4.10.7. Issue Resolution

(1) This IRM provides guidance for the proper application of tax law to resolve issues and determine the correct tax liability.

(1) By law, the IRS has the authority to conduct examinations to determine the correct tax liability under Title 26, Internal Revenue Code, Subtitle F – Procedure and Administration, Chapter 78, Discovery of Liability and Enforcement of Title, Subchapter A, Examination and Inspection, which includes, but is not limited to, the following IRC sections:

• IRC 7602, Examination of books and witnesses

• IRC 7605, Time and place of examination

(2) The authorities for this IRM include:

• IRC 6103, Confidentiality and disclosure of returns and return information

• IRC 6751, Procedural requirements

• IRC 7491, Burden of proof

• IRC 7805, Rules and regulations

(1) The Director, Examination Headquarters, is the executive responsible for providing policy and guidance for field employees and ensuring consistent application of policy, procedures and tax law to effect tax administration while protecting taxpayers’ rights. See IRM 1.1.16.5.5, Examination Headquarters, for additional information.

(2) The Director, Examination Field and Campus Policy, reports to the Director, Examination Headquarters, and is responsible for the delivery of policy and guidance that impacts the field examination process. See IRM 1.1.16.5.5.1, Field Examination and Campus Policy, for additional information.

(3) Field Examination General Processes (FEGP), which is under the Director, Examination Field and Campus Policy, is the group responsible for providing policy and procedural guidance on standard examination processes to field employees. See IRM 1.1.16.5.5.1.1, Field Examination General Processes, for additional information.

(4) All examiners must perform their professional responsibilities in a way that supports the IRS Mission. This requires examiners to provide top quality service and to apply the law with integrity and fairness to all.

(5) Examiners and their managers should thoroughly acquaint themselves with the examination procedures and information contained in this IRM, as well as other resources, such as those listed in IRM 4.10.1.1.7, Related Resources.

(1) This IRM defines various legal terms in each section. For other commonly used terms related to the examination process, see IRM 4.10.1.1.5, Terms.

(1) The following table lists commonly used acronyms and their definitions used throughout this IRM:

(1) The IRM sections in Part 4, Chapter 10, Examination of Returns, contain many of the procedures and guidelines examiners will use. See IRM 4.10.1.1.7, Related Resources, for a list of related IRM sections and websites.

(1) The IRC of 1986 is the primary source of federal tax law. It imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of federal taxation. The IRC is found at Title 26 of the United States Code (USC). The USC consists of fifty-three titles.

(2) For ease of use, the IRC is divided into different units: subtitles, chapters, subchapters, parts, and sections. Listed below are the chapters which fall within the eleven subtitles of the current IRC.

(3) Sections are usually arranged in numerical order. This sometimes leads to the need to show an IRC section number followed by a capital letter not in parentheses. An example is IRC 280A. This designation is used because subsequent legislation created additional IRC sections in Part IX, requiring the addition of new sections after section 280. Since section 281 already existed, new sections were added by creating sections 280A, 280B, 280C, etc.

(1) Federal tax legislation originates in the House of Representatives. Hearings are held by the House Ways and Means Committee. When a bill is introduced in the House, a Committee Report is published which often states the reason the bill is being proposed. This reasoning establishes the legislative intent behind the enacted law.

(2) After the bill clears the House, it is considered by the Senate. The Senate Finance Committee holds hearings and prepares a report explaining any changes made to the House bill. A Conference Committee later resolves any differences between the House and Senate versions of the bill and issues its own report.

(3) When the bill passes both the House and Senate, it is sent to the President to be signed. Once signed, the bill becomes law and a new or amended section of the IRC is enacted. Committee Reports are useful tools to determine Congressional intent behind certain tax laws. They can help assist examiners in correctly applying the law.

(1) The Code of Federal Regulations (CFR) is a codification of the general and permanent rules published in the Federal Register (FR) by the Executive departments and agencies of the Federal Government. It is divided into fifty titles which represent broad areas subject to Federal regulation. Each title is divided into chapters usually bearing the name of the issuing agency. Each chapter is subdivided into parts covering specific regulatory areas. Title 26 comprises the Internal Revenue Regulations and is cited 26 CFR.

(1) The Internal Revenue Bulletin (IRB) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official IRS rulings and procedures and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published on a weekly basis by the Government Printing Office.

(2) It is the policy of the IRS to publish in the IRB all substantive rulings necessary to promote a uniform application of the tax laws, including rulings that supersede, revoke, modify, or amend any of those previously published in the IRB. All published rulings apply retroactively unless otherwise indicated.

(1) The CB is a consolidation of items published in the weekly Internal Revenue Bulletin. The CB was issued on a semi-annual basis. The CB is numbered 1 to 5, inclusive (April 1919 to December 31, 1921); and I–1 and I–2 to XV–1 and XV–2, inclusive (January 1, 1922, to December 31, 1936). Each CB number thereafter bears the particular year covered, for example, 1963–1 (January 1 to June 30, 1963).

