4.10.9. Workpaper System and Case File Assembly

(1) This IRM provides the purpose, format, general content, and organization of examination lead sheets, workpapers, and case files.

(1) By law, the Service has the authority to conduct examinations 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 Internal Revenue Code (IRC) sections:

• IRC 7602, Examination of books and witnesses

• IRC 7605, Time and place of examination

(1) The Director, Examination Headquarters, is the executive responsible for providing policy and guidance for Field, Specialty, and Campus Exam Operations, 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, Examination Field 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 Examination. See IRM 1.1.16.5.5.1.1, Field Examination General Processes, for additional information.

(4) Examiners and their managers should thoroughly acquaint themselves with the examination procedures and information contained in this IRM.

(1) Periodic program reviews are conducted to:

• Assess the effectiveness of specific programs within Examination or across the organization,

• Determine if procedures are being followed,

• Validate policies and procedures, and

• Identify and share best/proven practices.

(1) The following table contains a list of terms used throughout this IRM and their definitions.

(2) The following table lists acronyms used throughout this IRM and their definitions.

(1) Additional IRM sections examiners may refer to for lead sheet and workpaper guidance include:

• IRM 4.2.5, Disclosure of Official Information

• IRM 4.10.2, Pre-Contact Responsibilities

• IRM 4.10.3, Examination Techniques

• IRM 4.10.4, Examination of Income

• IRM 4.10.5, Required Filing Checks

• IRM 4.10.7, Issue Resolution

• IRM 4.10.8, Report Writing

• IRM 4.10.15, Report Generation Software

• IRM 4.23.4, Employment Tax - General Procedures and Workpapers

• IRM 4.26.6, Bank Secrecy Act Examiner Responsibilities

• IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures

• IRM 4.33.1, Managing Electronic Records from Taxpayers and Third Parties

• IRM 10.5.1, Privacy Policy

• IRM 11.3, Disclosure of Official Information

(2) The following are links to helpful resources in the Virtual Library on Knowledge Management (KM):

• Lead Sheets and Workpapers

• Electronic Case Procedures

• Report Generation Software (RGS) and CEAS

• Required Filing Checks

• Report of Foreign Bank and Financial Accounts (FBAR)

• Electronic Records

• Disclosure and Privacy Knowledge Base

(3) The Lead Sheet Issue Reference Guide (LSIRG), a repository of audit steps, legal authorities, and links to numerous issue-specific workbooks, can be used to assist examiners in completing lead sheets.

(1) Administrative lead sheets address the administrative items requiring action and comment by the examiner (e.g., audit plan, initial discussion, required filing checks (RFC), minimum income probes (MIP)). They are also used as guides to assist the examiner with properly completing the audit. Administrative lead sheets are mandatory and are generally applicable to all income tax cases.

(2) Administrative lead sheets do not contain an adjustment grid displaying "Per Return" and "Per Exam" amounts.

(3) The administrative lead sheets listed below are mandatory for revenue agents (RA):

1. 100-02, Revenue Agent Audit Plan,

2. 100-03, Initial Taxpayer/Representative Discussion/Interview Check Sheet,

3. 100-04, Group Manager Concurrence Meeting (GMCM) and Managerial Involvement (mandatory for GS-12 and below),

4. 200-01, Multi-Year and Related Returns,

5. 300-01, Civil Penalty and Approval Form (mandatory for all deficiency and/or erroneous claim for refund or credit cases even if a penalty is not asserted), and

6. 400-01, Minimum Income Probe.

   Note: If gross receipts are classified, the examiner must add the issue as a "Classified Issue" (RGS will assign a number in the 4XX series). If gross receipts are not classified, but are examined, the examiner must add the issue as a "New Issue" (RGS will assign a number in the 5XX series). See IRM 4.10.15.8.9.1, Issue Types, for additional guidance.

(4) The administrative lead sheets listed below are mandatory for tax compliance officers (TCO):

1. 100-02, Tax Compliance Officer Audit Plan,

2. 100-03, Initial Taxpayer/Representative Discussion/Interview Check Sheet,

3. 200-01, Multi-Year and Related Returns,

4. 300-01, Civil Penalty and Approval Form (mandatory for all deficiency and/or erroneous claim for refund or credit cases even if a penalty is not asserted), and

5. 400-01, Minimum Income Probe (TCOs must use the Initial Interview Questions and Notes and Initial Interview Questions and Notes Business Supplement (for returns with Schedule C or F) workpapers within the TCO minimum income probe (MIP) workbook to document the initial interview).

Note: If gross receipts are classified, the examiner must add the issue as a "Classified Issue" (RGS will assign a number in the 4XX series). If gross receipts are not classified, but are examined, the examiner must add the issue as a "New Issue" (RGS will assign a number in the 5XX series). See IRM 4.10.15.8.9.1, Issue Types, for additional guidance.

