IRM 8.17.2, General Settlement and Rule 155 Computations, provides general procedures for Appeals Tax Computation Specialists (TCS), Appeals Officers (AO) and Appeals Team Case Leaders (ATCL). This section covers instances where it is necessary to prepare settlement computations that include information or require the use of formats that differ from the normal formats used.

This section also details the information to include on the "Form 5403 Instructions to APS" spreadsheet, referred to as the "Form 5403 Worksheet" throughout this IRM section. The Form 5403 Worksheet is accessed from a link on the Appeals TCS web site.

Account and Processing Support (APS) is responsible for completing Form 5403, Appeals Closing Record. The Form 5403 Worksheet helps APS with some of the entries involving technical issues. The TCS or AO completes the Form 5403 Worksheet when a settlement computation, Rule 155 computation, or statutory notice of deficiency is prepared.

Many of the forms, worksheets and spreadsheets discussed in this section are found on the Appeals Technical Support Sharepoint site. The Appeals Technical Support Sharepoint site is accessed through the "Spreadsheets Sharepoint" link on the Appeals TCS web site.

Some of the forms, worksheets and spreadsheets discussed in this section are found on the RGS web site. The RGS web site spreadsheets are also accessible through a link on the Appeals TCS web site. (See the RGS page on the TCS web site for the link.)

The following table gives a brief listing of where the forms are found:

The following subsections describe the use of the forms, worksheets and spreadsheets in the preparation of settlement computations.

The employee who prepares the settlement computations is responsible for completing the Form 5403 Worksheet at the time the computations are prepared.

The Form 5403 Worksheet is also required for Rule 155 computations and statutory notices of deficiency. Generally the TCS prepares the Rule 155 computation or the statutory notice of deficiency and will prepare the Form 5403 Worksheet at the same time.

If an AO sustains the Compliance report (RAR) or the statutory notice of deficiency, and settlement computations aren't prepared, then the AO must prepare a Form 5403 Worksheet when closing the case unless an exception applies under IRM 8.17.5.2.1.

If a Counsel case is received by APS and no worksheet was previously completed in Appeals or a revised worksheet is needed, APS may prepare a Request for Audit Work, Form 3608, requesting that TCS complete the Form 5403 Worksheet.

Each worksheet has the capacity for three tax years but use additional worksheets if needed.

The AO is responsible for attaching completed worksheets to the inside left flap of the administrative file folder.

Show the following information on the Form 5403 Worksheet:

Form 5403 entries are used to update IDRS so the transcript of account reflects the correct information based on the Appeals computations. Always check a TXMODA, IMFOLR, or BMFOLR to see what amounts were posted for the various reference numbers.

The Form 5403 Worksheet has a section for the Item 15 Reference Number information. If RGS is used for the computation, instead of entering the Item 15 Reference Number information on the Form 5403 Worksheet, the TCS or AO may print either the RGS Form 5403 or the RGS Form 5344 (if these forms have the correct Item 15 information) and attach one of them to the Form 5403 Worksheet.

Taxpayers may report a net operating loss or credit carryback loss as a tentative allowance on Form 1045, Application for Tentative Refund, (individuals) or Form 1139, Corporation Application for Tentative Refund. This is called a tentative allowance or tentative carryback.

Taxpayers may claim a net operating loss or unused credit carryback on an amended return using Form 1040X (individuals) or Form 1120X (corporation). This is called a claim for credit or refund.

Compliance usually secures Form 1045/1139 or Form 1040X/1120X and places it in the case file along with the return. If the form is not in the case file, the Appeals Officer should take steps to secure a copy so an analysis can be made to determine what year the carryback originated and the amount of the carryback allowed.

Prepare Form 2285, Restricted Interest Worksheet, when tentative allowances and other carryback claims are involved. See IRM 8.17.6.4, Preparation of Form 2285, for additional information.

Further discussions of tentative allowances (Form 1045/1139) and other carryback claims (Form 1040X/1120X) are found at IRM 8.17.4.14, Tentative Allowances and Other Carryback Claims In Notice of Deficiency Statement.

See Exhibit 8.17.5-1 for an example of how Form 4605-A is used to show the adjustment to partnership ordinary income, long-term capital gains and losses, and contributions. Similar schedules might be necessary for such items as partnership IRC 1231 gains and losses, general business credit, etc. Form 886-S, Partners’ Share of Income, Deduction and Credits, and Form 886-Z, TEFRA Partners' Shares of Income, are designed for use in distributing partnership income, deductions and credits.

Reconcile the "886-type" forms to the Schedule K-1’s. Make certain the percentage of profit column equals 100%. These forms serve as corrected Schedule K-1’s and are used by Campuses to make the investors’ calculations. Therefore, include all flow-through information shown on the Schedule K-1 on the "886-type" forms whether adjusted or not.

An alternative is to prepare the "886-type" form listing the adjusted issues only, and provide a statement at the bottom indicating all other issues remain the same as shown on the Schedule K-1 as filed.

S Corporation adjustments to income (adjustments to Form 1120-S , U.S. Income Tax Return for an S Corporation) are patterned along the lines of partnership adjustments. If the TCS receives a request for computations for the Form 1120-S , use Form 4605 or Form 4605-A for these computations. Also use distribution schedule Form 886-X.