(2) The CB is divided into four parts:

1. Part I, 1986 Code: This part is divided into two subparts based on provisions of the IRC of 1986. Arrangement is sequential according to IRC and regulations sections. The IRC section is shown at the top of each page.

2. Part II, Treaties and Tax Legislation: This part is divided into two subparts as follows: (1) Subpart A, Tax Conventions, and (2) Subpart B, Legislation and Related Committee Reports.

3. Part III, Administrative, Procedural, and Miscellaneous: To the extent practical, pertinent cross references to these subjects are contained in the other parts and subparts.

4. Part IV, Notice of Proposed Rule Making: The preambles and text of Proposed Regulations that were published in the Federal Register during this six month period are printed in this section. Included in this section is a list of persons disbarred or suspended from practice before the IRS.

(1) A revenue ruling (Rev. Rul.) is an official interpretation by the IRS of the IRC, related statutes, tax treaties, and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts.

(2) A revenue procedure (Rev. Proc.) is an official statement of a procedure by the IRS that affects the rights or duties of taxpayers or other members of the public under the IRC; related statutes, tax treaties, and regulations; or information that, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge.

(3) The purpose of revenue rulings and revenue procedures is to promote uniform application of the tax laws. IRS employees must follow revenue rulings and revenue procedures. Taxpayers may rely on them or appeal their position to the Tax Court or other federal court.

(4) Revenue Rulings and Revenue Procedures that have an effect on previous rulings use the following defined terms to describe the effect:

1. Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the original fact situation.

2. Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, confusion. It is not used where a position in a prior ruling is being changed.

3. Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them.

4. Modified is used where the substance of a previously published position is being changed.

5. Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. The term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in law or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted.

6. Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling.

7. Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 IRC and regulations the same position published under the 1939 IRC and regulations. The term is also used when it is desirable to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case the previously published ruling is first modified and then, as modified, is superseded.

8. Supplemented is used in situations in which a list, such as a list of the name of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series.

9. Suspended is used in rare situations to show that the previously published ruling will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a IRS study.

(1) IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating IRS positions, and include worksheets. Publications are nonbinding on the IRS and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position.

(1) This section focuses on the federal courts (and their predecessors) that interpret federal tax law, and the role of case law in tax research and decision making. This section includes the following:

(1) A Private Letter Ruling (PLR) represents the conclusion of the IRS for an individual taxpayer. The application of a private letter ruling is confined to the specific case for which it was issued, unless the issue involved was specifically covered by statute, regulations, ruling, opinion, or decision published in the Internal Revenue Bulletin.

(2) Technical Advice Memoranda (TAM) are requested by IRS area offices after a return has been filed, often in conjunction with an ongoing examination. TAMs are binding on the IRS in relation to the taxpayer who is the subject of the ruling.

(3) A private letter ruling to a taxpayer or a technical advice memorandum to an area director, which relates to a particular case, should not be applied or relied upon as a precedent in the disposition of other cases. However, they provide insight with regard to the IRS’ position on the law and serve as a guide.

(4) Existing private letter rulings and memoranda (including Confidential Unpublished Rulings (CUR), Advisory Memoranda (AM), and General Counsel Memoranda (GCM)) may not be used as precedents in the disposition of other cases but may be used as a guide with other research material in formulating an area office position on an issue.

(5) Whenever an area office finds that a CUR, AM, or GCM represents the sole precedent or guide for determining the disposition of an issue and cannot to its own satisfaction find justification in the IRC, regulations, or published rulings to support the indicated position, technical advice should be requested. Instructions for requesting technical advice are contained in the second revenue procedure issued each year. See IRM 4.8.8.12.1.4, Requests for Technical Advice Memorandum.

(6) Technical advice should be requested where taxpayers or their representatives take the position that the basis for the proposed action is not supported by statute, regulations, or published positions of the IRS. If it is believed that the position of the IRS should be published, the request for technical advice will contain a statement to that effect. Instructions for requesting technical advice are contained in the second revenue procedure issued each year. Questions regarding the procedures should be addressed to the functional contacts listed in the revenue procedure. See IRM 4.8.8.12.1.4, Requests for Technical Advice Memorandum.

(1) General Counsel Memoranda (GCM) are legal memoranda from the Office of Chief Counsel prepared in connection with the review of certain proposed rulings (Rev. Ruls., PLRs, TCMs). They contain legal analyses of substantive issues and can be helpful in understanding the reasoning behind a particular ruling and the IRS’ response to similar issues in the future.

