4.46.3. Planning the Examination

(1) Planning is crucial for an efficient examination. In order to use resources efficiently, examinations must be effectively planned employing an issue-driven strategy. A successfully executed plan requires active engagement by LB&I and the taxpayer, starting with the planning phase and continuing throughout the entire examination process.

(2) Work identified under the Campaign Development Process (IRM 4.50) will follow the LB&I Examination Process (LEP) when the treatment stream is an examination. Examinations vary in scope, size, and complexity; therefore, portions of this IRM section may be more applicable to some cases than others. Cases identified through the campaign process have at least one issue identified; the risk analysis portion of the planning phase must be tailored accordingly.

(3) The planning phase begins with an assessment of the tax return for examination potential. Once a return has been selected for examination, the examination team members should address the relevant planning considerations. These considerations include reviewing the information contained in the case-built file (CBF), the team members familiarizing themselves with the taxpayer and/or their industry, potential issues requiring specialist involvement, pending statute dates along with distribution of case file/taxpayer information to those involved with the risk analysis of the return.

(4) Initial planning discussions lay the groundwork for a mutual exchange of information and understanding that will assist both the examination team and the taxpayer in defining and carrying out an issue-driven examination. Depending on the scope of the examination and the type of taxpayer’s enterprise, the number and type of meetings will vary.

(5) Collaborating internally as well as with the taxpayer will allow the development of a well-defined, issue-driven, examination plan. Success will largely depend on the transparency, cooperation, and responsiveness of everyone involved in the examination.

(6) IRM 4.60.6, International Referral Criteria and Procedures, was incorporated into IRM 4.46.3. These procedures apply to LB&I, SB/SE and TE/GE personnel. The rest of the LEP IRM applies only to LB&I personnel.

(1) See IRM 4.46.1.1.2, Authority.

(1) See IRM 4.46.1.1.3, Roles and Responsibilities (LB&I only).

(2) LB&I, SB/SE and TE/GE are responsible for the international referral criteria and procedures incorporated into IRM 4.46.3.2.6.1 through 4.46.3.2.6.7.

(1) See IRM 4.46.1.1.4, Program Management and Review.

(1) See IRM Exhibit 4.46.1-1 , Glossary of LB&I Terms and IRM Exhibit 4.46.1-3 , Quick Reference Guide – Acronyms Only.

(1) The LB&I intranet sites https://irsgov.sharepoint.com/sites/LBI/ and https://irsgov.sharepoint.com/sites/ETD-KMT-KB051 are resources for learning more about the concepts and procedures in this section. Type key words in the search box on the LB&I home page or virtual library for more information about a specific item.

(1) The Issue Selection and Collaboration Process (ISCP) focuses on issue identification on a return prior to assignment to an examiner. It has two assessment tools for return and issue selection:

• Manager Initial Risk Assessment (MIRA)

• Specialist Initial Risk Assessment (SIRA)

(2) The source of the workload determines the applicability of the two components. The CAM can be used for all inventory. The MIRA/SIRA is not required for:

• Large Corporate Compliance (LCC) cases

• Large Partnership Compliance (LPC) cases

• Compliance Assurance Process (CAP) cases

• Joint Committee cases, claim cases or tentative refund cases where the refund is less than $25 million for corporate returns and less than $10 million for individual returns

• Prior and subsequent year pick-up returns

• Related party pick-up returns that are not part of the High Income Initiative (HII)

• Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, returns

• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, returns

• Penalty cases

• Cases controlled for APA purposes

• Form 1040, U.S. Individual Income Tax Return, that are not part of the High Income Initiative (HII)

• Single-issue campaign cases

• Pathway hire program training cases with activity codes 215 and 217 (SBSE returns) that are generally worked in the first two years of the Pathway program

(3) The following subject matter practice area specialist (SMPA) should complete the ISCP:

• Treaty and Transfer Pricing (including Economists)

• Foreign Payments Practice

• Cross Border Activities

• Financial Products

• Engineering

• Computer Audit Specialists (CAS) - CAS should be involved in ISCP issue discussions

• Tax Computation

• Employment Tax

• Excise Tax

• Tax-exempt and Government Entities

(4) When the case manager receives inventory to which the ISCP applies, the case manager will forward a copy of the Form 3210, Document Transmittal, to the SMPA managers based on the potential audit site location. The case manager (or their designee) will access and complete the MIRA via the Team Website (TWS) to determine if there are any potential Geographic Practice Area (GPA) and SMPA issues. Once the MIRA has been completed, the case manager will assign Case Built File (CBF) access to each SMPA manager for which a SIRA is required. A SIRA is required when any SMPA question on the MIRA form has a “yes” or positive response. The MIRA will be available for viewing in the TWS to assist the SMPA manager (or their designee) in preparing the SIRA to identify SMPA issues that merit examination or review. The designee can be an assigned revenue agent or specialist who will assist in preparing the MIRA or SIRA input for review and submission by the manager. A designee can fill out a MIRA or SIRA but cannot submit the final MIRA or SIRA. The case manager or SMPA manager is required to review, make any required corrections, and submit the completed MIRA or SIRA.

(5) The issues identified on the MIRA/SIRA will be discussed at a manager collaboration meeting within the timeframe agreed to by the managers. The use of these tools, along with manager discussions, will help the managers to identify and select the most strategically important issue(s) and cases for examination and determine resource availability.

(6) If the return is selected for examination at this meeting, the selected issue(s) and subject matter practice area specialist/SME who will work them, if identified, will be shared with the TC.

(1) Returns can be surveyed either before or after assignment. To survey a return an analysis and evaluation of audit potential and resources must be completed. If the managers decide the return has no audit potential, then the case manager will survey the return before assignment. If the return is selected for examination, the TC may still survey the return after further analysis of the return at any time before an actual inspection of the taxpayer’s books and records. If the return contained a manager’s recommendation to examine, the TC must discuss with the manager before surveying the return after assignment. Time spent to survey returns after assignment in which no contact with the taxpayer was made, except for Joint Committee (see (3) below), should be charged to Examination Activity Code 615, General - Survey. See IRM Exhibit 4.9.1-1, Definitions of Miscellaneous Examination Activity Codes.

(2) A return may be surveyed after assignment provided both the following conditions are met:

1. The taxpayer (or representative) has not been contacted, or if contact has been made, no taxpayer books and records have been inspected, and

2. The examiner determined an examination will most likely not result in a material change in the taxpayer's tax liability.

(3) There are special rules for Joint Committee surveys. Refer to IRM 4.36.3.4, Joint Committee Procedures, Examination Team Responsibilities, Survey After Assignment Criteria. Time spent for all surveys after assignment meeting Joint Committee criteria should be charged to Examination Activity Code 596, Joint Committee Survey. A Joint Committee case is identified on AIMS with a Project Code 0077.

(4) For partnerships subject to the centralized partnership audit regime (BBA), refer to IRM 4.31.9.7.8(9) for survey after assignment procedures.

(5) A Survey Reason Code (SRC) is required for all LB&I returns that are surveyed either before or after assignment (Disposal Code 31 or 32). The SRC values and definitions are as follows:

1. Survey Reason Code A: No Large, Unusual or Questionable (LUQ) Items– This code should be used if the primary reason for the survey is because there are no LUQ items on the return.

2. Survey Reason Code B: No Change in Prior Year– This code should be used if the primary reason for the survey is that the same issues identified on the current year return were just as significant in either of the two preceding years and were no-changed or had a small tax change.

3. Survey Reason Code C: Beyond Cycle (includes statute issue)– This code should be used if the primary reason for the survey is based upon currency and/or statute considerations. Currency for LCC cases means the last two filed return years are in open, closed, surveyed, merged or decontrolled status. Cycle time refers to the time for completing the examination and disposition of income tax returns.

4. Survey Reason Code D: Lack of Resources– This code should be used if the primary reason for the survey is due to a lack of resources. This survey code cannot be used with Disposal Code 32, Survey After Assignment. It can only be used for survey before assignment cases.

5. Survey Reason Code E: Other– This code should only be used if the primary reason for the survey is other than those indicated in Survey Reason Codes A through D or F through I.

6. Survey Reason Code F: Collectability– This code should be used when there is doubt as to collectability of any potential understatement of tax.

