8.17.4. Notices of Deficiency

(1) The notice letter is one of the following letters.

(1) Most of these letters are available on the Appeals Centralized Database System (ACDS) through the Appeals Generator of Letters and Forms (APGolf). Use ACDS to generate the notice letter when possible because the letters are updated regularly with the latest language and Commissioner information.

(2) APGolf generates the name and address in all capital letters, without punctuation, per the IRS Addressing Standards (Document 12019). It also generates the SSN or EIN, and power of attorney information. Ensure the information is correct.

(3) When an error is found on the ACDS information, tell the AO so corrections can be made.

(4) The deficiency notice must advise taxpayers of their right to contact the local office of the Taxpayer Advocate and must provide the location and telephone number of the appropriate office.

1. Letter 894(cg) and Letter 901(cg) inform the taxpayer that the Taxpayer Advocate can be contacted by calling the national Taxpayer Advocate phone number, or contacting the Taxpayer Advocate for the IRS office that issued the notice of deficiency.

2. The APGolf letters will fill in the phone number and address information for the local Taxpayer Advocate office closest to the AO's office. Check to make sure this information is correct.

(1) Include the type of tax in the notice of deficiency letter, if the letter has an appropriate field. When the letter used has a heading that includes a line entitled "In Re", enter the type of tax in a format similar to "In Re: Income Tax".

(2) If the notice of deficiency letter includes a field for "Form Number", complete it with the return form number -Form 1040, Form 1120, Form 1042, etc.

(3) Show the details of the tax period(s) and the deficiency for tax and penalties (or additions to the tax) above the salutation line on the notice letter. Insert the code section for each penalty or addition to tax.

(4) Do not date the notice of deficiency letter. The date is added when the notice is issued.

(5) Whoever issues the notice must enter the date on the "Last Date to File a Petition with the United States Tax Court" line.

(1) Include the Appeals Officer’s name, telephone number, and unique identifying number. In Appeals, the unique identifying number is the Appeals Officer’s badge number.

(1) It is recommended that notice letters use the guidelines outlined in the IRS Addressing Standards ( Document 12019) when preparing the notice letter:

• Capitalize ALL letters in the name and address.

• Left-justify every line in the address block on the letter.

• Use the U.S. Postal Service designated two-letter state abbreviations.

• Use the U.S. Postal Service street designators. ("AVE" for "Avenue", "BLVD" for "Boulevard", "APT" for "Apartment", etc.) A list of the street designators can be found in the IRS Addressing Standards document.

• Use the most complete Zip Code which is a 9 digit number consisting of 5 digits, a hyphen, and 4 digits, which the U.S. Postal Service refers to as the Zip + 4 Code. If unknown, use the 5 digit Zip Code. Verify the Zip Code on the U.S. Postal Service's web site at http://www.usps.com/.

(1) Carefully check the name of the taxpayer.

(2) For corporations, use the name of the corporation as shown on the tax return. If the name of the corporation has changed, address that corporation as follows on the letter: "ABC Corporation, formerly known as XYZ Corporation."

(3) For married persons filing joint returns:

1. If both spouses use the same last name, the notice letter should reflect either "John and Mary Doe" or "John Doe and Mary Doe."

2. If the spouses use different last names, show both names on the notice letter as "John Doe and Mary Smith".

3. If the spouse remarries, the notice letter should reflect a new name, such as: "John Doe and Mary Smith, formerly known as Mary Doe". The name can also be shown as "John Doe and Mary Smith (formerly known as Doe)"

4. See IRM 8.17.4.28.2.1 for information on how to prepare the notice of deficiency if one spouse has died since the joint return was filed.

5. See IRM 8.17.4.28.3 for information on how to prepare the notice of deficiency for divorced or separated taxpayers.

6. See IRM 8.17.4.28.4 if a joint return was filed and a notice of deficiency needs to be issued to only one spouse.

(4) If it is determined that the taxpayer used more than one name, include both names on the notice letter with "also known as" or "AKA". For example, "John T. Smith, also known as J. Thomas Smith"

(1) The mailing address for a notice of deficiency must be the taxpayer’s last known address.

(2) Carefully check the address of the taxpayer. Several large deficiencies have been lost because of typographical errors in the address or because the last known address of the taxpayer was not used. Section 301.6212-2(a) of the Treasury Regulations defines the taxpayer's last known address as the address on the most recently filed and properly processed tax return unless the taxpayer clearly and concisely notifies the IRS that there is a change in address.

(3) A deficiency notice can be considered invalid if it is not sent to the taxpayer's last known address. The Tax Court lacks jurisdiction over a case that is based upon an invalid notice.

1. Handle these situations on a case by case basis.

2. If the statute of limitations is still open, Appeals may reissue the notice of deficiency to the correct address.

3. See IRM 8.17.4.32 for additional information on invalid notices.

(4) Use only one address on the letter, Form 4089 (or Form 4089-A), etc. For example, if there are two alternative addresses for a taxpayer, prepare two Notices of Deficiency using one of the addresses on each. See IRM 8.17.4.6 for information about duplicate original notices.

(5) Address information must be obtained from IDRS by accessing the following command codes in the order listed:

1. Check an ENMOD either with no definer or with an "A" definer. If "A" is entered with ENMOD and there is data available, ENMODA will give you the same result as ENMOD. If "A" is entered with ENMOD and there is no ENMOD data available, ENMODA will automatically default to AMDIS for further search for address information.

   Note: If an ENMOD is not available, use command code IMFOLB or BMFOLB to obtain the ENMOD.

2. If an ENMOD cannot be obtained, check INOLE (definer code "S").

3. On joint accounts, check SPARQ to determine the most current address for both taxpayers at once.

4. If none of the above are available, check IRPTRO, IROLE, and IMFOLE.

(6) Review the administrative case file for documentation to help determine if the taxpayer's address has changed since the return was filed. (While some of this documentation does not officially update the taxpayer's last known address, it puts the Service on notice to research whether the taxpayer's address was updated.) Examples of documentation include:

1. Addresses shown on correspondence in the file, especially any sent to the taxpayer by the Appeals Officer, or any received after the latest return was filed.

2. New address on a return envelope.

3. New address on a power of attorney form. If Form 2848 is in the file, review the power of attorney form for a different address. Compare the signed dates found on the power of attorney to those found on the most current filed return.

4. An address on the case summary card different than what is shown on the return or IDRS.

   Note: Since the notice of deficiency request sent to the TCS often includes no administrative file (or an incomplete administrative file), it is the responsibility of the Appeals Officer to review the administrative file and notify the TCS of any pertinent information concerning the last known address of the taxpayer. It is also the responsibility of the Appeals Officer to review the statutory notice of deficiency prepared by the TCS to ensure that the address is correct.

(7) For any case where the last known address is in doubt, review a transcript for any year that is within three years of the period(s) included in the notice of deficiency.

1. Review transcripts to determine if other IRS functions (Collections, Compliance, etc.) have had contact with the taxpayer.

2. If so, contact the function(s) to access their databases to research a current address. In each case where a database is accessed, keep evidence of the research in the case file.

(1) If a taxpayer is represented by a duly authorized Power of Attorney (POA) and the Form 2848 is appropriately annotated, a copy of the notice mailed to the taxpayer(s) will be sent to the representative by regular mail.

(2) Letter 937, Transmittal Letter For Power of Attorney, is used as the cover letter to transmit the copy of the notice. Generally the TCS will prepare the Letter 937 when preparing the notice, but local procedures may vary.

(3) Effective with the March 2004 revision, Form 2848 no longer provides the taxpayer an option to have the representative receive the original of all correspondence (including notices of deficiency).