(1) Technical Memoranda (TM) function as transmittal documents for Treasury Decisions or Notices of Proposed Rule Making (NPRMs). They generally summarize or explain proposed or adopted regulations, provide background information, state the issues involved, and identify any controversial legal or policy questions. Technical Memoranda are helpful in tracing the history and rationale behind a regulation or regulation proposal.

(1) A wide range of tax literature is available to IRS personnel. Monthly publications such as The Journal of Taxation, Taxation for Accountants, and Taxation for Lawyers, published by Warren, Gorham & Lamont.

(2) Numerous books presenting detailed analyses of tax laws and issues are available and provide excellent sources of information. One of the better known is Federal Income Taxation of Corporations and Shareholders by Bittker and Eustice, published by Warren, Gorham & Lamont, which has been cited by the Supreme Court.

(3) A number of tax services are available from commercial publishers that provide explanations and annotations on a variety of tax issues. For example, CCH Incorporated’s Standard Federal Tax Reporter, Bureau of National Affairs’ Tax Management Portfolios, and Research Institute of America’s American Federal Tax Reports.

(4) There are numerous sources of information available through on-line research. IRS has electronic access to thousands of data bases. See IRM 4.10.7.2.13.1, Electronic Research Services, for more detail.

(1) Electronic tax research using online tax services is available. Information can be accessed quickly and all references to a given topic, obtained by searching, by specific words or word groups. Most of the documents discussed above are available from commercial vendors online.

(1) Evidence is something which tends to prove a fact or point in question. Evidence is distinguished from proof, in that proof is the result or effect of evidence.

(1) The IRC requires all taxpayers to keep adequate records. There are times, due to unusual circumstances, when records do not exist. In such cases, oral testimony may be the only evidence available. Therefore, oral statements made by taxpayers to examiners represent direct evidence which must be thoroughly considered. Although self-serving, uncontradicted statements which are not improbable or unreasonable should not be disregarded. The degree of reliability placed on a taxpayer’s oral statements must be based on the credibility of the taxpayer and surrounding circumstantial evidence (IRM 4.10.7.3.10 below). The following general guidelines should also be considered:

1. Oral evidence should not be used in lieu of available documentary evidence.

2. If the issue involves specific record keeping required by law and regulations (e.g., IRC 274), then oral evidence (testimony) alone cannot be substituted for necessary written documentation.

3. Oral testimony need not be accepted without further inquiry. If in doubt, attempts should be made to verify the facts from other sources of evidence.

(2) In some instances a summary of a conversation or statement made by a taxpayer or witness should be prepared as documentation of the oral testimony and the taxpayer (or third party) should be requested to sign the document. It should always be signed by the examiner or examiners party to the interview. If the taxpayer or third party does not sign the documentation, then it is considered a report of the interview. This summary document should always contain:

1. Date, time and place of contact,

2. Name of the parties present, and

3. Description of what transpired.

(3) Sometimes a more formal written statement is needed when documentation is not available and oral testimony will significantly affect the outcome of the case. In these cases examiners should assume that the case may eventually be resolved through litigation and should use formal written statements such as affidavits to record taxpayer or third party statements. An affidavit is an attested statement and has great validity when properly prepared and voluntarily given. Affidavits should be completed using Form 2311, Affidavit. Affidavits may be used:

1. When other documentary evidence is unavailable,

2. When the examiner wants the taxpayer’s statements to become part of the case file,

3. To help accumulate complete and accurate information,

4. To record the testimony of a witness, and

5. To prevent a taxpayer from changing testimony.

(4) If oral testimony is accepted or where oral testimony is not allowed, the workpapers should reflect a full development of the facts, oral statements, corroborating evidence and conclusions, including an explanation of the factors supporting the conclusion. "Per oral testimony" or "as reasonable" are insufficient unless the amounts are both de minimis and reasonable.

(1) One of the basic rules of evidence is that witnesses (either taxpayers or third parties) can testify only about facts of which they have first hand knowledge. In other words, witnesses must be able to say the facts to which they testify are true.

(1) Some issues are so difficult that the ordinary person needs assistance from someone more familiar with the subject to understand and resolve the matter at hand. An expert opinion is made by someone with the education and experience to qualify as an expert. Thus, expert testimony is needed.

(1) Hearsay is what a witness says another person was heard to say. It is a secondary source of information and generally the reliability and trustworthiness of the evidence rests upon the veracity and reliability of a person giving testimony.

(2) A common example of hearsay evidence is testimony of taxpayers’ representatives. It should therefore be recorded in the workpapers by examiners. Hearsay often leads to primary sources of information.

(1) A statement that is harmful to the person making the statement is considered an "admission against interest." When an admission is made voluntarily and with deliberation, it represents substantial evidence that the fact admitted is probably true.

(1) An opinion is a belief not based on absolute certainty, or a judgment or evaluation of what seems to be true. Opinions are statements of personal feelings.