7. Survey Reason Code G: Combat Zone– This code should be used if the taxpayer is serving in a combat zone.

8. Survey Reason Code H: Timing Issue– This code should be used when the only issues identified are timing issues.

9. Survey Reason Code I: De Minimis Tax– This code should be used when it is determined that the issues at risk would result in de minimis tax.

(6) When preparing a case file for survey, one of the SRC values must be entered on the closing form (i.e., Form 4251, Return Charge-Out; or Form 5351, Examination Non-Examined Closings; or Form 5546, Examination Return Charge-Out Sheet) to the right of the Disposal Code. The SRC must also be entered in ERCS when closing the return from the group. Only one reason code can be entered. If more than one reason code applies, only use the code that reflects the primary reason for the survey.

(7) For returns using SRC E, "Other," the case manager must include a separate form in the administrative case file that clearly explains the reason for the survey. Either Form 14235, LB&I Income Tax Survey or Form 1900, Income Tax Survey, can be used for this purpose. The form will remain in the case file when it is closed.

(8) For paperless surveys, see IRM 4.46.3.2.2.1, Paperless Survey - Non-Examined Closures Using a Paperless Process.

(9) Survey Claims After Assignment - IRM 4.10.2.5.3, Surveying Claims, provides guidance on surveying claims after assignment.

(1) Review and consider both Policy Statement 4-5 (P-4-5) and Policy Statement 4-6 (P-4-6) for all cases when considering assignment of resources. For more detail see the following IRM subsections:

• IRM 1.2.1.5.3, Policy Statement 4-5 (Rev. 1), Restrictions on Examiners’ and Specialists’ Consecutive Survey or Examination Responsibilities, describes restrictions on consecutive survey or examination responsibilities. IRM Exhibit 4.46.3-9, LB&I Transition Rules for Implementation of Revisions to Policy Statement 4-5 and IRM Exhibit 4.46.3-10 ,, Policy Statement 4-5 Guidance provide additional guidance applicable to all LB&I employees on the most recent changes to P-4-5.

• IRM 1.2.1.5.4, Policy Statement 4-6, Examiner may not examine return if relationship impairs impartiality, states that managers and examiners may not examine a return if certain relationships impair impartiality.

• IRM 4.10.2.2.3, Conflict of Interest

• IRM 4.10.2.2.4, Restrictions on Consecutive Audit or Survey by the Same Examiner - Policy Statement 4-5

• IRM 4.46.3.4.3, Financial Interests or Other Conflicts of Interest and Disclosure

(1) Certain factors should be considered when assigning a return for examination. These factors are listed below:

1. Statute of Limitations – The first responsibility of the examination team when a return is assigned is to determine when the statute of limitations for assessment will expire. Careful consideration should be given to the earliest statute of the tax year or years when creating the examination plan.

2. LB&I Strategic Goals – Returns selected for examination will be in line with LB&I strategic goals. Case managers will collaborate with specialist managers when reviewing inventory. Examiners are expected to follow the guidance and instructions issued with campaign-generated returns.

3. Case Built File (CBF) Information - The CBF serves as a repository for case related information that is available to an employee assigned to examine a return. Types of items included are: campaign instructions, classification sheets, Taxpayer Information Gateway (TIG) reports, Selection, Workload and Classification (SWC) reports, yK-1 reports, CDW Knowledge Graph Environment (CKGE) reports, Financial Data and Risk Assessment Reports, Schedule UTP information, Office of Tax Shelter Analysis disclosure documents and risk assessment documentation assembled by classifiers using the Content Management and Collaboration system. CKGE and yK-1 perform data analytics from information in the Compliance Data Warehouse (CDW). The CDW is a repository of information and not considered an authoritative source. Therefore, CKGE and yK-1 should be used in conjunction with an authoritative source such as the Integrated Data Retrieval System (IDRS).The case manager will forward the CBF information to the appropriate managers to ensure comprehensive risk analysis. The CBF can be uploaded to IMS.

   Reminder: CBF information should be obtained and shared early in the examination process.

   Note: CKGE, yK-1 and any other data analytic tool Disclosure: The output from tools such as the CKGE Link Analysis Tool, yK-1 (electronic or hardcopy) or any other similar data analytic tool contains tax return information of multiple taxpayers. Pursuant to IRC 6103, 7213, and 7431, this information cannot be disclosed to the taxpayer or their representative.

4. Resources Available - Planning an examination is a collaborative effort between case and specialist managers leveraging all available resources. Consultations with practice area specialists and local counsel are valuable resources that should also be used.

5. Auditor’s Workbench - This program displays tax return information and incorporates custom reporting and analysis tools useful in the review and audit of taxpayers. The source of data for the use of the program is the XML files that can be downloaded from the LIN system.

6. Form 1065 and 1120S Schedule K1 Reconciliation Application: To assist with planning, agents can use the Form 1065 and 1120S Schedule K1 Reconciliation Application to reconcile the Schedule K against the Schedule K-1's for the Form 1065, U.S. Return of Partnership Income, and 1120-S, U.S. Income Tax Return for an S Corporation, tax returns. 

7. IMS Input Requirements – Accurate and contemporaneous information must be input in IMS to allow for appropriate decision making regarding case development and resource allocations.

(2) Managerial approval is needed for opening examination with less than 12 months on statute. See IRM 25.6.23.5.1.4, Initiation of Controls by an Examiner or Specialist - Area Offices and Campus Operations.

(1) After a return is assigned, the TC will review and update the preliminary assessment/classification information and familiarize themselves with the taxpayer’s business operations. This research will assist in setting a preliminary examination scope and determining whether additional issue team members not already identified by the case manager may be needed. If the return was selected as part of a campaign, follow the instructions provided in the CBF.

(2) For each potential issue where it was determined in the ISCP that a specialist is required, a referral should be submitted as early as possible in the Specialist Referral System (SRS) to document the collaborative risk analysis process. The SRS referral submitted should include the information relied upon during the initial return assessment, including the ISCP, to ensure proper resources are assigned. The case manager should collaborate with specialist peers to ensure that resources are available during the audit time frame. For more information on SRS see IRM 4.46.3.2.6, Specialist Referral System.

(3) The case manager should estimate the examination starting date, so that resources can be identified in a timely manner. Priorities should be established through an issue-driven risk process, which compares the potential benefits to be derived from examining an issue to the resources required to perform the examination. The risk analysis should document any considerations regarding selection and control of any related returns.

(1) Automated System for Requesting Specialist Assistance – The Specialist Referral System (SRS) automates the referral process requesting specialist assistance. Agents generate referral requests online and SRS automatically notifies the appropriate specialist managers of the request.

(2) The SRS referral system should be used with all cases, including cases using the ISCP. The requester should use the comments section (located at the bottom of the page for each specialist requested) to document one of the following case types:

1. IC cases

2. Mandatory work (claims, JCC, etc.)

3. Campaign cases (issue-based treatment stream)

4. CAP case

5. LCC (or replacement program cases)

6. LPC (or replacement program cases)

(3) Specialists covered by the SRS – The following specialist services must be requested using SRS:

(4) The SRS is accessible through the LB&I intranet at https://srs.web.irs.gov/.

(5) The SRS is a database of referral information. Reports are only available on ad-hoc basis by requesting them from the SRS administrator at: *SRS

(1) After the case has been selected for examination and assigned, contact with the taxpayer should be timely initiated.

(2) All initial contacts with taxpayers to commence an examination must be made by mail using the appropriate initial contact letters. For the LB&I examination of a corporation or other business return types, examiners will use Letter 2205-L, LB&I Initial Contact Letter. For the LB&I examination of a partnership return, examiners will use Letter 2205-D, Initial Contact to Schedule Appointment - Partnership Returns. Both Letter 2205-L and Letter 2205-D are only applicable to business returns and include a reference to a web link to access and download Publication 1 and Notice 609 at www.irs.gov/businesses. Examiners can initiate contact by telephone with the taxpayer after mailing the contact letter, and allowing sufficient time for the taxpayer to respond (allow 14 calendar days from mailing the letter).