(4) Effective with the October 2011 revision, Form 2848 requires an affirmative action by the taxpayer to check a box to indicate that a copy of notices and other written communications will be sent to the representative. The taxpayer may elect to have copies of notices and other written communications routinely sent to up to two representatives listed in section 2 of the Form 2848.

(5) If the power of attorney does not cover all years in the notice of deficiency, do not send a copy of the notice to the representative. It is recommended that the AO obtain a new Power of Attorney for any years not covered prior to issuing a notice of deficiency.

(6) If a new Power of Attorney is not obtained, do not send a copy of the notice to the representative. Instead a copy of the notice of deficiency should be sent to the taxpayer with a separate letter explaining why the copy cannot be sent directly to the representative. Letter 4368, Statutory Notice Not Sent to Representative - Tax Periods Not Specified, may be used for this purpose.

1. Letter 4368 is available as a fillable Adobe Acrobat form on the Electronic Publishing Catalog website.

2. The AO may prepare the Letter 4368, or request that the TCS prepare the letter.

(7) The AO should use Command Code CFINK to verify the name and address of the Power of Attorney on the Centralized Authorization File (CAF) database. The AO must provide the TCS with the most current POA information when requesting preparation of the notice of deficiency.

(1) Unenrolled return preparers and registered tax return preparers are not permitted to represent taxpayers before Appeals. Therefore a copy of a notice of deficiency will not be sent to an unenrolled return preparer or a registered tax return preparer.

• Unenrolled return preparers and registered tax return preparers are authorized to represent taxpayers only before revenue agents, customer service representatives or similar IRS employees and only in connection with an examination of the taxable year or period covered by a return prepared and signed by the unenrolled return preparer or registered tax return preparer. (See Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service.)

(2) Letter 4369, Statutory Notice Not Sent to Representative - Limitations to Practice Before the IRS may be used to notify the taxpayer that a copy of the notice was not sent to the unenrolled return preparer or registered tax return preparer.

• Letter 4369 is available as a fillable Adobe Acrobat form on the Electronic Publishing Catalog website.

• The AO may prepare the Letter 4369, or request that the TCS prepare the letter.

(1) Include the Taxpayer's Identification Number (TIN) on each notice of deficiency letter issued by Appeals.

(2) Show the TIN, (SSN, ITIN, or EIN), as appropriate in the upper right portion of the letter.

(1) Income tax cases:

• Identify a calendar year as "Tax year ended December 31, ____".

• Identify a fiscal year as "Tax year ended June 30, ____".

• Identify a period of less than a year as "Tax year March 1, ____, to September 30, ____."

(2) See Exhibit 8.17.4-1.

(1) Use the following salutations in the notice of deficiency letter:

1. For individual taxpayers, use names such as "Dear Mr. and Mrs. Smith". ("Dear Taxpayer" may also be used.)

2. For all other entities (corporate, estate, gift, etc.) use "Dear Taxpayer".

(1) Generally enclosures listed on the last page of the notice of deficiency letter include the following:

• Statement

• Waiver

• Envelope

(2) Because the notice of deficiency "Statement" consists of the Form 4089, (or Form 4089-A), the tax computation, the explanation of adjustments, and any attachments, you may simply list "Statement" rather than individually listing the Form 4089/4089-A, tax computation form such as Form 5278, paragraphs, etc.

(3) Do not list "Audit Statement" or "settlement computation" as an enclosure since an Audit Statement or settlement computation is NOT included as part of the notice of deficiency.

(1) Show the name and address of the taxpayer on Form 4089 (or Form 4089-A), exactly as it appears in the letter. There is an exception when preparing notices for transferee cases. See IRM 8.7.5, Transferee and Transferor Liabilities.

(1) The captions on Form 4089 and Form 4089-A provide for the tax year and the deficiencies in tax.

(2) Enter any additions to the tax or penalties in columnar form under and to the right of the Deficiency block.

(3) Separately list each addition to the tax or penalty.

(1) The following sections discuss additional information that may be required on the face sheet.

(2) Show the additional information after the summary of the tax liability on Form 4089 or Form 4089-A, or on a continuation sheet attached to these forms.

(1) Tax Court generally does not have jurisdiction over prepayment/refundable credit adjustments that are not part of the statutory deficiency per IRC 6211(b)(4). The most common example of this type of credit is withholding credits. Adjustments to this type of credit may require a special format on the face sheet (Form 4089 or Form 4089-A) depending on whether the credit is understated or overstated.

1. "Understated" means the IRS has determined that the credit amount should be increased.

2. "Overstated" means the IRS has determined that the credit amount should be decreased.

(2) Refundable credits listed in IRC 6211(b)(4) such as earned income credit, first time homebuyer credit, etc. are included in the statutory deficiency, and so Tax Court does have jurisdiction over these refundable credit adjustments. Special formats on the face sheet are not required for adjustments to these credits.

(1) Insert an explanation on the face sheet if an overpayment claimed on the return has not been refunded. (The term "frozen refund" is often used to refer to a claimed overpayment that has not been refunded.)

(2) The explanation can be shown on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms. Use the following format:

(3) The statutory deficiency is the amount shown on line 21 of Form 5278. This amount ($5,000.00 in the above example) is used on Form 4089 (or Form 4089-A) and the notice of deficiency letter as the tax deficiency, not the underpayment amount ($3,800.00 in the above example).

(1) Include the following paragraph on the face sheet (Form 4089, Form 4089-A, or on a continuation sheet attached to these forms) if the taxpayer has made a partial payment that has not been assessed:

"The deficiency shown above does not take into account a payment of $____ made on ____, which amount will be applied upon the final disposition of this case."

(2) The above paragraph is not needed for the following types of payments:

1. A credit balance on the account that is not due to a partial payment.

2. A cash bond payment.

3. An IRC 6603 deposit.

4. A designated payment of interest (since interest amounts aren't included in the notice of deficiency).

(1) Include the following interest statement on Form 4089 or Form 4089-A:

"Interest, as provided by law, will be charged on the unpaid liability until it is paid in full."

(2) The Form 4089 and Form 4089-A generated by ACDS includes this interest statement.

(3) Subsequently information is provided on how to show interest in the notice of deficiency. See IRM 8.17.4.21.

(1) If the taxpayer files a claim for refund that has not been processed, and a notice of deficiency is being issued, notify the taxpayer in the notice of deficiency that the claim has been considered.

(2) The Appeals Officer must inform the TCS when a claim is filed and what action to take with respect to it. Special language may be required on the face sheet, as discussed in paragraph (3) below.

1. It is the responsibility of the TCS to insert the proper paragraph in the statement.

2. However, the AO must provide the TCS with the reason that issues raised in the claim were adjusted or not allowed, so that the correct paragraph can be selected and properly completed.

(3) Use the following paragraphs on the face sheet whenever applicable. (Show the explanatory paragraphs on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms.)

1. Issue in claim not conceded:
    
   "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. It is determined that the issue raised in your claim (identify the subject matter) is not allowable because (state reason). If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."
   

2. Multiple issues in claim not conceded:
   
   "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. It is determined that the issues raised in your claim are not allowable as discussed below: (list each issue and the reason for disallowance). If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issues set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."
   

3. All Issues in claim(s) conceded:
   
   "In making this determination of your income tax liability, careful consideration has been given to your claim(s) for refund filed on __. The issue raised in your claim for refund with respect to (identify the subject matter) has been allowed and taken into account in the computation of tax in the notice of deficiency. However, other adjustments result in a deficiency. "
   

4. If the issue in a claim is partially conceded:

   Example: The taxpayer files a claim requesting that Schedule E income reported on the return of $15,000 be reduced to $1,000. It is determined in Appeals that $10,000 of the income is still reportable on the tax return. See suggested format below:
   
   "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. It is determined that Schedule E income of $10,000 must be reported on your return rather than the amount shown in your claim of $1,000. The notice of deficiency adjusts the Schedule E income. Other adjustments to your return result in a deficiency. If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."