(5) Each administrative lead sheet must be thoroughly completed/documented for all administrative items applicable to the specific taxpayer being audited. The administrative lead sheets contain links to IRM references and other resources (e.g., job aids, websites) to assist examiners with determining the appropriate documentation requirements. Examiners should also refer to Documenting Lead Sheets and Workpapers job aid for supplemental guidance on completing administrative lead sheets.

(1) Issue lead sheets are used to:

1. Document the adjustments, conclusion, audit steps, facts, law, and taxpayer's position for examined issues, and

2. Index and reference supporting workpapers.

(2) An issue lead sheet is required for all audit issues, including penalties and statutory issues.

(3) Issue lead sheets contain the following:

1. Header - See IRM 4.10.9.8.1.

2. Content - See paragraph (4) below.

3. Footer - See IRM 4.10.9.8.1.

(4) Issue lead sheets must reflect the issue name, adjustments (when applicable), conclusion, facts, law, taxpayer's position, and audit steps. This information should be presented in a logical order so reviewers can easily determine what audit steps and actions were taken to support the conclusion.

1. Adjustments -- Document the adjustments resulting from the audit. The lead sheet will detail the "Per Return," "Per Exam," and "Adjustment" amounts with each adjustment referenced to the supporting workpapers.

   Note: There are some issues that do not result in an adjustment to the tax return (e.g., innocent spouse and identity theft). For these types of issues, the examiner may delete the adjustment grid or write N/A for the "Per Return", "Per Exam", and "Adjustment" amounts.

2. Conclusion - Document a conclusion summarizing the disposition of each issue.

3. Facts - Document the facts upon which the adjustment is based. The statement should be in narrative form. The facts must be relevant to the issue and should be stated accurately and objectively. Facts favorable to both the Service’s and taxpayer’s position must be included.

4. Law - Document the applicable authority relied upon to resolve the issue (both no change and adjusted issues). The applicable authority should be correctly cited and explained (if necessary). Rulings, opinions, and decisions relied upon should be clearly stated and identified in the explanation. If the adjustment is supported by multiple code sections of tax law, they all must be reflected. For example, to support a disallowance of business expenses, IRC 162(a), ordinary and necessary business expenses, and IRC 6001, lack of substantiation, should be incorporated into the narrative, if both are applicable. Include the argument to support the Service’s position, by relating the facts, as previously stated, to the applicable law. See IRM 4.10.8.12.4(2), Explanation of Items.

5. Taxpayer's Position - Document the taxpayer's position. The taxpayer’s position should be stated objectively (in narrative form) if known. The legal authority, if any, that the taxpayer used as the basis of their argument should also be cited. If the taxpayer provided a written position statement, include and index it with the workpapers. If the taxpayer does not provide a position, the examiner should document that fact in this section of the lead sheet.

6. Audit Steps - Document the procedures and the audit techniques performed during the audit. Use the "Workpaper Reference" column to index the workpaper where the actions taken for the audit steps are documented.

   Note: The generic issue lead sheet contains standard audit steps (accessible from the drop-down menu in the "Audit Steps" section) for most issues. Issue-specific audit steps can be found in the Lead Sheet Issue Reference Guide (LSIRG).

(5) For additional guidance on creating issue lead sheets, refer to Documenting Lead Sheets and Workpapers job aid. Also see the TCO or RA Lead Sheets and Workpapers presentation.

(6) The examiner or group manager should document all managerial discussions on the relevant issue lead sheet, Form 9984, or on lead sheet 100-04, Group Manager Concurrence Meeting (GMCM) and Managerial Involvement.

(1) Workpapers must include a header and footer with the following information:

(2) Header information:

1. Taxpayer's name,

2. Taxpayer identification number,

3. Tax return form numbers and years examined,

4. Examiner's name (or initials), and

5. Date workpaper was prepared.

   Note: If a workpaper is prepared on multiple dates, the examiner should note each date that significant work was done.

(3) Footer information - Indexed page number.

(1) All workpapers must be numbered and labeled.

(2) Workpapers should be prepared using appropriate cross-referencing as follows:

1. Examiners should use the "Workpaper Reference" column on the administrative or issue lead sheet to point to the supporting workpaper(s). The supporting workpaper(s) must contain the documentation to explain the work performed.

2. It is not necessary to cross-reference all supporting workpapers to the lead sheet, however, supporting workpapers should be cross-referenced to each other when necessary to document the audit trail.

(3) Tick marks are used to simplify documentation of conditions found and work performed. Tick marks do not need to be standardized throughout the case file, but they must be consistent throughout the workpapers for an issue. Tick mark explanations must be a part of the workpaper or included in a separate tick mark legend workpaper.

(4) Workpapers should be indexed and labeled contemporaneously throughout the audit.

