR is written using clear and concise language.

Ensure that the IDR is customized to the taxpayer or industry.

Provide a draft of the IDR and discuss its contents with the taxpayer. Generally, this process should be completed within 10 business days.

After this discussion is complete, determine a reasonable timeframe for a response to the IDR.

If agreement on a response date cannot be reached, the examiner or specialist will set a reasonable response date for the IDR.

When determining the response date, ensure that the examiner or specialist commits to a date by which the IDR response will be reviewed and a response provided to the taxpayer on whether the information received satisfies the IDR. Note this date on the IDR issued to the taxpayer.

a Delinquency Notice

a Pre-Summons Letter

a Summons

Taxpayer Fails to Respond. If a taxpayer fails to provide any response by the IDR due date, the examiner or specialist will, within 5 business days after the IDR due date, discuss with the taxpayer the cause of the failure to respond and determine if an extension is warranted. If the examiner or specialist determines that the taxpayer’s explanation warrants more time, then the examiner or specialist may grant the taxpayer an extension of up to 15 business days from the date the extension determination is made and communicated to the taxpayer.

Taxpayer Provides Incomplete Response If a response is received but the examiner or specialist determines that it is not complete, the examiner or specialist should discuss with the taxpayer the reasons why the response is not complete and determine within 5 business days whether an extension is warranted. If the examiner or specialist determines that the taxpayer’s explanation warrants more time, then the examiner or specialist may grant the taxpayer an extension of up to 15 business days from the time the extension determination is communicated to the taxpayers.

If no response is received by the IDR due date and no extension is granted, the IDR enforcement process begins on the date the determination not to extend is communicated to the taxpayer.

If an extension is granted and no response is received by the extended due date, the IDR enforcement process begins as of the extended due date.

If the IDR is considered complete upon review, the examiner or specialist must notify the taxpayer that the IDR is complete and closed.

If the IDR response is not complete, the timing of the enforcement process is as follows:

Discuss the delinquency notice with the taxpayer. During this discussion, ensure that the taxpayer understands the next steps in the enforcement process if the information requested in the IDR is not provided by the response date established in the delinquency notice.

Issue the delinquency notice signed by the team manager to the taxpayer within 10 days of beginning the enforcement process.

The delinquency notice should include a response date that is generally no more than 10 business days from the date of the delinquency notice. A territory manager must approve any date beyond 10 business days.

Provide a copy of the delinquency notice and the IDR to assigned Counsel.

Discuss the lack of a complete response to the delinquency notice with the team manager, specialist manager, the respective territory managers and Counsel and prepare the pre-summons letter.

The appropriate territory manager must discuss the pre-summons letter with the taxpayer. During this discussion, ensure that the taxpayer understands the next steps in the enforcement process if the information requested in the IDR is not provided by the response date established in the pre-summons letter.

Issue a pre-summons letter to the taxpayer signed by the appropriate territory manager. This must be done as quickly as possible but generally no later than 10 business days after the due date of the delinquency notice. Address this letter to the taxpayer management official that is at a level equivalent to the LB&I territory manager. This should be a level of management above the taxpayer management official that received the delinquency notice.

Include a response date in the pre-summons letter that is generally 10 business days from date of the pre-summons letter.

A Director of Field Operations (DFO) must approve any date beyond the 10 business day response period.

Discuss the pre-summons letter with Counsel.

DFO(s) must be made aware of the pre-summons letter prior to issuance.

Discuss the lack of response to the pre-summons letter with the case manager, issue manager, the respective territory managers and DFOs, and Counsel.

Solicit Counsel’s assistance in the preparation of the summons to ensure the summons is enforceable

Coordinate the issuance of the summons with assigned Counsel. It is imperative that the summons procedures are strictly followed. If the procedures are not followed, the summons will not be enforceable.

Summons procedures can be found in IRM 25.5.

the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and

the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.”