5. If the claim contains multiple issues and some are conceded:
   
   "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. The issue raised in your claim for refund with respect to (identify the subject matter of the first issue) has been allowed herein. However, it is determined that the issue raised in your claim with respect to (identify the subject matter of the second issue) is not allowable because (state reason). Other adjustments to your return result in a deficiency. If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."

(1) If the taxpayers say they are entitled to additional deductions not claimed on the return, or that income reported on the return should be excluded in whole or in part, include the following paragraph on the face sheet:

"The issue raised (in your protest) (at the hearing) requesting a deduction in the amount of $____ for ____has been given careful consideration and it has been determined that no deduction is allowable (follow with proper explanation of reason for non-allowance)."

(2) The AO must notify the TCS that additional issues raised by the taxpayer were not allowed, and provide all required information so that the above paragraph can be completed and included on the face sheet.

(3) Show the explanatory paragraph on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms.

(1) When the Power of Attorney (POA) authorizes the representative to receive copies, check the block "Copy to Authorized Representative" on Form 4089 (or Form 4089-A), and list the representative’s name and address to the right of the block.

(2) If two representatives are authorized to receive copies, list both representatives on Form 4089 (or Form 4089-A). Generally all the POA's are listed on one Form 4089 or Form 4089-A. If additional space is needed, a continuation sheet may be used.

(3) Effective with the October 2011 revision, Form 2848 requires that when a joint return is filed, each spouse or former spouse must submit a separate Form 2848. Any listed representative on the Form 2848 is permitted access to the tax information related to the joint tax return, but can only represent the authorizing spouse.

1. There is no disclosure violation if the Form 2848 POA information of one spouse is included on a Form 4089 (or Form 4089-A) sent to the other spouse.

2. There is also no disclosure violation if one spouse’s POA receives aForm 4089 (or Form 4089-A) that includes the POA information of the other spouse.

(4) Form 4089 (or Form 4089-A) procedures when spouses submit separate Form 2848's are shown below.

1. Spouses at the same address - both have the same POA - Follow normal notice procedures and just prepare one Form 4089 (or Form 4089-A) for the joint statutory notice with the POA address listed.

2. Spouses at the same address - each spouse has different POA - Prepare one Form 4089 (or Form 4089-A), addressed to both spouses. Generally the POA information for each spouse should be entered on the one Form 4089 (or Form 4089-A).

3. Spouses at the same address - only one spouse has POA - Prepare one Form 4089 (or Form 4089-A), addressed to both spouses Generally the POA information for the one spouse should be entered on the Form 4089 (or Form 4089-A).

4. Spouses at different addresses - Since duplicate originals are required if the spouses have different addresses, prepare two Form 4089's (or Form 4089-A's). Include the names of both spouses on each Form 4089 (or Form 4089-A). Each Form 4089 (or Form 4089-A)) should include address information for only one spouse. The Form 4089 (or Form 4089-A) addressed to a particular spouse must show the POA information for that spouse.

(1) The starting point for taxable income is usually the return as filed, the latest processed amended return, or an assessed partial agreement.

(2) If the taxpayer did not file a return, Compliance should have followed substitute for return (SFR) procedures. The starting point for taxable income will be zero. Since no return was filed by the taxpayer, the notice of deficiency will be issued in an amount determined to be the correct tax liability for the year.

(3) If a year was previously examined and there was a change in tax liability that was assessed, and now that year is open for recapture of a tentative allowance, the starting point is usually the taxable income shown on the previous examination report.

1. If a statute on a carryback year is held open only by the loss year’s statute, the recapture cannot be more than the tentative allowance shown on Form 1045 (Individuals) or Form 1139 (Corporations), or the carryback allowed in an amended return.

(4) If a partial agreement has been secured and the tax assessed, then the starting point for taxable income in the notice of deficiency is either the taxable income from the partial agreement or the taxable income per the return:

1. Starting point is the partial agreement: Preferably the starting point for taxable income in the notice of deficiency is the taxable income from the partial agreement.

2. Starting point is the original return: The starting point for taxable income in the notice of deficiency may be the taxable income from the original return. Usually "Previously agreed adjustments" is entered on line 7 of Form 5278 along with the total of all previously agreed adjustments . (This procedure may need to be modified depending on the computer software program used. For example, if RGS is used and itemized deductions are adjusted, then it may be difficult to follow this procedure and list the total of all previously agreed adjustments.)

(5) If permitted by the computation software used, annotate the starting point regardless of whether it is the original return, a processed amended return, or an assessed partial agreement. Use a format such as "Taxable Income per Amended return," "Taxable Income as Previously Determined," etc.

(1) List the adjustments to income on Form 5278. The adjustments should follow, as closely as possible, the sequence and wording used in the return. Label each adjustment with a letter of the alphabet.

(2) It is recommended that the notice include a computation of the amount shown on line 19 of Form 5278, "Total tax shown on return or as previously adjusted", if the liability per the return was adjusted.

1. This can be shown on the bottom of Form 5278 or on an attachment.

2. See IRM 8.17.2.10, Completing the Adjustment and Tax Computation Schedule, for an illustration of how this can be scheduled.

(3) Rules and guidelines for computing tax set out in IRM 8.17.2, General Settlement and Rule 155 Computations, apply equally to tax computations in notice of deficiency statements.

(1) Sample paragraphs used in explaining adjustments may be found as outlined in this section. Modify these suggested or sample paragraphs to suit facts and circumstances.

(2) RGS paragraphs - RGS may be used to generate paragraphs. TCS's may use the RGS paragraphs, when appropriate, in the statutory notice. If the RGS paragraphs are used, care should be taken to make certain that the paragraphs accurately and clearly explain the adjustments.

1. The Form 886-A paragraph schedule generated by RGS may be used in the statutory notice. No modification of this schedule is needed for any sort of Appeals format. (So no modification is needed to add wording such as "It is determined", "Accordingly taxable income is increased/decreased", etc.)

2. The RGS paragraphs may also be found in IRM 4.10.10, Standard Paragraphs and Explanation of Adjustments. See IRM 4.10.10-1, Index to Standard Explanations and IRM 4.10.10-2, Standard Explanations. These paragraphs have been approved by Chief Counsel and most of them may be used when preparing statutory notices.

3. The RGS paragraphs may also be copied to another schedule (such as a Form 886-A, or a blank Word or Excel document).

   Caution: Be careful when using the paragraphs shown in the RAR, since some paragraphs may not be suitable for statutory notices.

(3) Appeals paragraphs:

1. TCS web site: Paragraphs are available on the TCS web site. Click on the "Procedures and Resources" link on the TCS web site, and then see the "Statutory Notice Paragraphs" folder which contains sample explanatory paragraphs.

2. ACDS: Some paragraphs are also available on ACDS in the APGolf section. Go to the "Statutory Notice" category in APGolf, and select "Form 886-A."

(1) Generally, the present tense is used in wording paragraphs rather than the past tense. This presents the Service’s position as of the issuance date and does not affirm a prior decision.

(2) Use positive phrasing when possible. State that the "allowable amount is" rather than the "disallowance is". However, the more basic principle that the position of the Service should be clearly stated should govern.

(3) Do not use qualifying phrases such as "based on the information in our files" since it implies the Service is using information unknown to and withheld from the taxpayer.

1. Some of the RGS paragraphs use phrases such as "From records and information available, we determined", or "From records and information available, it has been determined". It is acceptable to use this wording in the paragraphs.

(4) Do not describe an item as a "deduction" and then disallow it because it does not qualify as an allowable deduction.

For example: Do not say, "It is determined that the deduction of $1,000 claimed as rent expense is not deductible since the amount was not paid or accrued during the taxable year." Instead say, "It is determined that the amount of $1,000 claimed as rent expense is not deductible since the amount was not paid or accrued during the taxable year."