(3) Refer to IRM 25.4.1 and IRM 25.4.2 for guidance in dealing with taxpayers designated under the "Potentially Dangerous Taxpayer" (PDT) and "Caution Upon Contact" (CAU) programs, respectively. Additional information can also be found on the Office of Employee Protection website.

(4) For individual taxpayers, LB&I will use Letter 2205, Initial Contact, to ensure that taxpayers who have limited access to the web receive the required publications and notices. Pub 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, must be included with the letters as required by RRA 98. SeeIRM 4.10.2.8, Initial Contact: Overview. Receipt of Publication 1 and Notice 609 will be confirmed at the first in-person meeting with the taxpayer and should be documented in the case file.

1. In cases when the taxpayer does not confirm receipt of Pub 1 or Notice 609, both publications will be provided at the opening conference/meeting.

2. Pub 3498, The Examination Process, explains the audit process from the initiation of the examination through an overview of the appeals and collection processes. It is mailed with all preliminary 30-day letters. SeeIRM 4.10.8.12.1, 30-Day Letters.

(5) Prior to issuing the applicable initial contact letter, examiners must conduct research on IDRS command code CFINK for any Form 2848 on file that corresponds with the tax matter and tax year under examination. If so, examiners must mail a copy of the initial contact letter to the representative(s) designated on Form 2848 to receive copies of IRS notices and communications.

(6) When the taxpayer calls to schedule the initial appointment, examiners must follow the procedures in IRM 4.10.2.8.2, Initial Telephone Conversation.

(7) If the examiner receives a phone call from an individual other than the taxpayer, do not discuss any confidential return information until you secure Form 2848 or Form 8821.

(8) Taxpayers and their representatives have the option of submitting Form 2848 or Form 8821 directly with the examiner or by filing online on IRS-approved platforms Submit Forms 2848 and 8821 Online at https://www.irs.gov/tax-professionals/submit-forms-2848-and-8821-online and Tax Pro Account at https://www.irs.gov/tax-professionals/use-tax-pro-account.

(9) If you receive a Form 2848 or Form 8821 from the taxpayer or representative, verify that the form is accurate and complete and the representative is authorized to practice before the IRS. Refer to IRM 4.11.55, Power of Attorney Rights and Responsibilities.

(10) After the initial telephone conversation with the taxpayer or representative, issue one of the following letters to confirm the initial appointment:

• Letter 3253, Taxpayer Appointment Confirmation Letter, is used for individual taxpayers.

• Letter 3253-L, LB&I Taxpayer Appointment Confirmation, is used for corporate, partnership or other return types.

• Letter 3254, Representative Appointment Confirmation Letter, is used when the initial appointment is scheduled with the representative. A copy of the letter must be sent to the taxpayer.

  Note: Attach a Form 4564, Information Document Request to the appointment confirmation letter, listing all the information needed at the initial appointment (e.g., basic books and records, organizational charts, Board minutes, and/or general information about the taxpayer’s business).

(11) When additional years are added to an open examination, provide written notification to the taxpayer using Letter 5968, Prior or Subsequent Year Pickup. Provide a copy of the letter to the taxpayer representative if there is a Form 2848 on file.

(12) Letters, forms and other documents issued to taxpayers or representatives can be signed digitally. However, the digital signature must display an image of the IRS employee’s handwritten signature in the signature block and the date signed. Refer to IRM 4.10.1.4.4, Digital Signatures.

(1) Inventory received may contain preliminary risk analysis information and instructions. Review all information transmitted with the return. If no guidance is received, the agent must conduct a preliminary risk analysis using the information resources that are available to the examiner. Financial information resources available will depend on whether the entity is publicly or privately held.

(2) Publicly held entities have published financial information that provides a basis for understanding the entity’s business activities, operations, accounting and financial data and policies. In contrast, privately held entities may have limited public information. When public financial information is not available, the examiner should determine whether any published financial information is necessary to develop the risk analysis and request it during the opening conference.

(3) Internal information resources available for preparing the preliminary risk analysis include:

• Tax return information

• Information contained in the CBF

• Historical examination information (see Exhibit 4.46.3-1): prior RARs, prior years’ IMS information, historical files, Appeals Case Memoranda (ACMs), etc.

• Internal information systems (IMS, ERCS, IDRS, etc.)

• IRS Source (https://irsgov.sharepoint.com/sites/IRSSource)

• IRS Virtual Library (https://irsgov.sharepoint.com/sites/ETD-KMT-VirtualLibrary)

• Practice area subject matter experts

• Practice Units (https://www.irs.gov/businesses/corporations/practice-units)

• Counsel

• yK-1

• Auditor’s Workbench

• Manager Initial Risk Assessment (MIRA)

• Specialist Initial Risk Assessment (SIRA)

(4) External resources include:

• Financial statement information

• Securities and Exchange Commission (SEC) filings

• Taxpayer website(s)

• Internet research

• Contracted vendor services (i.e. Bloomberg Tax, Westlaw, Accurint, Capital IQ, etc.)

• Publications such as newspapers, trade magazines, industry journals, etc.

• Regulatory agencies

• Any other third parties (see IRM 25.27.1, Third Party Contact Program, for procedures)

(1) To facilitate the understanding of potential industry issues, any recent legislative changes and emerging issues, consider contacting LB&I Area Counsel or subject matter experts. They can provide assistance in risk analysis and other aspects of the case planning process. Counsel and SMEs are valuable technical resources.

(1) A risk analysis must be completed during the planning stage of the examination. This risk analysis should be reviewed and updated throughout the examination as warranted. Risk analysis decision points to consider include:

1. Related return(s) received in group

2. Pre-contact analysis

3. Issue identification

4. Mid-cycle risk analysis (see IRM 4.46.3.3.6)

5. Ongoing factual development

6. Taxpayer’s acknowledgment of the facts

7. Issue resolution

(1) Team members should collaborate at the earliest point of the planning phase to finalize the initial risk analysis of the return. The case manager in consultation with specialist manager(s) will collectively assess potential issues identified, approve issues and establish issue priorities. Throughout the risk analysis process, an ongoing dialogue should occur among the team members. For example, depending on the complexity of the return, informal discussion(s) prior to the internal planning meeting are encouraged to discuss logistical concerns such as assignment of issue(s), overlapping of multiple specialties, assignment of a team member to multiple issue teams, etc. The informal discussions will enhance the internal planning meeting by resolving issues beforehand. Any informal agreement(s) discussed should be formalized at the internal planning meeting.

(2) As a reminder for cases subject to the ISCP process, the case managers and specialist managers, or their designees, should collaborate using the MIRA and SIRA process to determine the potential issues and availability of examiners having knowledge about each issue identified. See also IRM 4.46.3.2.1 for details about which specialists are subject to the MIRA and SIRA process.

(3) LB&I examiners are required to contact the Merger & Acquisition (M&A) Project Team for an assessment of whether the case should be part of the M&A Project when their case has 40 or more planned staff days related to potential M&A issues. Contact with the M&A Project Team must be made early in the examination planning stage by emailing the case name, potential M&A issue(s) and respective planned staff day information to *LB&I M&A Project Team. If the case is selected to be part of the M&A Project, the M&A Project Team will assist the examination team in the planning, examination and resolution of the M&A issue(s). Refer to the Corporate Issues Knowledge Base in the Virtual Library at https://irsgov.sharepoint.com/sites/ETD-KMT-KB020 for information on potential M&A issues. M&A issues may include, but are not limited to:

• Asset acquisitions

• Corporate carryovers

• Corporate distributions

• Corporate liquidations

• Corporate organization

• Corporate reorganizations

• Transaction costs

• Worthless stock losses

(1) The risk analysis is a process that is based on experience, judgment, and objective analysis. An issue-based approach should be used when performing the risk analysis to identify issues that are material or have significant compliance risk. Other goals of the issue-based approach are to:

• Improve the audit planning process

• Reduce examination cycle time

• Improve currency

• Efficiently use compliance resources

(2) The risk analysis is an ongoing process and should be periodically revisited and updated. Priorities can be established when weighing the potential impact on voluntary compliance and resources needed. Many factors can be considered during the risk analysis process which may change as additional facts are developed. Some of the factors that may be considered in conducting the risk analysis include the following:

1. Return information, including related returns, should be reviewed to determine possible large, unusual and questionable amounts. The risk analysis should consider the size and complexity of the return which may include related entities, changes between years and locations of entities.