(2) An opinion is not conclusive evidence of a fact. But opinions may be the only evidence available. Before accepting an opinion as evidence, the examiner should solicit other documentary evidence.

(3) Opinions emphasize connotative meaning, that is, how someone feels about something; how they value it.

(4) Opinions cannot be proven or verified. The only criterion for testing an opinion is whether it is acceptable or not, believed or not believed.

(5) There are three primary types of opinions:

1. Unqualified Opinion: An unqualified opinion is made by someone who is only guessing. The individual has neither the education or work experience to make an intelligent estimate.

2. Biased Opinion: A biased opinion is made by someone whose relationship with the taxpayer influences the opinion. Suspect bias when a valuation or opinion is rendered by a family member or someone receiving a substantial benefit from the taxpayer.

3. Expert Opinion: An expert opinion is made by someone with the education and experience to qualify as an expert, but biases, for example, family or employment relationships, should be considered. Any doubt about the validity of an expert’s opinion should be resolved by seeking a second expert’s opinion.

(1) Observations are statements, judgements, or inferences of fact based on something observed. It is the act of recognizing and noting a fact or occurrence.

(1) Documents are another form of evidence. Documentary evidence is generally regarded as having great probative (providing proof or evidence) value. Writings made contemporaneously with the happening of an event generally reflect the actual facts and show what was in the minds of the parties to the event.

(2) While documentary evidence has great value, it should not be relied on to the exclusion of other facts. Facts can also be established by oral testimony and there will be occasions when courts will give greater weight to oral testimony than to conflicting documentary evidence.

(1) Circumstantial evidence is evidence from which more than one logical conclusion can be reached. To be useful, both the credibility of the evidence and the reasonableness of the conclusion should be evaluated.

(1) The best evidence rule requires that, when possible, original evidence be used. Therefore, examiners should always ask to the see original documents when there is reason to believe such documents are available.

(1) Secondary evidence is used when original evidence is unavailable. Examples of acceptable secondary evidence are copies of original documents made by an examiner. In the absence of original documents, copies made by the examiner become the best evidence available.

(1) The fact in dispute can, in some cases, be proved by showing other facts from which the fact can be inferred. In other words, as a matter of logic, an inference can be made from facts to decide a disputed fact.

(2) An inference is a logical conclusion based on facts. Things beyond the range of what can be observed are inferences.

(1) A determination of taxpayer credibility is most often required in connection with evaluating oral evidence presented by taxpayers (see IRM 4.10.7.3.2, Oral Testimony, for additional guidance).

(2) It is the responsibility of examiners to establish the taxpayer’s or third party’s credibility as part of the evaluation of oral evidence. Corroborative or contradictory details will have an important bearing on determining the reasonableness and probability of the statements.

(3) If the statements of taxpayers, in the judgment of examiners, suggest some degree of unreliability, the decision to accept some, all or none of the oral statements as credible evidence should take this into account. However, unless taxpayers’ statements are found to be wholly unreliable, they must be given some weight in the conclusion reached.

(1) When deductions (such as exemptions for dependents) are based on a substantial number of small expenditures all of which cannot be substantiated by documentary evidence, examiner judgement will be used to reach a reasonable determination. This is provided when there is a basis for allowance under the law and regulations.

(2) These instructions are not intended to relieve taxpayers of the burden of proof, nor to sanction their failure to comply with the record keeping requirements of the law and regulations. Rather, they are intended to give examiners flexibility in the evaluation of incomplete evidence that is often encountered in everyday administration of the tax laws.

(3) Examiners will exercise sound judgment to make reasonable determinations. The examiner must be sure there is a basis for each allowance. This involves consideration of the following elements, which will vary according to the nature of the items involved and the circumstances of the case:

1. Considering the extent to which detailed documentation is required,

2. Examining all existing records essential to adequate substantiation, and

3. Determining the weight to be accorded oral statements and explanations.

(4) Close approximations of items, not fully supported by documentary proof, can frequently be established through reliable secondary sources and collateral evidence. For example, in questionable exemption cases, the fact that taxpayers cannot furnish documentary evidence in support of some of the amounts contributed need not be fatal to allowance of the exemption. Taxpayers may be able to demonstrate the total cost of support with reasonable certainty and satisfy examiners, for example, by third-party affidavits, that only nominal amounts were contributed by others.

(5) Due consideration should be given to:

1. Reasonableness of the taxpayers’ stated expenditures in relation to the taxpayers’ reported income,

2. Reliability and accuracy of the taxpayers’ records (determined by examining items on the return more readily lending themselves to detailed record keeping), and

3. General credibility of the taxpayers’ statements in the light of the entire record in the case.

(6) The practice of disallowing amounts claimed because there is no documentary evidence available, which will establish the precise amounts beyond any reasonable doubt (even though it is clear the taxpayer did incur some expense) ignores commonly recognized business practice, as well as the fact that proof may be established by credible oral testimony. However, an arbitrarily computed portion of deductions in this situation will not be allowed merely for the purpose of expediting the closing of the case.