(5) Avoid so-called "net adjustments" since they tend to be difficult to follow and may present a question as to the actual amount at issue.

(6) The following phrases may be used at the end of a paragraph to clarify how the adjustment affects the tax return:

1. Accordingly/Therefore, taxable income is increased/decreased ___.

2. Accordingly/Therefore, tax is increased/decreased ___.

(7) The length of the paragraphs should be sufficient to clearly state the conclusions. Additional information may be needed to show the detail of certain determinations.

1. For example, an explanatory paragraph which determines that an unreported capital gains transaction results in $10,000 of long-term capital gain may be supplemented with a computation setting forth the amount realized, adjusted basis, gain to be taken into account and other pertinent figures, etc.

2. Use a separate exhibit or schedule to show voluminous details and reference this exhibit or schedule in the explanatory paragraph, such as "See Exhibit A attached."

3. Depreciation: Form 1914 may be included to show the depreciation computations. If the AO wants the depreciation computations included in the notice, the AO must provide information so that the TCS can prepare the computations.

4. Identify the source of unreported income in the explanatory paragraph.

5. Indirect Method: An exhibit generally is included to show the computation. The AO must provide information so that the TCS can prepare the exhibit. IRM 4.10.4, Examination of Income, has detailed information on indirect methods. The following exhibits have sample formats:

• Bank deposits method: IRM 4.10.4-9, The Bank Deposits and Cash Expenditures Method: Example of Computation of Gross Receipts.

• Source and application of funds method: IRM 4.10.4-10, Source and Application of Funds Method: Example of Computation for Cash and Accrual Based Taxpayer.

• Net worth method: IRM 9.5.9-1, Net Worth Statement.

(8) State the taxable year involved in each explanatory paragraph, except as discussed below:

1. It is not necessary to state the taxable year if only one year is involved in the statutory notice.

2. If the RGS generated Form 886-A paragraph schedule is used, the format includes a header for each paragraph where the year(s) is listed. Therefore, it is not necessary to also include the year in the explanatory paragraph.

(9) In some situations it may be necessary to include a copy of a document as part of the notice. If this happens, refer to the document in the explanatory paragraph by stating "See Exhibit A", "See Schedule 3", "See attached schedule", etc.

(1) Cite code sections only to the extent necessary to inform the taxpayer of the real nature of the adjustment. Use of code sections can unnecessarily limit or narrow the Commissioner’s position. Make sure all applicable codes sections are cited.

1. Never use code citations as the only explanations for disallowance.

2. Do not use references to regulations or decided court cases.

(2) As a general rule it is preferable to use exact Code language rather than attempt to paraphrase Code language. For example, the statement, "Since it has not been established that your farm was operated with the intention of making a profit, the amounts deducted are not ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." should be used rather than "You have not shown that such claimed deductions were connected with a business activity during your taxable year."

(1) Include explanatory paragraphs for the additions to tax or penalties in the statutory notice of deficiency. See IRM 8.17.4.13.1 for available sample paragraphs.

(2) The penalty paragraphs may be placed behind the paragraphs explaining the various adjustments to income, credits, etc. The penalty paragraphs may also be shown on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms.

(3) Generally the RGS penalty schedules or the TCS Excel penalty spreadsheets on the Technical Support SharePoint site are used for the statutory notice:

1. The RGS penalty schedules or the Excel penalty spreadsheets can be attached to Form 4089, Form 4089-A, or placed behind the explanations of adjustment.

2. If the RGS penalty schedules or the Excel penalty spreadsheets are included in the statutory notice, the explanatory paragraphs discussed in paragraphs (1) and (2) will most likely not be needed since the RGS penalty computation schedules and the Excel penalty spreadsheets include appropriate explanatory paragraphs.

3. If the explanatory paragraphs included on the RGS penalty schedules and the Excel penalty spreadsheets are not acceptable, then also include appropriate explanatory paragraphs with the statutory notice.

(1) A tentative allowance is filed on a Form 1045 (individual) or a Form 1139 (corporation) and is identified by the presence of a TC 295 on the account module.

(2) If a notice of deficiency is being issued and the examination of the unused loss/credit year is not complete, or if it cannot be determined if the unused loss/credit year is under examination, completely ignore the tentative allowance in the notice of deficiency.

(3) Ignoring the tentative allowance means:

1. Do not use net operating loss and capital loss carrybacks giving rise to the tentative allowance to decrease taxable income or alternative minimum taxable income.

2. Do not use credit carrybacks to decrease tax liability.

3. Do not include the increase or decrease in tax attributable to a tentative allowance in "tax as previously adjusted".

(4) If it can be determined that there is no examination activity on the year giving rise to the tentative allowance, and the statute of limitations has expired on that year, include the tentative allowance in the notice in the amount previously allowed.

1. Although Appeals adjustments may increase taxable income and tax liability in the allowance year, limit the amount of the tentative allowance to the amount originally allowed on Form 1045 (individual) or Form 1139 (corporation).

2. Increasing the amount of tentative allowance may result in a duplicate allowance to the taxpayer. Only allow an additional amount when it can be determined that the allowance does not result in duplication.

(5) If it is determined that examination of the year giving rise to the tentative allowance has been completed, include the tentative allowance in the notice. Include the amount determined to be allowable based on the examination adjustments made to the loss/unused credit year.

(1) If the notice of deficiency is being issued and both the tentative allowance year and the loss/unused credit year are under consideration in Appeals, include both years in the notice of deficiency.

(2) Adjust the year with the tentative allowance (the carryback year) based on adjustments made to the loss/unused credit year.

(3) If adjustments to the loss/unused credit year do not result in a deficiency, then:

1. Do not include the loss/unused credit year in the notice letter.

2. Include the loss/unused credit year on Form 4089 (or if prepared, Form 4089-A and Form 870).

3. Include the loss year on the Form 5278 with the carryback year.

(4) Follow specific procedures if the adjustments to the loss/unused credit year result in an overassessment. See IRM 8.17.4.16.

(5) Include explanations of adjustments for all adjustments to the loss/unused credit year as well as the carryback year.

(1) This section discusses cases where a notice of deficiency is being prepared and a claim for credit or refund has been filed to carryback a loss/unused credit to one or more of the years included in the notice of deficiency. The claim is filed on an amended return Form 1040X (individual) or a Form 1120X (corporation).

(2) An amended return is identified by the presence of a TC 291 or 299 on the account module.

(3) If a notice of deficiency is being issued and the examination of the year of the loss/unused credit is not completed or if it cannot be determined if the year is under examination, do not ignore the prior allowance in the notice. Discuss the case with the Appeals Officer since the case may have to be returned to Compliance to examine the loss/unused credit year.

(4) If it can be determined that there is no examination activity on the year giving rise to the carrybacks, and the statute of limitations has expired on that year, include the previously allowed claim amount in the notice.

1. Although Appeals adjustments may increase taxable income and tax liability in the carryback year, limit the carryback claim to the amount originally allowed on Form 1040X/1120X.

2. Increasing the amount of a carryback claim may result in a duplicate allowance to the taxpayer. An additional amount should only be allowed when it can be determined that the allowance does not result in duplication.

(5) If it is determined that examination of the loss/unused credit year has been completed, include the carryback claim in the notice. Include the amount determined to be allowable based on the examination adjustments made to the loss/unused credit year.

(1) If the notice of deficiency is being issued and both the carryback claim year and the loss/unused credit year are under consideration in Appeals, include both years in the notice of deficiency.

(2) The year with the carryback claim (the carryback year) should be adjusted based on adjustments made to the loss/unused credit year.