However, if the TCS has the Form 1120-S administrative file and is also preparing the computations for all the shareholders, it is not usually necessary to prepare Form 4605, Form 4605-A or Form 886-X.

If the TCS receives a request for Form 1040 computations and there are S Corporation adjustments, the S Corporation adjustments are generally just included on the tax computation form along with any other adjustments being made to the Form 1040. Form 4605, Form 4605-A and Form 886-X do not need to be prepared.

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the Subchapter S Revision Act of 1982 established unified procedures for examining certain partnerships and S corporations. As a result of this act, a separate set of procedures was established addressing the preparation of settlement computations for TEFRA partnerships and S Corporations.

The Appeals Officer or Counsel Attorney should indicate whether the case is TEFRA.

See IRM 8.19, Appeals Pass-through Entity Handbook, for additional information.

Form 886-W, Distribution of Beneficiaries’ Share of Income and Credit, is a distribution schedule of beneficiaries’ shares of income, credits, etc. Use either Form 4605-A or pattern a schedule to fit the needs of the case, when adjusting fiduciary income.

The net worth method of proving taxable income is based upon the theory that increases or decreases in a taxpayer’s net worth during a taxable period, adjusted for nontaxable expenditures and nontaxable income, must result from taxable income.

IRM 4.10.4.6.7, Net Worth Method, provides detailed information about the net worth method. A formula for computing income using the net worth method can be found at IRM 4.10.4.6.7.3, Formula for the Net Worth Method. An example of the net worth method can be found at IRM 9.5.9-1, Net Worth Statement.

The source and application of funds method is a variation of the net worth method and is simply the comparison of all known expenditures with all known receipts. Excess of expenditures, when reported adjusted gross income or net income is included among the sources, represents understated income.

In this method enter only increases and decreases in assets and liabilities along with other non-deductible and non-taxable receipts.

IRM 4.10.4.6.3, Source and Application of Funds Method, provides a detailed explanation of this method. See IRM Exhibit 4.10.4-10, Source and Application of Funds Method: Example of Computation for Cash and Accrual Based Taxpayer, for an example.

This method is based upon the assumption that outlays disclosed on the return were actually made; however, only two types of expenditures, check or cash, paid for these outlays. If cash paid them, then the source of that cash must be due to receipts if not accounted for from other funds.

IRM 4.10.4.6.4, Bank Deposits and Cash Expenditures Method, provides a detailed explanation of this method. The basic formula for computing the understatement of taxable income is outlined in IRM 4.10.4.6.4.6. See IRM 4.10.4-9, The Bank Deposits and Cash Expenditures Method: Example of Computation of Gross Receipts, for an example.

Devise a schedule to fit the needs of the issue or adjustment. For example, a schedule appropriate for installment sales under IRC 453(b) is totally inapplicable to a timber transaction under IRC 631. The tax return format of capital gains and losses, Schedule D, is an excellent guide for applying the law in effect for a given year.

The computation of the adjusted depreciation may be shown under the explanations of adjustment, or on a schedule or exhibit such as Form 1914. However, there are situations in which a depreciation computation might not be needed. Some examples would be:

If the AO or Counsel wants a depreciation computation included in the settlement computation prepared by the TCS, they must provide the TCS with the information necessary for the TCS to prepare the computation of the depreciation adjustment or provide the TCS with the depreciation computation. Otherwise the TCS may just include the depreciation adjustment amount shown in the work request in the settlement computation without including a depreciation computation schedule.

Excel Form 1914 spreadsheets available:

IRC 172 provides that net operating losses may be carried back to prior years and forward to future years as deductions.

If needed, explain adjustments to a net operating loss deduction in the settlement computation. Examples of when a computation may not be needed include:

In order for the TCS to compute the net operating loss, the AO or Counsel must provide the information needed. Generally the complete returns including all schedules and attachments are necessary for the year of the loss and the carryback/carryforward years.

See IRM 4.11.11, Net Operating Loss References, for a list of net operating loss references and resources.

Sometimes complicated computations of limitations on contributions and contributions carryovers are needed.

Schedules patterned along the line of schedules in the return may be used whenever appropriate for individuals and for corporations. See Exhibit 8.17.5-2 (Computation of Corporation Contribution Deduction and Carryovers) for details.

A charitable contributions limitation worksheet for Form 1040 is found on the RGS web site.

Certain computations are common to both corporate and individual taxpayers. See Exhibit 8.17.5-3 for an example of a computation of tax when the taxpayer restores an amount held under claim of right (IRC 1341). Special computations may be necessary for income tax paid to a foreign country or U.S. possession ( IRC 27 and IRC 901).

A life insurance company files their return on a Form 1120-L. There are special tax rules for life insurance companies and special limitations on losses when a life company files a consolidated return with a non-life company. The rules that govern the taxation of life insurance companies are located in IRC sections 801 through 818. Some of the general provisions that apply to all insurance companies are contained in IRC sections 841 through 848.

Worksheets to use when computing life insurance company taxable income are available on the Appeals Technical Support Sharepoint site.