(7) For instance, if a taxpayer cannot precisely document amounts spent for expenses while away from home on business, examiners may establish reasonable amounts were spent for such items if taxpayers can clearly establish the following:

1. Time: Dates of departure and return for each trip away from home, and number of days away from home,

2. Place: Destinations or locality of travel, for example, name of city or town,

3. Business Purpose: business reason for travel or nature of business benefit derived or expected to be derived, and

4. Proof that Expenditures were incurred: a reasonable showing, based upon secondary evidence, including oral testimony, and out-of-pocket expenses were paid.

(8) The extent of the allowance in (7) above should be governed by the principles stated in (4), (5) and (6) above. Allowances should be consistent with an appraisal of the facts and conservative to ensure taxpayers do not profit from failure to keep required records of all elements of travel expenses.

(1) The Internal Revenue Manuals (IRM) contain tolerances to be observed for deficiencies and various types of penalties (e.g. IRM 4.10.2.3.1, Large Unusual or Questionable (LUQ) Items Defined; IRM 20.1, Penalty Handbook; Delegation Order SBSE 1-23-15, Error Tolerance Levels, etc.). Consult the applicable IRM as needed.

(1) The definition of "significant" or "material" depends on an examiner’s evaluation of a return as a whole and the items that comprise the return. There are several factors, however, that examiners must consider when determining whether an item is significant. These factors include:

1. Comparative size of the item,

2. Absolute size of the item,

3. Inherent character of the item,

4. Evidence of intent to mislead,

5. Beneficial effect of the manner in which an item is reported, and

6. Relationship to/with other item(s) on a return.

(2) Generally, automatic adjustments (obvious errors or omissions on the return) in excess of tolerances are to be considered significant items.

(1) The impact on compliance within a segment of the population, sector of the economy, or similarly situated taxpayers will be considered when making a decision whether or not to raise an issue.

(1) Once an examination has begun and a decision is made to limit the scope of the audit based on collectibility, examiners will complete the examination at the earliest possible opportunity. IRM 4.20.1.2.1, Collectibility Considerations, and IRM 4.20.1.2.3, Fact Finding, provide guidance the examiner should consider in determining to limit the scope.

(2) If the examiner decides, based on information developed, the examination of remaining issues is no longer warranted, the examiner must document their determination in the workpapers. See IRM 4.20.1.2.4, Document Collectibility, for guidance.

(1) In examinations conducted by examiners using field techniques, timing issues should be dealt with at the planning level. Generally, planning an examination to include short-term timing issues is not an effective use of resources. However, unplanned timing issues which are uncovered or arise as a correlative adjustment during an examination of non-timing issues should be made if cost effective to do so.

(2) The pre-contact and/or examination plan should preclude the inclusion of timing issues, except those with long term, flagrant short term, indefinite, or permanent deferral features.

(1) Certain cases present recurring, significant legal issues affecting large numbers of taxpayers. When there is a critical need for enforcement activity with respect to such issues, cases are designated for litigation in the interest of sound tax administration to establish judicial precedent, conserve resources, or reduce litigation costs for the IRS and taxpayers. For example, judicial precedent may provide guidance for the resolution of industry-wide, tax shelter or other issues, thereby serving early issue resolution and conserving IRS and taxpayer resources.

(2) Examination personnel should request designation of an issue in a case in the limited circumstances where sound tax administration is best served by establishing a legal precedent on the issue and not merely to prevent review by the IRS Independent Office of Appeals (Appeals). See IRM 4.10.28, Designation of Cases for Litigation, for examination guidance.

(3) When an issue under the jurisdiction of a BOD is designated for litigation, a partial agreement may be secured for the nondesignated and agreed issues. The taxpayer will not receive a 30-day (or similar) letter with respect to the remaining unresolved issues in the case. Rather, the taxpayer will be issued a SNOD for the unagreed issues. In general, the designation of an issue in a case will not preclude the settlement of the remaining issues either before or after the case is docketed. Nor, in general, will designation preclude Appeals from considering and settling the same issue in other cases within its jurisdiction.

(4) See CCDM 33.3.6, Designating a Case for Litigation, for additional information.

(1) The term whipsaw refers to situations where the government is subjected to conflicting claims by taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and correct reporting of the transaction may benefit one and adversely impact the other for tax purposes.