(3) If adjustments to the loss/unused credit year do not result in a deficiency, then see below:

1. Do not include the loss/unused credit year in the notice letter.

2. Include the loss/unused credit year on Form 4089 (or if prepared, Form 4089-A and Form 870).

3. Include the loss year on the Form 5278 with the carryback year.

(4) Include explanations of adjustments in the notice for all adjustments to the loss/unused credit year as well as the carryback year.

(1) Tax Court has no authority to review or redetermine an overassessment.

(2) The issuance of a notice of deficiency (and any subsequent petition filed with the Tax Court) for the deficiency year does not extend the statute of limitations for the overassessment year.

(3) The combination of (1) and (2) above could cause taxpayers to lose the refund to which they may be entitled if the statute on the overassessment year(s) expires before the deficiency year is resolved. Therefore, if the taxpayer has not filed protective claim(s), at the Appeals Officer’s option a claim invitation letter may be prepared by the TCS and issued along with the notice.

1. The claim invitation letter should be mailed separately and ordinarily should not be "certified" or "registered."

2. A pattern letter is set out in an exhibit. See Exhibit 8.17.4-3. (The letter is not available on ACDS APGolf or the Publishing Catalog web site.)

(1) If a return is not timely filed, IRC 6651(a)(1) provides for a penalty of 5% if the failure is for not more than one month, with an additional 5% for each month or fraction thereof during which the failure continues, but not in excess of 25%. This penalty is computed on the net amount due as defined in IRM 8.17.7.3, Failure to File, IRC 6651(a)(1).

(2) If the taxpayer files a late return, only the IRC 6651(a)(1) failure to file penalty attributed to the amount of the deficiency should be asserted in the notice of deficiency. The amount used to compute the penalty is the tax required to be shown on the return that is not paid on or before the date prescribed for payment.

1. Absent an extension of time to pay affected by IRC 7508, Time for Performing Certain Acts Postponed By Reason of Service in Combat Zone or Contingency Operation, or IRC 7508A, Authority to Postpone Certain Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions, the date prescribed for payment is generally the return due date without regard to extensions.

2. The amount used to compute the IRC 6651(a)(1) penalty is not decreased by late payments, even if those payments are made prior to the extended return due date.

(3) The IRC 6651(a)(2) failure to pay penalty cannot be asserted in a notice of deficiency when the taxpayer has filed a return, because this penalty applies only to tax shown on a filed return, not to a deficiency.

(4) IRC 6651(c)(1) provides that the penalty for filing late under IRC 6651(a)(1) must be reduced by the amount of any penalty for paying late imposed under IRC 6651(a)(2) for any month during which both penalties apply.

1. Therefore, if IRC 6651(a)(2) was assessed by the Campus when the return was filed, the amount of the penalty imposed under IRC 6651(a)(1) must be reduced by the amount of the IRC 6651(a)(2) penalty assessed for any month or part of a month during which both penalties apply.

2. See IRM 8.17.7-1, Computation of Failure to File Penalty After Tax Adjustment, with Previously Assessed Failure to Pay Penalty, for a sample computation.

(1) If the failure to file the tax return is due to fraud, the FFTF penalty imposed by IRC 6651(f) may be asserted rather than the regular FTF penalty under IRC 6651(a)(1).

(2) For late filed returns, the FFTF penalty under IRC 6651(f) that is based on the tax per the return is not subject to deficiency procedures. The notice of deficiency will not reflect an IRC 6651(f) penalty on the portion of total corrected tax attributable to the return as filed (delinquent return).

(3) The portion of the IRC 6651(f) penalty that is attributable to the tax deficiency is subject to deficiency procedures. Reflect this portion of the IRC 6651(f) penalty in the notice of deficiency.

(4) When the IRC 6651(f) penalty is proposed on an SFR, the penalty is based on the total corrected tax per the examination. The IRC 6651(f) penalty asserted on an SFR is subject to deficiency procedures and is included in the notice of deficiency.

(5) See IRM 20.1.2.2.7.5, Fraudulent Failure to File - IRC 6651(f), for additional information.

(1) When the FFTF penalty under IRC 6651(f) is asserted, the AO will instruct the TCS if the IRC 6651(a)(1) failure to file penalty should be included in the notice of deficiency as an alternative issue.

(2) If the AO instructs that the failure to file penalty should be included in the notice of deficiency as an alternative issue to the FFTF penalty, then an explanation for the failure to file penalty must be included in the notice following the explanation of the fraudulent failure to file penalty.

(3) See below for sample format for the language to use for the alternative issue:

"In the event the fraudulent failure to file penalty under Internal Revenue Code section 6651(f) is not sustained, in the alternative it is determined that because your income tax return for the taxable year ended ___was not filed within the time period required by law; and you have not shown that such failure to timely file your return was due to reasonable cause, ___percent of the tax is added as provided by section 6651(a)(1) of the Internal Revenue Code for the taxable year ended ___."

(4) If the RGS or Excel IRC 6651(a)(1) penalty schedules are used, the paragraph for the alternative issue shown above in paragraph (3) can be added to those schedules, or included on a separate schedule.

(5) The IRC 6651(a)(1) failure to file penalty is not shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870) or on Form 5278. The penalty is only mentioned in the paragraph for the alternative issue discussed above.

(1) The IRC 6662 accuracy related penalty and IRC 6662A accuracy related penalty on reportable transactions:

1. Apply only if a return is filed.

2. Cannot be asserted on a substitute for return (SFR) prepared by the IRS under IRC 6020(b).

3. Do not apply to any portion of an underpayment that is subject to a fraud penalty.

4. Either IRC 6662 or IRC 6662 with a subsection such as 6662(a) may be used in the notice of deficiency.

5. Either IRC 6662A or IRC 6662A with a subsection such as 6662A(a) may be used in the notice of deficiency.

(2) See IRM 8.17.7.9, Accuracy-Related Penalty, IRC 6662, and IRM 20.1.5, Return Related Penalties, for more information.

(1) The IRC 6663 fraud penalty applies only if a return is filed. It cannot be asserted if the taxpayer did not file a return.

(2) The IRC 6663 fraud penalty cannot be asserted on a substitute for return (SFR) prepared by the IRS under IRC 6020(b).

(3) The IRC 6663 fraud penalty cannot be asserted on the same underpayment (or portion of an underpayment) on which accuracy related penalties are asserted. Only one penalty can be applied to any portion of an underpayment of tax.

(4) Either IRC 6663 or IRC 6663 with a subsection such as 6663(a) may be used in the notice of deficiency.

(5) The delinquency and fraud penalties can be asserted concurrently.

(6) Although there is no specific prohibition against asserting penalties under both IRC 6651(f), Fraudulent Failure to File Penalty, and the IRC 6663 fraud penalty, the court is not likely to sustain the assertion of both penalties unless compelling facts support the IRS’s position. Area Counsel should be consulted before asserting both IRC 6651(f) and IRC 6663 on the same return. (Also see IRM 20.1.5.14.2, Penalty Assertions, for additional information.)

(7) See IRM 8.17.7.10, Fraud Penalty, IRC 6663, and IRM 20.1.5.14, IRC 6663, Civil Fraud Penalty, for more information.

(1) It is recommended that the IRC 6662 accuracy-related penalty should be included in the explanation of adjustments as an alternative penalty to the civil fraud penalty under IRC 6663 except in the following situations:

• A criminal conviction under 26 U.S.C. 7201 collaterally estops the taxpayer from denying fraud, or

• The statute of limitation has expired in the absence of a finding of fraud.

(2) Remember that IRC 6663 and IRC 6662 cannot be asserted if the taxpayer did not file a return.

(3) When the fraud penalty is asserted, the AO will instruct the TCS that the IRC 6662 penalty must be included in the notice of deficiency as an alternative issue.