2. Claims and voluntary disclosures

3. Potential tax adjustment compared with the resources needed.

4. Significant interrelated issues which, if fully developed, would require additional returns to be brought under examination. For example, recognition of income and deduction of expenses between related parties or the tax treatment and valuation of assets in mergers and acquisitions may require expansion of examination to include related returns.

5. Weighing the magnitude of compliance risks against the resources required to examine a highly complex issue.

6. Consideration should be given to prior cycle issues that have been settled or are pending in Appeals. For issues that have been resolved, consideration should be given to settlement authority. See IRM 4.46.5.4.2.2, Delegation Orders. If the issue is open, teams should have ongoing discussions with the taxpayer on the status of the issue before Appeals, and when settled, obtain the Appeals Case Memorandum (ACM). For those issues still pending, the ex parte rules must be followed. See Rev. Proc. 2012-18 and IRM 8.1.10, Appeals Function, Ex Parte Communications.

7. Any applications for change in accounting method or consent letters attached to the return should be reviewed to determine whether the accounting method change was proper and the corresponding adjustments were computed correctly. See IRM 4.11.6, Changes in Accounting Methods for additional information.

8. Compliance consideration or items of strategic importance

9. Financial condition of the entity - collectability

10. Materiality - adjustment potential

11. Recurring nature of the issue and potential impact on future years

12. Effect of legislative changes

13. Litigation consideration

14. Business risks that may result in material misstatements in financial statements

15. Significant changes in entity such as large acquisitions, reorganizations, or other unusual events

16. Significant changes in the taxpayer’s industry

17. Significant new products, services, or new lines of business

18. Tax haven locations and significant changes in or expansion to different tax jurisdictions

19. Operations in areas with unstable economies

20. High degree of complex regulations

21. Effective Tax Rates (ETR) – changes and trends in US and worldwide rate

22. Foreign Tax Credits/ limitations

23. Taxpayer’s system and controls

24. Amended returns

25. Carryback and carryover items

26. Any other relevant risk factors identified but not listed above

(1) To facilitate issue development, on-going risk analyses should occur in all cases. All issue teams must document an initial risk analysis.

(2) Mid-cycle risk analysis is required on all LCC and LPC cases (or successors to the LCC and LPC programs) and must be approved by the territory manager. This should occur when the case reaches the earliest of either 50% of time applied or 50% of time lapsed based on ECD.

(3) Mid-cycle risk analysis is optional on LB&I IC cases with ECDs of less than 12 months. Should the ECD of any LB&I case be extended to exceed 12 months, an updated risk analysis is required. The issue team's risk analysis is approved by the issue manager(s) and forwarded to the case manager for concurrence. Depending upon local management's practices, the risk analysis may need to be forwarded to the territory manager for approval. At mid-cycle, the issue team will submit the issue team’s risk analysis to the case manager with a recommendation to continue, expand, or reduce the scope of the examination.

(4) Mid-cycle risk analysis is not required for micro-captive insurance cases if:

• The case is part of the Micro-Captive Insurance Campaign (project code 1138)

• The only issue is captive insurance

(5) Because the risk analysis is an ongoing process, when significant events occur such as adding new issues or additional examination years, the risk analysis should be updated/revised as actions occur.

(6) The initial, mid-cycle, and or updated risk analyses documents will be shared with the taxpayer once the updated documents have been approved by the case and issue managers.

(1) The need to contact third parties should be considered early in the examination or as soon as the need arises. IRC 7602(c) provides that IRS personnel may not contact third parties with respect to the determination or collection of tax liability without providing advance notice to the taxpayer. IRS personnel are required to maintain a record of such contacts and provide taxpayers with this record upon request.

(2) Section 1206 of the Taxpayer First Act amended IRC 7602(c)(2), Notice of Contact of Third Parties, and now requires IRS to:

• Issue advance notice before any third-party contacts are made

• Intend, at the time such notice is issued, to contact third parties (the notice must state the intent)

• Specify in the notice the time period, not to exceed one year, in which IRS intents to make third-party contact(s)

• Send the notice at least 45 days before the first contact with a third-party

(3) Case and issue managers and examiners should refer to IRM 25.27.1, Third-Party Contact Program, for procedures and exceptions to the notification requirements.

(1) RRA 98 Sec. 3705(a) provides that any manually or computer-generated correspondence shall include the name, telephone number, and unique identifying number (employee identification number) of an IRS employee who can be contacted with respect to the correspondence and resolve any subsequent inquiries.

(1) The case manager will ensure that all personnel on the LB&I examination are aware of and understand the statute requiring disclosure of any financial interests or other conflicts of interest that might create a real or apparent conflict of interest. See Document 12011, Internal Revenue Service Ethics Handbook, for conflict of interest rules. Also see IRM 4.10.2.2.3, Conflict of Interest.

(2) If an employee has a conflict, financial or otherwise, Form 6782, Certification of a Financial Interest in a Work Assignment, will be completed by the employee and given to their manager. This form will be completed only when a potential conflict exists. Managers will remove examiner(s) with potential conflicts of interest from the case unless determination(s) granting exemption are properly approved.

(3) LB&I employees who are not issue team members on an examination, but have a potential conflict of interest (financial, personal, or business) in a work assignment should complete the Form 6782 at the beginning of their involvement. Such employees will be removed from the case unless determination(s) granting exemptions are properly approved. Examples of employees that may be affected include, but are not limited to:

• Territory managers

• Directors of field operations

• Practice area directors who will impact the decision or treatment of an issue or return

• Subject matter experts

• Personnel from other programs where the taxpayer’s identity is known or inferred, and the employee will impact the decision or treatment of an issue or return

• Tax computation specialists

• Joint Committee specialists involved in the review of a return

(1) There are various internal and external sources of information available to assist the case manager and agents in identifying potential issues, determining staffing requirements and the general approach to the examination. See IRM 4.46.3.3.1, Examiner's Preliminary Risk Analysis - Information Resources.

(2) Depending on the resources deployed, the number of issues and complexity of those issues, use professional judgment to determine the depth of the procedures needed to efficiently prepare for the examination.

(1) Depending upon the complexity of the return, internal discussions may involve only the TC and the case manager.

(2) When the examination involves multiple issue team members, team members assigned to the case should have more formalized internal discussions prior to meeting with the taxpayer.

(3) Team members assigned to the case will assess the risks of the potential issues with respect to their specialties. All team members will come to the internal planning meeting with a listing of the potential material issues and related preliminary audit procedures for consideration and collaboration.

(1) An agenda should be created to emphasize the objectives of the internal planning discussions. See Exhibit 4.46.3-2, Sample Agenda Topics for Initial Internal Planning Meetings, for a suggested list of agenda items to cover in the planning discussions.

(1) Specialist examiners and their managers who will be involved in the examination should be notified of:

• The date, time and method of the internal planning discussion(s)

• The scheduled starting date of the examination

• Data available for review

(2) Other participants who may be invited to the planning discussion(s) (depending on the size and complexity of the case) may include the following individuals:

• Support personnel

• Subject matter experts

• Territory manager(s)

• Director of field operations

• Area counsel

• Tax law specialists

(1) Major topics to consider in internal planning discussions should include:

1. Team member briefing

2. Issue identification/risk analysis

3. Resource allocation and utilization (issue teams)

4. Setting tentative timelines for the examination and issues

5. Review and documentation of preliminary examination procedures

6. Consolidation of common examination procedures

7. Preparation for discussions with the taxpayer

8. Time schedule coordination

9. Communication methods

10. Administrative procedures

(1) Minutes - Upon completion of the internal planning discussion, the discussion outcomes should be summarized in narrative form. The planning agenda should be used as a template when preparing the minutes. The minutes should capture the agreements, decisions, arrangements, etc. made during the internal planning discussion.

(1) The examination team should exercise professional judgment when determining what items to include on the agenda, when to hold the opening conference/meeting and who should attend. For complex examinations it may be necessary for the TC, issue team members and their respective managers to attend the opening meeting. On less complex cases, the opening meeting may include only the team coordinator and the taxpayer.