Most of the tax forms and instructions are available at the Electronic Publishing Catalog web site.

Refundable credits are different from non-refundable credits:

See the following IRM sections for additional information about refundable credits:

The following IRM sections discuss the procedures to follow for refundable credit adjustments made to income tax returns:

Pre-refund cases (also called frozen refund cases) are those selected for examination prior to scheduling refunds claimed on returns. The IRS identifies issues that may indicate a taxpayer is not truly entitled to the refund amount claimed. The entire refund is generally held pending assurance of entitlement. The refund is released when the taxpayer provides information indicating he/she is entitled to the refund. To determine the status of refunds, however, secure a transcript of account before a case is closed. (See IRM 8.17.3, Preparing a Statement of Account.)

Examples of pre-refund examinations include earned income credit cases, CID initiated freeze codes, and unallowable tax holds.

The general procedure for settlement computations for frozen refund cases is the same as other individual income tax cases except that special language is needed either on Form 3610 or on the tax computation form. See discussion in paragraphs (4) and (5).

If Form 3610 is prepared, either of the formats discussed in paragraphs (a) or (b) can be used:

The Form 3610 formats discussed in paragraph (4) are not needed if language is included on the tax computation schedule instead:

IRC 6013 provides for filing joint returns. This subsection discusses the procedures for converting separate returns to joint returns in non-docketed cases.

When collection of income tax is in jeopardy, the Area or Field Operations Director terminates a taxpayer’s taxable period, and has an assessment made for tax and penalty determined to be due, under the conditions found in Policy Statement P-4-89 and the procedures in IRM 4.15, Jeopardy/Termination Assessments.

At the end of the usual annual accounting period, the taxpayer is responsible for filing a return for his or her annual accounting period.

Upon filing the full year return, the Area or Field Operations Director’s office determines the correct liability and, where appropriate, issues a preliminary notice or notice of deficiency. The statutory deficiency is the difference between the liability determined and the liability entered on the full-year return. If the taxpayer does not file a full-year return, follow the "substitute for return" procedures. The statutory deficiency is not reduced by the assessment under IRC 6851. The taxpayer may protest the notice to Appeals. In some cases, it is possible for Appeals to receive the case prior to issuance of the notice of deficiency. In these cases, Appeals issues the notice of deficiency.

In preparing settlement computations, use the format similar to jeopardy assessment cases, except change "jeopardy assessment" to "termination assessment under IRC 6851."

See IRC 7429(a) and IRM 8.7.1.6.4, Termination Assessments, for additional information.

If a termination assessment case is docketed, a statement of account is required. See IRM 8.17.3, Preparing a Statement of Account.

Jeopardy assessments of income, estate and gift taxes are covered in IRC 6861, and jeopardy assessments on all other taxes are covered in IRC 6862.

Generally settlement computations for cases involving jeopardy assessments follow the pattern of a regular settlement computation, except for the changes noted below.

If a jeopardy assessment case is docketed, a statement of account is required. See IRM 8.17.3, Preparing a Statement of Account.

Appeals procedures are covered in IRM 8.7.6, Appeals Bankruptcy Cases.

If a settlement computation is needed in a case where an assessment was made under bankruptcy/receivership proceedings, follow the format of jeopardy assessment cases.

If it is determined an overpayment or deficiency in a case is barred by statute, special annotations are made to Form 3610 or the tax computation form (Form 5278, Form 4549, etc.). The information can also be shown on an attachment.

The same procedures apply to barred overpayments and barred deficiencies whether the case is non-docketed or docketed.

If the total overpayment or deficiency is barred, asterisk (*) the amount and add a footnote to Form 3610, the tax computation form, or an attachment. The following is an example of the footnote for a barred overpayment case:

If only part of the overpayment or deficiency is barred, asterisk (*) the total amount and add a short summary of the barred amount to the bottom of the Form 3610, the tax computation form, or an attachment. The following is an example of the summary for a barred overpayment case:

It is the responsibility of Appeals to provide tax recomputation assistance for settlements and judgments in Department of Justice (DOJ) refund litigation cases when it is requested by Counsel. All requests for TCS assistance on DOJ cases must come from a Counsel attorney to a TCS manager for assignment. The DOJ cannot send a request for TCS assignment directly to the TCS manager but must go through a Counsel attorney.

Since refunds involve payment of interest by the Government, these recomputations must be furnished without undue delay.

The tax computation form (Form 5278, Form 4549, etc.) will be prepared taking into consideration prior assessments of tax and penalties. (Be sure to attach penalty schedules if applicable.) Show the tax, penalty and interest adjustments on Form 3610 by periods to enable the Campus to properly handle the overpayments and process the refunds.

Form 3610 is required for refund litigation cases. Other forms needed to prepare recomputations are the same as those used for regular settlement computations - Form 5278 , Form 4549 , penalty schedules, etc.

If the TCS is preparing tax computations for a DOJ refund litigation case and needs assistance/support with interest computations due to complexity, the TCS will:

See Exhibit 8.17.5-6 for an example of a suggested format for a settlement computation prepared for a refund litigation case.