(4) If the AO instructs that the IRC 6662 penalty should be included in the notice of deficiency as an alternative issue to the IRC 6663 civil fraud penalty, then an explanation for the IRC 6662 penalty must be included in the notice following the explanation of the civil fraud penalty.

(5) See below for sample format for the language to use for the alternative issue:

"Alternatively, to the extent that it is determined that fraud does not apply to any portion of the underpayment, you are liable for an accuracy-related penalty under section 6662(a) of the Internal Revenue Code for any portion of the underpayment which is relieved from liability for fraud because there was (1) a substantial understatement of income tax, (2) a valuation misstatement(s), or (3) you were negligent (or disregarded rules or regulations)."

(6) If the RGS or Excel IRC 6663 penalty schedules are used, the alternative paragraph shown above can be added to those schedules, or included on a separate schedule.

(7) The IRC 6662 penalty is not shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870), or on Form 5278. The alternative issue is only shown in a paragraph that follows the explanation of the civil fraud penalty.

(8) The IRC 6651(a)(1) failure to file penalty is not shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870) or on Form 5278. The penalty is only mentioned in the paragraph for the alternative issue discussed above.

(1) Former IRC 6621(c), pertaining to substantial underpayments attributable to tax motivated transactions (TMT), was repealed for returns with due dates (determined without regard to extensions) after December 31, 1989. However, some TMT cases are still active, and/or still in collection status and TMT rates continue to apply to those balances. For detailed information on former IRC 6621(c), refer to the historical IRM 8.17.2 archived on the Publishing web site.

(1) IRC 6621(c) provides for a two-percent increased interest rate on the underpayment of a tax by a "C" corporation if the underpayment exceeds $100,000. For a complete discussion of large corporate underpayments, see IRM 8.17.6.6, Large Corporation Underpayment Interest (LCU) under IRC 6621(c).

(2) If the requirements of IRC 6621(c) are met, interest accrues at the higher rate for all tax periods after December 31, 1990.

(3) If the taxpayer is subject to the increased rate of interest under this section, the notice of deficiency letter should include a paragraph similar to the following:

"If you are a C corporation, under Internal Revenue Code section 6621(c), large corporate underpayments may be subject to a higher rate of interest than the normal rate of interest for underpayments."

1. Letter 901(cg) and Letter 894(cg) available on APGolf include this language.

2. Since some letters (such as the Letter 3424(cg)) may not include this language, check the notice letters carefully to make sure this paragraph is included if IRC 6621(c) interest is applicable.

(4) A paragraph concerning this section should be shown on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms. Recommended language is as follows:

"It is determined that the deficiency for the taxable year(s) ___is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax shall be 2 percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code for the tax year(s) ended ___."

(5) The paragraph shown in (4) should be modified if there are carrybacks allowed in the notice of deficiency.

1. The paragraph must be modified to inform the taxpayer that the deficiency subject to the increased rate of interest is computed without regard to loss and credit carrybacks.

2. This is especially important if the deficiency in the notice of deficiency is less than $100,000. The increased corporate interest under IRC 6621(c) could still apply if the deficiency before any carrybacks is more than $100,000.

3. See modification of paragraph, below:

"It is determined that the deficiency for the taxable year ___is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax shall be 2 percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code for the tax year ended ___. The amount of the large corporate underpayment is computed without regard to any net operating loss carryback, capital loss carryback or credit carryback, pursuant to IRC 6601(d)."

(6) Form 5403 Instructions to APS Spreadsheet:

1. The TCS will enter the "Notice Date" on the Form 5403 Instructions to APS spreadsheet date. The "Notice Date" is the date of the letter/notice that activates the large corporate underpayment rate.

2. The Form 5403 Instructions to APS spreadsheet is available on the Appeals Tax Computation Specialist web site at http://appeals.web.irs.gov/taxcomput/Default.htm. After the spreadsheet is completed, it should be attached to the inside left side of the administrative file folder.

3. See IRM 8.17.5.2.2, Interest 6621(c) Notice Date, for more information.

(1) If Form 8857, Request for Innocent Spouse Relief, has been filed and shows a new name or address for the requesting spouse, the new name or address cannot be disclosed to the non-requesting spouse.

(2) The AO must inform the TCS that a Form 8857 has been filed and provide the new name or address.

(3) See IRM 8.17.4.28.3, paragraph (5) for an example of how to address the notice of deficiency in a case where a Form 8857 with a new name has been filed.

(4) See IRM 25.15.12.23, Notice of Deficiency Under IRC 6015, for procedures when preparing notices of deficiency for cases where innocent spouse relief is requested.

(1) A fiduciary is a person to whom property or power is entrusted, for the benefit of another. A fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest, or receives and controls income of another. This relationship occurs most often in cases involving:

1. A deceased taxpayer or

2. Legal disability - In situations where a taxpayer has been deemed disabled and unable to take care of his/her own affairs.

(2) Form 56, Notice Concerning Fiduciary Relationship, is used by an individual to notify the IRS of a fiduciary relationship. Other legal documents establishing fiduciary relationships can be substituted for the Form 56.

(3) When a taxpayer is deceased or under a legal disability, and the IRS has not been notified of a fiduciary relationship, an attempt should be made by the AO to obtain the name of the fiduciary as long as there is sufficient time remaining on the statutory period of limitations. Once the name is obtained, the fiduciary should be asked to give notice in accordance with the existing Internal Revenue laws (e.g. IRC 6903).

(4) If the IRS has been notified as to the existence of a fiduciary relationship, a notice of deficiency must be mailed to the fiduciary's mailing address. Sample formats are discussed below:

• Deceased taxpayer:
  
  John Brown, Deceased,
  Richard Doe, Executor
  (Richard Doe's address)

• Legal Disability:
  
  John Smith,
  Howard Doe (Enter proper title of fiduciary)
  (Howard Doe’s address)

(5) If the name of the fiduciary cannot be obtained or if there is not sufficient time remaining on the statutory period of limitations, address the notice of deficiency for a deceased taxpayer as follows:

John Doe, Deceased
(John Doe’s address)

(6) When a fiduciary relationship cannot be established on a case involving a taxpayer under legal disability, address the notice of deficiency as follows:

John Doe,
(John Doe’s address)

(1) In the case of a joint return, if the Service has been notified by either spouse that separate residences have been established, then instead of the single joint notice, duplicate originals of the joint notice will be sent by certified mail to each spouse at the last known address.

(2) Each notice will carry only the address of the spouse to whom the notice is sent. It is very important not to disclose the new addresses of the spouses to each other. The duplicate notices should be addressed as shown below:

John Doe and
Mary Doe
(John Doe's last known address)

and

John Doe and
Mary Doe
(Mary Doe's last known address)

Note: The name in the above examples can also be shown as John and Mary Doe.

(3) If a spouse’s surname has changed, address that individual as follows on all letters, schedules and attachments: Alice Jones, formerly known as Alice Smith. The name can also be shown as follows: Alice Jones (formerly known as Smith). The "formerly known as Alice Smith" or "formerly known as Smith" will be deleted on the mailing envelope.