(2) An agenda should be prepared that covers mandatory topics as well as recommended items, including the items identified during internal planning. The examination team will provide a copy of the agenda and the preliminary risk analysis in advance to the taxpayer. The taxpayer may add any items they would like to address during the opening conference/meeting.

(3) Disclosure Safeguards - The case manager or designee is responsible for making all arrangements authorizing discussion and exchange of information between team members and the taxpayer's personnel. It may be necessary to hold separate opening conferences in the following circumstances:

1. Separate meetings may be required if corporate authority is decentralized into various operating components of the company.

2. Separate meetings may be required to avoid unauthorized disclosure of information between related entities. (Note that the taxpayer, in these instances, may request separate examination plan sections for some of the entities.)

3. Only corporate officers who have the authority under state law to bind the corporation are authorized to receive confidential return information absent a power of attorney or other authorization. Examiners should always be aware who is in the room and that the individual has authorization to receive confidential information from the IRS. See IRM 11.3.2.4.3, Corporations, which discusses which individuals in a corporation may have access to return and return information. Also see IRM 11.3.3.3.2., Requirements for Oral Authorization.

(1) Depending on the size and type of the entity, the examination team may decide it is more efficient to hold an administrative opening conference before the internal planning meeting. If the internal planning meeting has occurred, the opening conference/meeting would be combined to include both the administrative items and a discussion of the preliminary risk analysis.

(2) The timing of the opening conference and whether to hold an administrative-only opening conference or combined with the preliminary risk analysis is up to the judgment of the examination team.

(3) The opening conference for a BBA partnership can be scheduled for a date only after the Notice of Administrative Proceedings issuance date. Refer to IRM 4.31.9.8.1, Notice of Administrative Proceeding (NAP)

(1) Audits may require a separate opening conference to discuss administrative items and a separate meeting to discuss the preliminary risk analysis.

(2) For example, during the examination of a small, privately-held entity with limited public information, the TC may want to hold the opening conference before an internal planning meeting to gain a better understanding of the taxpayer's business and activities, and to review the taxpayer's books and records, before submitting a referral for a specialist. In this situation, the TC can make a more informed specialist referral or consult after the opening conference/meeting and then conduct the internal planning meeting with the specialist(s).

(3) In another example, with large complex taxpayers, the opening conference/meeting may serve only as an administrative meeting before the internal planning meeting is held. In this situation, the preliminary risk analysis would be prepared after the administrative opening conference/meeting. A subsequent meeting would then be scheduled for the examination team and the taxpayer to discuss the preliminary risk analysis.

(1) The opening conference/meeting can be combined to include administrative items as well as a discussion of the preliminary risk analysis prepared during internal planning meeting(s). The examination team may determine that it is more efficient to combine the administrative items and the preliminary risk analysis discussion during the opening conference/meeting.

(1) The preliminary risk analysis will be shared and discussed with the taxpayer with the intent of obtaining information that will help the examination team to narrow or focus the scope of the audit on the most significant issues.

(2) The examination team should discuss with the taxpayer the reasons each tax issue was selected for audit. In this discussion, the team should carefully consider any information provided by the taxpayer that could explain what was initially risked as a large, unusual, or questionable item, and take this information into consideration in determining whether to continue with the issue, and if so, the appropriate audit steps. The following objectives should be addressed at either the opening conference/meeting or at separate issue discussion meeting(s) with the taxpayer:

1. Select which issues or aspects of a particular issue warrant examination

2. Identify LB&I team members and taxpayer personnel to include on each issue team

3. Establish effective and efficient initial audit steps

4. Determine an estimated timeline and issue completion date for each issue as needed

(1) The opening conference/meeting should be conducted by the case manager (or delegated to the TC) and attended by the TC and other issue team members including their manager(s) whose attendance adds value by being able to discuss potential issues or assist in gathering information. It is important to remember that the opening conference/meeting is a working conference/meeting. If the taxpayer will be presenting a thorough overview of their business activities, operational structure, and accounting systems, team members that will benefit should attend. Participants who add value can be determined during internal planning or other discussions with the TC, case manager, and issue manager(s).

(2) For complex cases or large examination teams, there may be value in conducting an internal pre-meeting before the opening conference/meeting to review the opening conference/meeting agenda and confirm the role of each examination team member attending. In some instances, the pre-meeting may coincide with the internal planning meeting.

(3) The opening conference/meeting should include the head of the tax department and other appropriate key employees who can adequately discuss the agenda items as well as the preliminary risk analysis. Only corporate officers are authorized to receive confidential return information absent a power of attorney or other authorization. Examiners should always be aware who is in the room and that the individual has authorization to receive confidential information from the IRS. See IRM 11.3.2.4.3, Disclosure to Persons with a Material Interest – Corporations and IRM 11.3.3.3.2, Disclosure to Designees and Practitioners – Requirements for Oral Authorization.

(4) If the preliminary risk analysis is to be discussed at the opening conference/meeting , the examination team member(s) who can explain to the taxpayer why each issue is being considered for examination should attend. For issues selected for examination, the appropriate taxpayer personnel and examination team member(s) should work together to develop initial audit steps.

(1) During the opening conference/meeting, materiality thresholds should be discussed as appropriate. Setting a materiality threshold involves both quantitative and qualitative factors. There is no economic or mathematical formula or standard that should be applied to determine whether an amount is material in an examination. See IRM 4.46.3.3.5.4, Materiality. The issue team(s) should use their professional judgment and experience in establishing materiality thresholds.

(2) As with any other agreement, agreed materiality thresholds should be memorialized in the examination plan and should apply to issues examined as well as claims. The issue team and taxpayer will have to weigh all the facts and circumstances in assessing materiality either by category type (such as credits, deductions, etc.) or as specifically defined in the examination procedures of an issue.

(3) Materiality threshold agreements should apply equally to both the examination team and the taxpayer. A cooperative and transparent taxpayer will use the same materiality thresholds before filing any claims.

(1) The examination team will discuss the claim expectations at the opening conference/meeting.

(2) The opening conference/meeting will also trigger the start of the 30 calendar-day window for submitting informal claims. LB&I examination teams will consider informal claims that are fully documented and supported within 30 days of the opening conference/meeting. However, after the 30-day window, claims for refund should be filed using Form 1120-X, Form 1040-X or Form 843 and a copy provided concurrently to the team along with supporting documentation to enable the examination team to make a tax determination without the use of IDRs. See IRM 4.46.3.7, LB&I Claims Process.

(3) For partnership examinations subject to the centralized audit regime (BBA), informal claims may not be filed after the 30-day window. Refer to IRM 4.31.9.8.3, Informal Claims (LB&I Taxpayers). BBA partnerships cannot file an Administrative Adjustment Request (AAR) after a Notice of Administrative Proceeding (NAP) letter has been issued. Refer to IRM 4.31.9.7.7, Administrative Adjustment Request (AAR) and Other Subsequent Filings.

(1) The case manager or their designee should conclude the conference/meeting by reviewing all agreements and understandings reached with the taxpayer.

(2) Any modifications or additions to the preliminary risk analysis should be reviewed and approved. Also, arrangements made for future issue discussion meetings, presentations, site visits, review of corporate minutes, etc. should be scheduled and confirmed.

(3) Upon completion of the opening conference/meeting, the discussion outcomes should be summarized in narrative form. The planning agenda should be used as a template when preparing the minutes. The minutes should capture the agreements, decisions, arrangements, etc. made during the opening conference/meeting.

(1) The earlier the examination team receives a fully substantiated claim, the sooner it can be risk assessed to determine whether it should be accepted or examined. To improve efficiency in LB&I examinations, LB&I has set forth the following claim expectations.

(1) Regardless of when a claim, formal or informal, is submitted during the examination, the examination team must timely review the claim to ensure the claim meets the standards of Treas. Reg. 301.6402-2. After the 30-day window, the claim must be filed using the prescribed form and in the manner specified in Treas. Reg. 301.6402-3. For an illustration of the LB&I claim review process, see Exhibit 4.46.3-7, LB&I Guidelines for Reviewing Non-Research Credit Claims.