(2) A potential whipsaw situation could be present in almost any transaction; however, experience has shown the following issues to generate the majority of whipsaw cases:

1. Goodwill vs. covenant not to compete,

2. Alimony vs. child support,

3. Allocation of purchase price,

4. Buyer vs. seller,

5. Sale vs. rental/royalty,

6. Employee vs. independent contractor,

7. Payments to widows (gift vs. taxable income),

8. Dependency exemptions for children of divorced parents,

9. Husband and wife filing separate returns,

10. Grantor, trust, and beneficiaries,

11. Parent and child,

12. Decedent and decedent's estate,

13. Taxpayers in which the Commissioner has invoked the provisions of IRC 482, and

14. Parent and subsidiary corporations.

(3) When whipsaw issues require (i.e. material tax consequence) an examination of both parties, examiners will secure the name, address, and the tax identification number (TIN) of the related party. A transcript will be requested to determine the related party's examination status.

1. If a related party is under examination, then the examiner assigned to the case will be notified.

2. If the related party is not under examination, then the examiner will determine if they can examine the return or if a referral is needed. If a collateral examination is warranted, then Form 6229, Collateral Examination, will be prepared. See IRM 4.2.1.7, Collateral Examinations, for additional information.

(4) The primary objective of requiring support examinations of these returns is to assure consistent treatment of related taxpayers or taxpayers involved in the same transaction.

(1) This section focuses on techniques for conducting closing conferences, presenting examination findings, explaining proposed adjustments, and soliciting agreements. Each situation is unique and techniques vary widely, but there are basic procedures which should always be followed. See IRM 4.10.8 for report writing requirements.

(2) Generally, substantive issues should be proposed and discussed with the taxpayer and/or the representative in a face-to-face meeting. In some circumstances, a telephone conference or call may suffice, but this would be the exception.

(3) Generally, a report will not be mailed to the taxpayer prior to discussing findings and proposed issues with the taxpayer and/or the representative. Exceptions to this rule would be for the following:

1. No-show/ no-response appointments,

2. Uncooperative taxpayers, or

3. When additional records are provided for the examiner to consider.

(4) A revised report may be mailed to the taxpayer rather than presented in a face-to face-meeting.

(5) To facilitate discussion at closing conferences, the examiner may provide the taxpayer with a listing and brief description of proposed adjustments and penalties to be discussed. In lieu of a list, Form 5278 reflecting proposed adjustments (including penalties) can be shared during a face-to-face appointment.

1. Overassessment and no-change cases are generally not controversial and, in most instances, there is no need to hold a formal closing conference.

2. For agreed cases, a closing conference is generally not required as the issues were probably discussed and resolved throughout the audit. However, in some instances, a formal closing conference will be needed. The examiner should discuss the report with the taxpayer and/or representative to ensure all questions are answered and that payment arrangements are made.

3. For unagreed cases, a closing conference will generally be held.

(6) The examiner should choose the order in which issues will be presented at the closing conference. The order can be modified during the conference. While there is no "right" order or order which is best for all occasions, it is generally easier to resolve factual issues or issues involving an established application of law. These issues should be discussed first. Less certain issues should be discussed last.

(7) Closing conferences vary in the degree of formality, but generally the following areas are covered:

1. The examiner discusses their findings with the taxpayer and/or representative.

   Note: The examiner should be prepared to converse knowledgeably and explain proposed adjustments and provide the taxpayer with copies of relevant court cases, lead sheets and workpapers showing computations.

2. The examiner provides the taxpayer and/or representative with the authority for their findings (law, argument and conclusion).

3. The examiner receives information from the taxpayer and/or representative and addresses any taxpayer concerns. It is very important the examiner listens to the taxpayer and gets a clear understanding from all persons present that there are no pertinent facts other than those of which the examiner is aware. This can be done in a positive manner by stating, "This is my understanding . . .," and then detailing the facts as the examiner understands them. " Are we all in agreement on this? Are there any other material facts or circumstances of any consequence?"

4. The examiner solicits an agreement from the taxpayer.

   Caution: If penalties requiring supervisory approval under IRC 6751(b) are proposed, written approval must be obtained before a report is issued. See IRM 20.1.1.2.3.1, Timing of Supervisory Approval, for additional guidance.

   Note: When a joint return is being examined and only one spouse is present at the interview, a copy of the examination report must be mailed to the other spouse. If the taxpayers are represented by a power of attorney and they sign the audit report, copies of the audit report will be sent separately to each spouse.

(1) This section provides additional information for the processing of office examination cases. See IRM 4.10.7.5 for general information.

(2) Generally, examiners should issue a report at the conclusion of the initial face-to-face appointment, unless:

1. Income is an issue that needs further development;

2. Additional information is needed to work a prior and/or subsequent return concurrently with the year under examination (a focused IDR, using Form 4564, Information Document Request, should be issued to request additional information);

3. Penalties requiring supervisory approval under IRC 6751(b) are proposed and written approval has not yet been obtained; or,

4. The manager is not available to sign the 30-day letter.

Reminder: The authority to sign and issue 30-day letters (e.g., Letter 915, Examination Report Transmittal) is delegated to group managers. See Delegation Order SBSE 1-23-55 (IRM 1.2.65.4.34), Authority to Sign Thirty Day Letters, for additional guidance.