(4) In the following example, a notice of deficiency is being prepared for the 2008 return of Alice and John Smith. Alice Smith has remarried and changed her name to Alice Jones. (The new name was not obtained from Form 56 - No Form 8857 has been filed.) Duplicate original Notices of Deficiency are required for 2008 as shown below:

One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

John Smith and
Alice Jones, formerly known as Alice Smith
(John Smith's last known address)

and

One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

John Smith and
Alice Jones, formerly known as Alice Smith
(Alice Jones’ last known address)

(5) In the following example, a notice of deficiency is being prepared for the 2008 return of Alice and John Smith. Alice Smith has remarried and changed her name to Alice Jones. The IRS is aware of the wife’s new name because it is shown on the Form 8857 that was filed. Therefore, the wife’s new name should not appear on any letters or forms being sent to the husband. Duplicate original Notices of Deficiency are required for 2008 as shown below:

One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

John Smith and
Alice Smith
(John Smith’s last known address)

and

One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

John Smith and
Alice Jones, formerly known as Alice Smith
(Alice Jones’ last known address)

(6) The necessary number of photocopies may be made of the remaining parts of the notice (Form 5278, explanation of adjustments, etc.) and associated with the separately typed notice of deficiency and waiver. Make sure that if there is a new name for one spouse obtained from Form 8857 that this name is not disclosed to the non-requesting spouse on any of these schedules. Also, the new address of one spouse should not be shown on any copies of these schedules sent to the other spouse.

(7) Statements attached to duplicate original notices will be computer generated originals, typed originals, or photocopies.

(1) Under certain circumstances, a notice of deficiency will be issued to only one spouse for a married filing joint return. Examples of this include, but are not limited to:

1. When only one spouse signs a statute extension, or

2. When only one spouse signs a waiver agreeing to the additional tax deficiency.

(2) If a notice of deficiency will be issued to only one spouse for a married filing joint return, prepare the notice letter as follows:

1. Use the names of both spouses on the notice letter.

2. Use the address of the spouse to whom the notice is being sent.

3. Use the primary social security number as shown on the return.

4. The salutation will be directed only to the spouse to whom the notice is being sent.

(3) The Form 4089 will reflect only the name, address and social security number of the spouse to whom the notice is being sent.

(4) Prepare Form 5278 as follows:

1. Use the names of both spouses on Form 5278.

2. Use the primary social security number as shown on the return.

(5) Example: John and Jane Doe timely file a joint return for 2006 reflecting John's social security number as the primary. The 2006 return was examined and a deficiency of $5,000.00 is proposed. The taxpayers filed a protest for an Appeals hearing. John Doe signed a waiver in Appeals. Jane Doe did not sign a waiver and does not agree to the tax. Consequently, an MFT 31 assessment is made for John Doe and a notice of deficiency must be issued to Jane Doe.

1. The notice of deficiency includes Letter 894(cg), which is addressed to both John and Jane Doe, with Jane Doe's address. John's social security number is reflected on the letter. The salutation for the letter is "Dear Jane Doe:"

2. The Form 4089 waiver is addressed to Jane Doe only and therefore, it reflects only Jane Doe's address and social security number.

3. The Form 5278 is also addressed to both John and Jane Doe. John's social security number is reflected on the form.

(1) Letter 901(cg) is used for notices issued to consolidated corporations. In these cases the taxpayer is determined to be the parent company and its subsidiaries or affiliates.

(2) It is recommended that the letter be addressed to the taxpayer in a manner similar to "ABCD Corporation and Subsidiaries", "ABCD Corporation and Affiliated Companies", or "ABCD Corporation and Affiliates".

1. The return can be used as a guide to determine the name to use on the notice letter.

2. If the name on the return differs slightly from year to year, Form 872 and Form 2848 are valid legal documents that can be used to help determine the proper name to use.

3. Although it is important that the notice be as accurate as possible, use of "and Subsidiaries" rather than "and Affiliated Companies", and vice versa, will not make the notice invalid.

(3) Letter 901(cg) is a letter on APGolf:

1. APGolf should be used to generate the Letter 901(cg).

2. The opening paragraph of Letter 901(cg) is patterned as follows:
    
   "We've determined that you and your affiliated companies have a deficiency in your tax accounts. This means you owe additional tax, other amounts such as penalties or additions to tax, or both, as shown above. This letter is your NOTICE OF DEFICIENCY that the law requires. The enclosed statement shows how we figured your deficiency."
   
   

3. The APGolf letter has a two opening paragraph options, one for affiliated companies, and one for all other cases such as corporate, estate, gift, certain excise taxes, and withholding of tax at the source. Select the affiliated companies opening paragraph option on the input screen, and APGolf will generate the above paragraph.

(4) Form 4089 or Form 4089-A should contain the name and address of the taxpayer, and a summary of tax liability for each year. It must also contain an annotation that states, "Affiliations Statement Attached".

1. Use the same name on the Form 4089 or Form 4089-A as that used on the letter. (ABCD Corporation and Subsidiaries, for example.)

(5) Prepare an affiliations’ statement listing the names of the parent and subsidiaries, and the years each was affiliated with the consolidated group.

1. The following paragraph must be included on the affiliations’ statement:
    
   "The tax liability of (Name of parent company) and each subsidiary company named above is stated as provided for by regulations prescribed under section 1502 of the Internal Revenue Code. The deficiencies shown will be assessed severally against each corporation named above in accordance with regulations under section 1502 of the Internal Revenue Code."

(6) Form 5278 should list all companies with proposed adjustments.

1. Next to each company, show the total adjustment attributable to that company. Do this for each year included in the notice.

2. If there is insufficient room on Form 5278 to list all the companies, annotate "See Schedule 1A attached" on the first line under "Adjustment to Income", and for each year provide an aggregate total of all the companies’ adjustments to income.

3. Using Form 4549-B or similar schedule, list all the companies and the total adjustment proposed against each. Label this schedule as Schedule 1A. The total of all the adjustments listed on this schedule should equal the aggregate total described in (b) above.

   Note: Instead of using "Schedule 1A" to reference the schedule that lists all the companies and the total adjustment proposed against each, any schedule or exhibit number may be used for the schedule discussed in (b) and (c).

4. It is preferable that Form 5278 and Form 4549-B list all companies with proposed adjustments, as discussed above. However, if it is impractical, the adjustments do not have to be listed by entity since this will not invalidate the notice.

(7) List separately any automatic adjustments not attributable to any particular company. List them on the second line under "Adjustment to Income" on Form 5278.

(8) The explanation of adjustment schedule (Schedule 2) should provide a detailed explanation for each issue proposed against the companies listed on Form 4549-B. Check to make sure the total of the issues listed for each company equals the adjustment amount shown on Schedule 1A for that company.

(9) See Exhibit 8.17.4-6. This exhibit is an example of the Affiliations Statement, Form 5278, Form 4549-B and explanations of adjustment schedules discussed above.

(1) Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is the annual taxable return used to report tax withheld on U.S. source income paid to foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts.

(2) Adjustments to Form 1042 are subject to deficiency procedures. Statutory notice of deficiency procedures also apply to the failure to deposit penalty (IRC 6656) as it relates to Form 1042. See IRM 20.1.4.11.5, Deficiency Procedures Form 1042, for additional information.

(3) Notice of deficiency letter

1. Use Letter 901(cg) for the notice. Letter 901(cg) is available on ACDS APGolf.

2. Formerly a notice of deficiency letter issued for a Form 1042 required a special opening paragraph. Now, Letter 901(cg) is used with a general opening paragraph.

3. When generating the Letter 901(cg) using ACDS, the APGolf letter has two opening paragraph options: one for affiliated companies, and one for all other cases such as corporate, estate, gift, certain excise taxes, and withholding of tax at the source. Select the second paragraph option, which is appropriate to use for all other cases including withholding of tax at the source.

4. In the "Tax Type" field on the letter, enter "Withholding of Income Tax at Source".

5. In the Form number field, enter "Form 1042".

(4) The rest of the notice is prepared as usual - prepare Form 4089 (or Form 4089-A and Form 870) Form 5278, explanations of adjustment, etc.

(1) A statutory notice of deficiency may be issued only for penalties subject to deficiency procedures. The determination of whether a penalty will be subject to a statutory notice of deficiency procedure depends on whether the underlying tax is subject to deficiency procedures. See IRM 8.17.4.17 for additional information on penalties subject to deficiency procedures.