(2) Claim issue(s) should be risk assessed in the same manner as any other potential audit issue, after the claims have satisfied the appropriate treasury regulations. See IRM 4.46.3.7.3, Risk Assessing Claim Issue(s)

(1) Claim issues(s) should be risk assessed in the same manner as any other audit issue. For an illustration of the LB&I claims risk assessing process see Exhibit 4.46.3-8, Risk Assessing Non-Research Credit Claim Issue(s).

(2) Examiners must determine if the claim constitutes a request for a retroactive change in accounting method as outlined in IRM 4.11.6.7.5, IRC 446(e) - Taxpayer Files Amended Return or Claim (Formal or Informal) to Make Retroactive Change in Accounting Method, and if so, whether the claim should be allowed.

(3) If the taxpayer provides sufficient documentation necessary for the examination team to make a proper tax determination, the examination team should weigh compliance and materiality against the risks, benefits and burdens of examining claim issue(s). Consideration should also be given to any materiality threshold agreements.

1. After risk assessing, accept the claim issue(s) not requiring examination and incorporate claim issue(s) allowed into the revenue agent’s report (RAR). If appropriate, group accepted claim issues on one Form 5701, Notice of Proposed Adjustment. See IRM 4.46.3.7.4, Grouping of Claims and Affirmative Issue(s).

2. After risk assessing, add issue(s) and issue team(s) members to the examination plan. The issue team(s) should discuss with the taxpayer the resources needed, the issue timeline(s), and if necessary, the extension of the case ECD and statute of limitations.

(4) The burden of proof is on the taxpayer to support their claim issue(s), and as such the taxpayer must provide all credible evidence to support its claims, ideally without issuing an IDR.

1. If the taxpayer provides all documentation necessary for the examination team to make a proper tax determination, the claim issue(s) should be risk assessed.

2. If the taxpayer does not provide sufficient documentation for a proper tax determination to be made, based on the facts and circumstances of the claim, it must be determined whether it is appropriate to issue an IDR or disallow the claim as the taxpayer has failed to meet the burden of proof. Generally, an IDR will be issued only in instances where the team believes that an IDR will focus and facilitate the taxpayer’s production of documents sufficient to support its claim.

(5) If an IDR is issued and the taxpayer does not respond by the IDR response date or the response is incomplete, the issue team must decide whether to disallow the claim based on the taxpayer’s failure to satisfy its burden of proof. Generally, the IDR enforcement process should not be used since the taxpayer has an existing obligation to produce sufficient information to support its claim, without which the claim will be appropriately disallowed. Each situation has unique facts and circumstances; therefore, the issue manager in collaboration with the case manager must determine which option to follow and when it is appropriate to consult with senior management and/or counsel.

1. When disallowing a claim, refer to the procedures in IRM 4.10.11.2, Claims for Refund and IRM 4.31.9.8.3, Informal Claims (LB&I Taxpayers).

2. When following the IDR enforcement process, refer to IRM 4.46.4.7, Information Document Request Process. The issue team may elect to accelerate the IDR enforcement process for claim issues.

(6) When fully or partially disallowing a claim, the written acknowledgment of facts process applies and must be followed. Taxpayers may attempt to present new information or evidence to Appeals on unagreed claim issue(s) and the added step of securing an acknowledgment of facts provides Appeals with a clear understanding of the facts that were presented to the examination team. Refer to IRM 4.46.4.11, Written Acknowledgment of the Facts (AOF).

(1) To reduce administrative burden, if appropriate, claim and affirmative issue(s) accepted without examination may be grouped by character and tax treatment (income, expense, credit etc.) when establishing issues in IMS, and combined on one Form 5701 for processing. If the explanation of the adjustment is longer than the space provided on the Form 5701, then a Form 886-A can be used to list and briefly explain each accepted affirmative and claim issue. When grouping claim or affirmative issues, consideration should be given to the potential impact grouping issues can have on other items on the tax return, and carryback or carry forward attributes.

(2) To identify claims or affirmatives in IMS not warranting examination, it is recommended to use either SAIN 060 for Claims or SAIN 061 for Self-Audit Adjustments (Affirmative Adjustments). To identify the character or tax treatment of the grouped issues, a general UIL code may be used, such as 162.00-00 for expenses and 61.00-00 for income. When using these general UIL codes, it is recommended that adjustments in BNA are entered on line 10 for "other income" and line 26 for "other deductions."

(1) After the 30-day window, all issues that have not been identified for examination that result in a claim for refund (i.e. taxpayer’s favor), must be filed on a formal claim. The examination team should request that the taxpayer concurrently provide a copy of the formal claim to the team along with supporting documentation, including all information the taxpayer relied on when preparing the claim.

(2) Occasionally, a taxpayer may net issues on an informal claim (i.e. issues in the government’s and the taxpayer’s favor); however, offsetting amounts do not preclude the requirement for filing a formal claim on issues that could result in a refund.

(3) If the taxpayer submits a netted informal claim after the 30-day window, the examination team should explain that a formal claim is required for those issue(s) that result in a claim for refund (i.e. the taxpayer’s favor) unless there is an exception. See IRM 4.46.3.7.1.1(4).

(4) Netting of claims after the 30-day window is not applicable to BBA partnerships. Refer to IRM 4.31.9.8.3, Informal Claims (LB&I Taxpayers).

(1) Treas. Reg. 301.6402-2(b)(1) requires taxpayers that are filing a refund claim to apprise the Commissioner of the exact basis for the claim. To satisfy Treas. Reg. 301.6402-2(b)(1), taxpayers filing a claim for refund that includes a claim for the IRC 41 Credit for Increasing Research Activities "research credit claim" must provide, at a minimum, five items of information.

(2) In addition to the five items of information listed above, a declaration signed under penalties of perjury verifying that the facts provided are accurate is required. In most cases, the signature on Form 1040-X or Form 1120-X serves this function.

(1) If a taxpayer submits a claim late in the examination that adversely impacts the ECD, the statute of limitations and/or resources, a high-level discussion with senior management and the taxpayer equivalent should be held to ascertain the reason for the late claim and to discuss methods to improve tax administration.

(2) If the claim is not valid or properly filed, and is not perfected by the target date, LB&I may decline to act on the claim. See IRM 4.46.3.7.2.3, Declining to Act on a Claim.

(3) If the claim is valid and properly filed, the examination team should risk assess the issues on the claim. See IRM 4.46.3.7.3, Risk Assessing Claim Issue(s). The examination team and the taxpayer should determine the appropriate resources and issue timeline for all claim issue(s) that need to be examined. The case ECD and statute will be extended, if necessary, to allow sufficient time for the issue team(s) to properly examine all claim issues.

(4) If the examination team determines that a claim issue(s) is material or has an impact on compliance and cannot be examined in the current cycle, the examination team and the taxpayer should collaborate on the most efficient option to examine the claim. Options may include, but are not limited to: examining the claim issue(s) in a separate examination or resolving the issues through an existing resolution tool. In the event the current cycle is unagreed, coordination with Appeals is required if the claim issue will be examined in a separate examination.

(1) Time spent examining the protection of the revenue base must be kept separate from regular examination time. This is accomplished using the codes in IMS and ERCS. For guidance on how to correctly use the N, P, and R codes when reporting time, refer to the procedures in IRM 4.9.1.5.6, Protection of Revenue Base, and use IMS help topic "Handle claims in IMS."

(1) During the issue discussions, potential tax issues that are identified in the preliminary risk analysis are discussed with the following joint objectives:

1. Select which issues or aspects of a particular issue warrant examination

2. Finalize the issue team members along with taxpayer personnel for each issue

3. Establish effective and efficient audit steps

4. Prepare an issue timeline, as necessary

(2) The issue manager is ultimately responsible for working with the taxpayer in setting the issue timeline, approving the audit steps, and managing the issue. The issue manager should coordinate with the case manager and team coordinator when setting the issue timeline.

(3) Issues selected for examination, audit steps, issue team members, and issue timelines will be documented in the examination plan. As a part of the planning process, the case manager will collaborate with the issue manager(s) to determine the issues that warrant a separate timeline and the issues that run on a concurrent timeline. Once all issue timelines are determined, the overall case timeline and estimated case closing date will be driven by the tax issue requiring the longest time to complete.