Note: If the issuance of a report is delayed while the examiner secures the manager’s signature on the 30-day letter and/or the penalty approval form, update the ERCS action code to 08, for follow-up in 5 days. Once the report is issued, update the ERCS action code to 04 for follow up (generally in 15 days).

(3) If the taxpayer says they have additional information to consider at the end of the initial meeting, this should generally not delay the issuance of a report. A focused IDR should be issued to request additional information if the information was not previously requested on the initial or a subsequent IDR. The examiner and taxpayer should agree on a mutually acceptable date (generally 15 days) for submission of additional information.

(1) When the communication process between the examiner and the taxpayer is working well, the examiner will know at the end of field work which issues are agreed and which are unagreed.

(2) If the desired level of communication and cooperation is not achieved, once the examination is complete, examiners will explain the basis of the proposed adjustments to taxpayer and/or representative. Examiners should be prepared to cite the law, regulations, rulings, and court decisions on which their conclusions are based and provide the taxpayer with copies of workpapers explaining the proposed adjustments.

1. Overassessment and no-change cases are generally not controversial and, in most instances, there is no need to hold a formal closing conference.

2. For agreed cases, a closing conference is generally not required as the issues were probably discussed and resolved throughout the audit. However, in some instances, a formal closing conference will be needed. The examiner should discuss the revenue agent’s report with the taxpayer and/or representative to ensure all questions are answered and payment arrangements are made.

3. For unagreed cases, a closing conference will generally be held.

(1) When agreement is reached with the taxpayer and/or representative on the last of the disputed issues, examiners must calculate the deficiency or overassessment.

1. Penalties requiring supervisory approval are proposed: Do not issue a report until written approval is obtained. See IRM 20.1.1.2.3, Approval Prerequisite to Penalty Assessments, for additional guidance.

   Note: Prior to obtaining supervisory approval of penalties, Form 5278 or a written list of proposed adjustments (including penalties) can be shared to facilitate discussion during a face-to-face appointment. The activity record should be contemporaneously documented to indicate the date and circumstances under which the Form 5278 or written list was provided. If Form 5278 is provided to the taxpayer, issue a report after supervisory approval of penalties is obtained.

2. Penalties requiring supervisory approval are not proposed: Issue a report if there is no reason for delay in execution of an agreement.

(2) Examiners will solicit payment of the tax due including accrued interest and applicable penalties, unless the taxpayer is in bankruptcy, then refer to IRM 4.27.1.8.1.1, Agreed Closures.

(3) If the taxpayer indicates an inability to pay the tax due at closing or within 120 days of the first notice, alternative payment methods should be discussed. An installment agreement should be offered if the taxpayers meet requirements. Form 9465, Installment Agreement Request, can be used to solicit an installment agreement.

(4) If the taxpayer and/or representative agrees with the findings, but does not wish to pay the deficiency immediately, explain that a notice and demand for payment of the deficiency plus interest and penalties will be mailed. Secure appropriate waivers and close the case.

(5) Examiners should inform taxpayers the IRS has agreements with state tax agencies under which information about federal tax, including increases or decreases, is exchanged with the states. If this change affects the amount of their state income tax, they should amend their state return by filing the necessary forms.

(1) The taxpayer’s position will be solicited on all unagreed issues. If agreement can be reached on one or more, but not all issues or years, taxpayers should be encouraged to enter into a partial agreement by executing a waiver such as Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, covering the agreed issues or years. When penalties requiring supervisory approval are proposed, do not solicit a partial agreement until after written approval is obtained.

(2) Managerial involvement is required in all unagreed cases and a managerial conference will be offered to the taxpayer and/or representative. The group manager should review the case file to ensure the taxpayer has submitted requested information and all issues are fully developed and documented. See IRM 1.4.40.4.11.5, Unagreed Closing Procedures, for additional guidance.

1. Office Examination group managers are required to make contact in person or by telephone with taxpayers and/or representatives to offer a group manager's conference on cases where the taxpayer has requested their case be sent to Appeals.

2. Field Examination group managers are required to make contact in person or by telephone with taxpayers and/or representatives on all unagreed cases.

(3) During conferences the group manager should discuss disputed issues with the taxpayer in an attempt to resolve the issues, obtain agreement, and limit taxpayer burden.