(2) If it is determined that a penalty is subject to notice of deficiency procedures, a "penalty only" notice of deficiency can be issued just for the penalty in certain circumstances. See examples below:

(3) Example 1: A notice of deficiency can be issued for a penalty when the underlying tax subject to deficiency procedures has been assessed and therefore can't be included in the notice of deficiency.

1. Form 5278 should be prepared and include the assessed tax on line 19 - the "Total tax shown on return or as previously adjusted" line. That way the Form 5278 will correctly show that there is no tax to include in the notice of deficiency.

2. A penalty computation based on the assessed tax must be included in the notice.

3. Any payments applied towards the assessed tax are not shown in the notice of deficiency prepared for the penalty.

(4) Example 2: A penalty only notice of deficiency can also be issued if the adjustments resulted in no tax but a penalty is applicable (for example, due to a loss or credit carryback).

(1) When preparing a notice of deficiency involving open criminal aspects, Letter 894(cg) may be used, but it must be modified as outlined below:

1. Add a new paragraph between the current paragraph 1 and paragraph 2. The new paragraph should read as follows:

"Neither this notice, nor any related action taken by the Internal Revenue Service, affects other sanctions the law provides."

2. Delete the following two paragraphs:

"If you decide not to file a petition with the Tax Court, please sign the enclosed waiver form and return it to us at the IRS address on the top of the first page of this letter. This will permit us to assess the deficiency quickly and can help limit the accumulation of interest. The enclosed envelope is for your convenience."

"If you decide not to sign and return the waiver, and you don't file a petition with the Tax Court within the time limit, the law requires us to assess and bill you for the deficiency after 90 days from the date of this letter (150 days if this letter is addressed to you outside the United States)."

(2) Letter 531-C, Notice of Deficiency for Open Criminal Case, may be used instead of Letter 894(cg). No modifications are needed to the Letter 531-C.

1. Letter 531-C is not on ACDS, but a fillable Letter 531-C may be found on the Publishing Catalog website.

2. Letter 531-C refers the taxpayer to Notice 1214 for the Taxpayer Advocate telephone numbers and addresses. Notice 1214 must be mailed to the taxpayer with the notice of deficiency if Letter 531-C is used. Notice 1214 can be found on the Electronic Publishing Catalog website. (Notice 1214 is not required if Letter 894(cg) is prepared instead of Letter 531-C.

(3) No waiver or other form permitting the taxpayer to agree to a deficiency should be prepared. Therefore, do not include Form 4089 or Form 870 with the notice. Form 4089-A is prepared instead for a notice of deficiency prepared for an active criminal case.

(4) Area Counsel's written approval of the notice of deficiency is required prior to issuance.

(1) Notice of deficiency procedures are generally not used in TEFRA cases.

(2) If any partner in a TEFRA partnership does not agree to the settlement, Appeals will prepare the notice of final partnership administrative adjustment (FPAA).

(3) The FPAA is similar to a notice of deficiency; however, it contains only partnership adjustments rather than a tax deficiency. See IRM 8.19, Appeals Pass-Through Entity Handbook, for complete instructions on the preparation of the FPAA.

(1) When preparing a notice of deficiency for a case with an open TEFRA proceeding, the notice of deficiency for non-TEFRA items is issued at the investor level and shows the deficiency in tax and penalties attributable only to the non-TEFRA adjustments.

1. Munro computations (Munro v. Commissioner, 92 T.C. 71 (1989)) are used, except when the returns involved are determined to be oversheltered.

2. See IRM 8.19 for information on Munro computations and oversheltered returns.

(1) An examination can be conducted on a copy of a taxpayer's return or with a BRTVU or RTVUE print.

(2) If it becomes necessary for Appeals to issue a notice of deficiency, the original return must be requisitioned through Account and Processing Support (APS). The AO is responsible for requesting that APS order the original return.

(3) If a statute is imminent, it may be necessary to issue a notice of deficiency based on copies of returns or BRTVU/RTVUE prints. If so, obtain a transcript to verify taxable income and tax per return.

(1) If the fraud penalty is asserted on a copy of a return, immediate attempts must be made by the AO to secure the original tax return. Such attempts need to be documented and made part of the case file.

(2) See IRM 4.8.9.19, Electronically Filed Returns Where the Civil Fraud is Asserted, for information about electronic returns.

(1) When the administrative file is returned to APS with Counsel’s approval, APS will return the file to the AO for preparation of the statutory notice and signature:

1. The approving Appeals official signs the notice in pen and ink, on behalf of the Commissioner.

   Note: Copies of the notice letter which are used for the originals or duplicate originals should have a handwritten signature and not a facsimile or reproduced signature.

(2) If the administrative file is returned directly to the AO with Counsel’s approval, follow the procedures below:

1. If Counsel sends the file back to the AO without going through APS, and an ACTION code SNDC and a TODATE is on ACDS, the AO must ensure that the FROMDATE (date the administrative file was returned by Counsel) is entered on ACDS.

2. To request this update be made by APS, the AO submits an "ACDS Update Request Form" to their designated APS ACDS Update Mailbox using secure encrypted e-mail.

(3) ACDS Update Request Form:

1. The AO prepares the "ACDS Update Request Form" found on APGolf under ACDS Updates, completing only the required items.

2. On the "Other" line of the ACDS Update Request Form, the AO will enter "FROMDATE Update". The AO then includes in the "Comments" section "Case Returned from Counsel" and the date the administrative file was returned by Counsel

3. The AO e-mails the ACDS Update Request Form to their designated APS Team using the appropriate organizational mailbox. To locate the list of APS Organizational mailboxes, access the APS web page using the following link http://appeals.web.irs.gov/APS/default.htm. On the APS web page scroll down to the Contacts section and click the APS Team Manager Information hyperlink to open the Excel spreadsheet. Then select the appropriate APS organizational mailbox under the ACDS Update Email column.

4. An APS employee will be assigned the "ACDS Update Request Form" within 24 hours of receipt. APS will e-mail the AO if clarification is needed to process the request.

(1) Occasionally, a case referred to Counsel for consideration of the issuance of a notice of deficiency, EP or EO adverse determination letter, or for concurrence in the removal of a fraud penalty, is returned to Appeals with a memorandum stating the reason for withholding concurrence.

(2) If the administrative file is returned directly to the AO by Counsel:

1. If Counsel sends the file back to the AO without going through APS, and an ACTION code SNDC and a TODATE is on ACDS, the AO must ensure that the FROMDATE (date the administrative file was returned by Counsel) is entered on ACDS.

2. To request this update be made by APS, the AO submits an "ACDS Update Request Form" to their designated APS ACDS Update Mailbox using secure encrypted e-mail.

(3) ACDS Update Request Form

1. The AO prepares the "ACDS Update Request Form" found on APGolf under ACDS Updates, completing only the required items.

2. On the "Other" line of the ACDS Update Request Form, the AO will enter "FROMDATE Update". The AO then includes in the "Comments" section "Case Returned from Counsel" and the date the administrative file was returned by Counsel

3. The AO e-mails the ACDS Update Request Form to their designated APS Team using the appropriate organizational mailbox.To locate the list of APS Organizational mailboxes, access the APS web page using the following link http://appeals.web.irs.gov/APS/default.htm. On the APS web page scroll down to the Contacts section and click the APS Team Manager Information hyperlink to open the Excel spreadsheet. Then select the appropriate APS organizational mailbox under the ACDS Update Email column.

4. An APS employee will be assigned the "ACDS Update Request Form" within 24 hours of receipt. APS will e-mail the AO if clarification is needed to process the request.

(4) When the Appeals Area Director and the Associate Area Counsel cannot agree on the actions recommended in Counsel's advice, the matter is resolved by the Director of the Appeals Operating Unit after consideration of the advice and the Deputy Area Counsel.