(1) The examination plan at a minimum should include:

1. Detailed audit steps for each selected issue

2. Case and issue timeline(s) with milestone dates

3. Issue team members, including each team member's estimated days

4. Issue manager identified for each issue

5. Taxpayer members assigned to work with each issue team

6. Taxpayer contact information and each individual’s level of authority with respect to the examination (i.e. authorized to discuss tax matters, authorized to provide and receive information and authorized for all matters including binding taxpayer regarding adjustments)

7. Established dates and/or decision points that are used to periodically risk assess issues being examined

8. Agreements and arrangements made during the opening conference/meeting

(1) The examination plan must be shared and discussed with the taxpayer before the plan is final. This discussion should be conducted in an interactive manner to increase the taxpayer's involvement in the planning process, which contributes to their understanding of the examination plan and also affords them the opportunity to propose changes before the plan is final.

(1) The examination plan must be signed and approved by the case manager, issue manager(s), and in certain circumstances, the territory manager, before providing the plan to the taxpayer. A copy of the completed plan must be discussed with and provided to the taxpayer. The examination team is responsible for documenting this in the activity record. Request that the taxpayer sign a copy to acknowledge their receipt of the examination plan. This concludes the planning phase.

(1) The examination plan is a flexible document and may be revised during the examination if warranted. Any proposed revisions to the examination plan will be shared and discussed with the taxpayer, issue manager(s), and affected issue team members for their input before being approved by the case manager, and for certain examinations approved by the territory manager.

(1) The issue-based examination plan is prepared using Form 13744-I, Issue-Based Examination Plan and Risk Analysis. Form 13744-I is optional and may be used instead of Forms 4764, 4764-A (optional), 4764-B, 13744, and the examination timeline. Attach the opening conference/meeting minutes, including any pertinent agreements reached during the opening conference/meeting. See IRM Exhibit 4.46.3-3, Sample Agenda for Opening Conference/Meeting.

(2) A complete issue-based examination plan will include:

1. Form 13744-I, Issue-Based Examination Plan and Risk Analysis

2. Meeting minutes including pertinent agreements reached during the opening conference/meeting

(1) If this option is selected, a complete IC Examination Plan will include the following:

1. Form 4764-IC, LB&I Examination Plan for Industry Case (IC) Audits

2. Form 13744, Risk Analysis Worksheet

3. Form 4764-A, Summary of Assignments (optional)

4. Form 4764-B, Examination Procedures

   Note: Also document the issue manager and issue team members, including taxpayer personnel assigned to the issue.

5. Examination timeline using optional Form 13745, Examination Timeline, or similar workpaper.

(2) The Administrative Summary Sheet Workpaper for an IC examination is available to assist in preparing the examination plan and is not part of the plan given to the taxpayer.

(1) The examination plan will be prepared at the conclusion of the planning phase, it should be issue focused and also contain the following: the issues identified, audit steps, timeline(s), and communication agreements.

(2) Written document - The examination plan is a written document for all LB&I cases containing agreements with the taxpayer, information for the IRS personnel, work assignments, examination scope, examination procedures, time estimates, and special instructions. The plan is prepared using Form 4764, LB&I Examination Plan, Form 4764A, LB&I Examination Plan - Summary of Assignments and Form 4764B, LB&I Examination Plan – Examination Procedures.

(3) Organizational tool - The examination plan is the principal tool the case manager uses in collaboration with the examination team. The examination plan should:

1. Serve as a document for formalizing agreed upon arrangements with the taxpayer (these arrangements will have been negotiated through various preliminary planning meetings and the opening conference with the taxpayer)

2. Provide management with information regarding the type of examination planned and resources required

3. Define each issue team member's responsibility and how that responsibility is to be carried out

4. Serve as a basis for monitoring and directing the progress of the examination

5. Contain the scope of the examination

(4) Flexible - The examination plan should be only as sophisticated and detailed as needed for the examination to be performed. The plan for a single-location one-product business normally requires less detail than one written for an examination of a conglomerate type taxpayer having diversified products and global operations. An examination employing four or five team members may involve little or no coordination, whereas; a larger case with twenty or more agents will need more detailed written guidelines on how the members are to be used.

(5) Balanced - The plan should also have a proper balance between rigidity and flexibility. Excessive rigidity may result in a poor examination or a misuse of resources; however, a plan which is too general or flexible will defeat the purpose for which it is intended - a tool for directing, controlling and monitoring the examination. Proper evaluations of these factors when drafting a plan will not only result in an effective examination but will also save planning time.

(6) Taxpayer involvement - The examination plan is equally as important to the taxpayer as it is to the IRS. The taxpayer, through involvement during the entire planning process, develops a vested interest (aside from tax consequences) in how the examination is to be conducted. Both the taxpayer and the Service benefit when the taxpayer is able to plan ahead to provide space, equipment and personnel when needed by the team. Therefore, the taxpayer and the Service should have a mutual understanding in sufficient detail as to what, where, and when examination activity will take place.

(7) Living document - The examination plan is not a static tool. Case/Issue managers should revisit and revise the plan throughout the examination to take advantage of the additional information and feedback obtained. Personnel resources are; thus, more effectively used and the most significant issue areas are covered.

(8) Responsibility for the examination plan - The examination plan is the responsibility of the case manager, working in collaboration with the issue managers. The LB&I TC is responsible for coordinating the preparation of the examination plan.

(1) Sequence - Parts I and II of the plan should be completed before any substantial amount of examination work is started. The preliminary analysis, planning conferences and the initial survey of the taxpayer's records provide the information for the preparation of these parts of the plan. Part I, Taxpayer Information Section, should be completed first, since decisions reached in completing this section could influence instructions to the team and work assignments. Other portions of the examination plan may be developed simultaneously.

(2) Review and approval – Parts I and II of the examination plan contain important information such as the type of examination being planned, the time span scheduled and the estimated cost in resources and travel, which are of interest to second and top level LB&I management. This portion of the plan is subject to their review and approval (which must be documented) and must be submitted as early as possible so that the case manager can make any requested modifications. This further highlights the fact that Part I and Part II should be submitted before any substantial amount of examination time is expended.

(3) Taxpayer agreement - The orderly progress of the examination will depend upon the taxpayer's full agreement to and complete understanding of the examination arrangements.

(4) Review of books and records - The taxpayer's books and records should be reviewed for noncompliance areas before the last part of the Examination Procedures Section is completed.

(5) Examination procedures - Team members are expected to develop the written examination procedures to be used to accomplish their assignments. Form 4764B, LB&I Examination Plan – Examination Procedures, has been designed for this purpose. Other formats may also be employed reflecting the required written procedures and other pertinent data. The case manager must require timely submission of the planned procedures to decide if they are compatible with the overall plan. This is a primary device for controlling examination time.

(1) Three parts - The plan is the product of the case and issue team manager(s), team members, and the taxpayer. It is comprised of three individual sections, as follows:

1. Part I - Taxpayer Information Section (Examination Arrangements). This section is the overall plan of examination. It contains information extremely important to both the taxpayer and the team. The taxpayer is asked to sign this portion of the plan indicating agreement with its content.

2. Part II -- Service Management Information Section (Examination Program LCC Cases). This section is the case and/or issue manager(s)’ instructions to team members containing information about the taxpayer, as well as information of a general management nature.

3. Part III -- Examination Procedures Section. This section contains each issue team member's assignment and the procedures to be used in accomplishing the assignment.

(2) Sharing the Plan with the Taxpayer - All parts of the plan should be shared with the taxpayer. Information which would impair tax administration such as Official Use Only (OUO) documents and some specialized audit compliance techniques cannot be included in the examination plan.

(1) Responsibility - Case managers are fully responsible for all management aspects of their cases. This requires substantial activity on their part in reviewing and discussing matters with all members of the team. Their activity should be briefly outlined in this section of the examination plan so that team members and the taxpayer will be able to properly coordinate their activities. The outline should cover items such as:

1. Planned contacts with specialists and assistance or support team supervisors

2. Frequency of manager's meetings with taxpayer and team members

3. Coordination with assistance or support groups

4. Involvement in creating the examination plan and method for documenting approved changes in the examination plan

5. Review of work in process

6. Input and review of issues selected through the manager’s initial and mid-cycle risk analysis process

7. Identification of requests which will require the case/issue manager’s documented approval (include only those that are relevant) such as requests for accountants' work papers and tax accrual work papers (see IRM 4.10.20), third-party contacts, issuance of summons, summons enforcement, contacts made to Division Counsel and requests for outside services.