(4) If the issues cannot be resolved with the involvement of the group manager, the taxpayer should be informed of the following resolution options:

1. FTS for eligible cases (see IRM 4.10.7.5.6, SB/SE Fast Track Settlement),

2. Formal appeal with Appeals,

3. Pay the deficiency and file a claim for refund, and

4. Receive a notice of deficiency and file a petition in the United States Tax Court.

(1) FTS provides taxpayers with an optional strategy to reach resolution when the SB/SE examiner and manager, and the taxpayer have exhausted established issue resolution strategies. For eligible cases, FTS allows taxpayers with unagreed examination issues to work with SB/SE Examination and Appeals to resolve the issues while the case remains in SB/SE's jurisdiction. FTS may be initiated any time after an issue has been fully developed.

(2) The FTS process is estimated to be completed within 60 calendar days of Appeals' acceptance of the FTS application.

(3) There are many benefits of the SB/SE FTS program, including:

• Resolving issues at the lowest level possible by using the mediation skills and settlement authority of Appeals.

• Reducing taxpayer burden.

• Reducing overall case cycle time.

• Reducing examiner burden in successful cases by eliminating the need for extensive write up, rebuttal memorandum, etc.

• Reducing resource needs for the IRS.

(1) In the examination of large, complex tax returns, numerous issues will likely be proposed. Adjustments need to be fully developed before they are presented to taxpayers for review. If adjustments are not adequately developed, the review process may take longer. Records should be maintained of proposed adjustments and every effort taken to secure taxpayers’ responses in a timely manner.

(2) Form 5701, Notice of Proposed Adjustment, may be used to present proposed adjustments to taxpayers. Form 5701 is a three part form designed to provide written record of proposed adjustments. It is distributed as follows:

1. Part I is kept by the taxpayers.

2. Part II is returned by the taxpayers with their response to the issue.

3. Part III is maintained by the examiners.

(3) Use of Form 5701 is not mandatory. Any method which provides a record of what was presented to taxpayers may be used.

(4) The issuance of Form 5701 is recorded on the Issue Control Sheet, Form 5700. Form 5700 is a log which provides a record of outstanding Forms 5701, along with their current status.

(5) Preparation of Form 5701 must be tailored to the peculiarities of the issue, the taxpayer, and the expected agreed or unagreed status of the proposed adjustment. Form 5701 may serve as a cover sheet for a Form 886-A, Explanation of Items. This facilitates incorporation of an explanation of the issue into the Revenue Agent’s Report.

(6) The suggested format for preparation of an issue proposal is as follows:

1. Issue,

2. Facts,

3. Law,

4. Government’s Position,

5. Taxpayer’s Position, and

6. Conclusion.

(1) The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) changed examination and administrative procedures for partnership examinations to allow examinations and statutes to be controlled at the partnership level. Under the 1982 Act, examinations, appeals, and judicial proceedings are, in general, conducted at the entity level. Closing conferences and issue proposals relating to TEFRA entities must by law follow rigid guidelines. See IRM 4.31.1, Introduction, and IRM 4.31.2, TEFRA Examinations - Filed Office Procedures, for guidance.

(2) Section 1101 of the Bipartisan Budget Act (BBA) of 2015 repealed TEFRA partnership and Electing Large Partnership (ELP) provisions beginning with tax years beginning 1/1/2018. BBA has replaced TEFRA and ELP with an entirely new centralized partnership audit regime. The new regime provides for determination, assessment and collection of underpayments at the partnership level unless certain elections are made by the partnership. Generally, all partnerships with tax years beginning 1/1/2018 will be subject to the BBA centralized partnership audit regime. Certain eligible partnerships may make an election out of the BBA regime. See IRM 4.31.9, Centralized Partnership Audit Regime (BBA) Field Examination Procedures, for additional guidance.

(3) See Partnerships Knowledge Base for additional information on TEFRA and BBA.

(1) Examiners should solicit full payment for the audit deficiency (i.e., tax, penalties, and interest) and any outstanding balances due from all tax years during the closing conference or at the conclusion of scheduled office examination appointment. See IRM 4.20.1.3.1, Request Full Payment, for information and guidance and IRM 4.20.1.2.4, Document Collectibility, for guidance on documenting the case file.

(1) IRC 7491(a)(1) shifts the burden of proof in a court proceeding from the taxpayer to the IRS if the taxpayer produces credible evidence regarding the factual issues relevant to determining tax liability and also satisfies the criteria below.

(1) IRC 7491(b) places the burden of proof on the IRS in any court proceeding when the IRS reconstructs any item of the taxpayer’s income using solely statistical information. See IRM 4.10.4.6.1.3 for more detailed discussion on the use of Bureau of Labor Statistical (BLS) data.

(1) IRC 7491(c) states that the IRS has the burden of production in a court proceeding when the issue is a penalty, an addition to tax, or an additional amount imposed by the IRC. In any court proceeding, the IRS must first present evidence that imposition of the amount is appropriate. Only then must the taxpayer assume the burden of persuasion to raise appropriate defenses, such as reasonable cause, to the imposition of the penalty. IRC 7491(c) applies only to individuals.