8. Involvement in the Information Document Request (IDR) process to address delays (see IRM 4.46.4.7)

9. Review and approval of significant or sensitive proposed issues (Forms 5701, Notice of Proposed Adjustment)

10. Approval of the assertion of penalties in writing prior to issuing any written communication of penalties to a taxpayer that offers the taxpayer an opportunity to sign an agreement or consent to assessment or proposal of the penalty. For LB&I examinations, the case manager is designated as a higher-level official who may approve the initial determination of penalties for purposes of satisfying IRC 6751(b) . Refer to IRM 4.46.4.12.2 , Managerial Involvement and IRM 20.1.1.2.3 , Approval Prerequisite to Penalty Assessments.)

11. Protection of all statutes of limitations

12. Review the case at the end of the examination

(2) Meetings and travel – The case manager (in collaboration with the issue manager(s)) should prepare estimates of likely dates for meetings and associated travel costs. Planned travel costs must be approved by the next level of management.

(1) List of activities - The TC's activities should be fully explained in Part II of the examination plan so that all team members will be able to conform to the administrative procedures involved in those activities. For example, TCs will:

1. Prepare the examination plan with the assistance of the case and issue manager(s).

2. Update the risk analysis with the assistance of the case and issue manager(s).

3. Review all team members' information requests (including specialists) for uniformity, clarity, duplication of other requests.

4. Ensure that information requests are discussed with the appropriate taxpayer representative prior to their issuance.

5. Ensure that issues to be presented on Forms 5701, Notice of Proposed Adjustment (NOPA), are discussed with the appropriate taxpayer representative prior to issuance.

6. Review all team members' (including specialists) proposed adjustments (Forms 5701/NOPAs).

7. Specify who will receive requested information from the taxpayer. (For example, will team members get their own information, or will the TC receive it and forward it to team members?)

8. Secure the case and/or issue managers’ approval of requests where required.

9. Maintain an IDR and Form 5701 log to document the date of issuance and receipt of each IDR or Form 5701 and retain copies of the requests.

10. Function as the liaison with the taxpayer for the day-to-day activities of the team, if designated.

11. Determine what work papers will be used to document the audit trail (time tracking, preparation of minutes/memos detailing significant meetings, etc. during the examination), including retaining copies of requests for information, NOPAs, IDRs, Forms 5701 and all statistical samples.

12. Update the planning file.

13. Prepare the post-examination critique.

14. Monitor the return for Pass-Through Control System (PCS) linkages using command code TSUMY periodically.

15. Control the coordination of meetings (e.g., planning meeting/opening conference/mid-cycle review/post-examination critique).

16. Ensure that ERCS, IDRS, and IMS are correctly updated.

17. Protect all statutes of limitations.

18. Perform other duties as determined appropriate by the case/issue manager.

(1) Scope – Risk analysis provisions should be followed in determining the scope of the examination.

(2) List of components – Part II of the plan provides for the listing of all components of the taxpayer. The listing should indicate percentage ownership of components, the principal product or function of each component, filing location if the component files a separate return, and reasons for not examining components. This information will help acquaint team members with the nature of their assignment and alert them not only to the possibility of inter-company transactions but also to those accounts in which those transactions may be found. This list will be used in the risk analysis process to help determine scope.

(3) Limiting the scope - Reasons for not including various items in the examination plan should be made known to team members, as well as to SMEs and management. Documenting this information allows management to evaluate decisions regarding cycle time and examination scope which may have a bearing on the territory's resource utilization, examination program, and currency. The individual team members also need to know this information to:

1. Avoid developing useless feeder information

2. Alert the case manager to significant interrelated issues which, if fully developed, would require that the component be brought under examination

3. Recognize information that was not available to the case manager in deciding the scope of the examination

(1) Team assignments - The case and issue manager(s) and TC should give specific assignments to each of the team members after the planning meetings. It should also be made clear to all of the team members that the instructions are a guide and are flexible depending upon the needs of the case. The case and issue manager(s) should always encourage independent thinking by all team members.

(2) Special instructions – This part of the plan aids the TC or case and issue manager(s) in conveying special instructions to the team members and is used for summarizing the assignments. Variations of this format may be desirable in some cases. It should:

1. Contain special instructions on case management activities for particular assignments only. (Instructions of a general nature should be covered in the Service Management Section.)

2. Contain instructions as to special accounts, special examination procedures to be applied, and issues or other matters the TC or case/issue manager(s) want to have covered.

3. Clearly describe the assignment and the team members’ responsibilities and staff day allocation. (This will help to determine the examination procedures to be applied.)

4. Point out special features or problems about the assignment that are known from past examinations or other sources. (It will not be necessary to duplicate information already contained in the Service Management Section.)

(3) Distribution – Form 4764-A, LB&I Examination Plan – Summary of Assignments, should be given to each team member before work begins.

(1) Format - Variation of the format for outlining procedures may be desirable in some cases, but should reflect the information contained on Form 4764-B, LB&I Examination Plan, Part III – Examination Procedures Section.

(2) Preparation - Team members should begin preparing the procedures part of the plan upon receipt of their assignments. It should be prepared to reflect clearly the steps to be taken in the examination of each particular account or item. Changes to procedures should be shown so that there will be a record of what was actually done.

(3) Preliminary examination work – Some preliminary work will have to be done before examination procedures can be finally determined. This could include a review of accounting procedures, internal controls and a test of their effectiveness, or other limited examination work. The procedures used in any preliminary or initial work should be documented in this section.

(4) Modifications - The procedures may have to be modified as the examination progresses. The examiner must be alert for any changes that may be necessary and, after discussion with the case/issue manager, incorporate any revisions in the appropriate section of the examination plan. The TC or case manager will coordinate significant changes with the taxpayer.

(5) Tailored procedures - The procedures to be used should be specific to the issues identified and the particular taxpayer, and not merely a copy of generally suggested audit procedures.

(6) Sequence – The examination procedures should be divided or arranged in the sequence to be followed.

(7) Assistance or support team - The case manager will decide if assistance or support group team members will also write the examination procedures for their assignments. It may be necessary for the case/issue manager to recommend procedures in those cases where it will be a first-time examination for the assistance or support group. It may also be necessary for the case/issue manager or TC to travel to the assistance or support group to help in identifying appropriate procedures.

(1) Responsibility - The TC or case and issue manager(s) are responsible for planning the time necessary for each examination. Time planning is essential to ensure staff resources are effectively utilized and concentrated in the most productive areas.

(2) Data available - TCs or case/issue managers have information developed during the preparation of Parts I and II of the examination plan that will assist in time planning. They must evaluate the information obtained, consult with team members, specialists, managers, the taxpayer, and others, including prior examiners who may be able to contribute to or supplement information about the taxpayer. The case/issue manager must then consider this accumulated information in determining the planned depth and scope of the examination to be conducted.

(3) Prior cycle information available - The best judgment of the team members and the case/issue manager is an important factor in those cases where detailed information about time expended for the prior examination is available. The case/issue manager and examination team must consider any changes to the depth and scope of the current examination, as well as any other known factors which would influence the examination. The case/issue manager must be careful not to simply roll over time estimates from prior examinations.

(4) No prior cycle - Some audits do not have a prior history of examination time. The detailed projection of time requirements in these audits should reflect the team members' and case/issue manager's best judgment after considering everything learned about the taxpayer.

(5) Other considerations - The following additional factors should be considered:

1. Experience of the case/issue manager and team members

2. Extent of computer assisted audit techniques

3. Location of records

4. Travel time (on-site vs. assistance or support)

5. Taxpayer's staffing

6. Taxpayer's cooperation

7. Effectiveness of taxpayer’s retrieval system

8. Extent and nature of in-depth probes

9. Complexity of examination areas selected

(6) Modifications - Case/Issue managers must keep in mind that in estimating time they are dealing with many variables and unknowns. Initial estimates of specific time requirements should be as accurate as possible; however, case/issue managers are expected to revise and adjust the time allocations during the examination (on-going risk analysis). This ensures the application of time to those areas having the greatest compliance potential.