(5) For cases requiring a physical (i.e., paper) administrative file, Document 12278, Examination Workpaper Index Reference Tabs, can be used by examiners to help index audit lead sheets and workpapers to the Form 4318. Generally, the information on each tab identifies the numeric index and the associated lead sheet as depicted on the Form 4318.

(1) A taxpayer and/or representative can request and receive information from the examiner. Documents in the case file can be released unless the disclosure would seriously impair tax administration. Refer to IRM 4.2.5.6, Requests for Open Examination File and Workpapers.

(2) Generally, information in a case file is Sensitive But Unclassified (SBU) data and it must be safeguarded from unauthorized disclosure. See IRM 10.5.1.2.2, Sensitive But Unclassified (SBU) Data, and IRM 4.2.5.1.1, Background.

(3) If a Freedom of Information Act (FOIA) request is received on a case, a Disclosure manager will determine what should be released or what should be withheld in full or in part. See IRM 11.3.13.5, Review and Redacting, for additional information.

(4) Examiners should keep their files clean of unrelated materials. For example, when examiners download information from services such as yK1 or CDW Knowledge Graph Environment (CKGE), they should immediately discard all material on unrelated parties (e.g., neighbors, prior property owners, etc.) unless such information is functionally declared necessary (e.g., to detail specific search methodology). See IRM 10.5.6.5.6, Privacy Act Requirement to Maintain Accurate, Relevant, Timely, and Complete Records, for additional guidance. If the examiner has a question about whether information is related to the case, they should consult their group manager.

(1) Examiners should refer to the IRM sections listed below for case file documentation requirements for the mandatory items listed:

• Pre-plan and initial contact: IRM 4.10.2.3, In-depth Pre-Contact Analysis, and IRM 4.10.2.8, Initial Contact: Overview

• Required filing checks: IRM 4.10.5.2.4, Case File Documentation

• Minimum income probes: IRM 4.10.4, Examination of Income, and IRM 4.10.3, Examination Techniques

(1) All information critical to the case or that supports an adjustment must be maintained contemporaneously in the electronic case file, including lead sheets, supporting workpapers, and any other pertinent documents. For example, the following items should be contemporaneously saved in the case file (not all-inclusive):

• Workpapers and files that establish whether an issue is properly reported [relevant copies of taxpayer documents (contracts, invoices, etc.) as well as examiner-created files (pictures, web pages, etc.)].

• Taxpayer records and third-party information that support adjustments.

(2) See IRM 4.10.9.8.9 for information on using a taxpayer’s accounting software data backup file to create spreadsheets and PDF files that are used to conduct the audit.

(3) Examiners can use various tools to assist in the preparation of workpapers. These may include word processing, database and spreadsheet applications. Examiners should use the tool that will provide the most utility and functionality in the most efficient and effective manner for the issue being addressed. KM is continuously updated with new releases of tax administration tools that may be helpful.

(4) Optional workbooks are available to assist examiners in performing various complex computations including but not limited to depreciation, net operating loss, alternative minimum tax (AMT), and qualified business income deduction (QBID). These workbooks are available on the KM page for a particular issue or under Special Applications in the Report Generation Software (RGS) and CEAS.

(1) Consideration of penalties must be documented in all audits, including those involving tax shelters and erroneous claims for refund or credit. The applicability of penalties should be considered during the audit and, if warranted, developed as the audit progresses. Only after all facts and circumstances surrounding an audit have been developed can a determination be made as to the application of appropriate penalties. See IRM 20.1.5, Return Related Penalties.

(2) Whenever an audit results in a deficiency or in cases of an erroneous claim for refund or credit, the assertion or non-assertion of penalties must be documented in the case file (on lead sheet 300-1, a separate penalty lead sheet, or on a supporting workpaper). See Documenting Lead Sheets and Workpapers job aid for procedures on how to document penalties in the case file. The extent of the documentation will depend on the nature of the adjustments and the amounts involved. Canned statements (e.g., "negligence penalty applicable" or "negligence penalty deemed to be not applicable") are not sufficient.

(1) During every audit, examiners must be alert to fraud indicators and assert the civil fraud penalty when there is clear and convincing evidence to prove that some part of the adjustment to taxable income and/or credits resulting in an underpayment of tax was due to civil fraud. Such evidence must show the taxpayer's intent to evade tax, which the taxpayer believed to be due.

(2) A fraud development job aid is available to assist examiners in making a determination of whether fraud should be pursued and developed. A link to the job aid is accessible from lead sheet 300-01 (Tab 1).

(3) For every case resulting in a deficiency, examiners must document their consideration of fraud, including applicable fraud indicators, even if the civil fraud penalty is not pursued or developed. See IRM 25.1.2.3, Indicators of Fraud. Refer to Documenting Lead Sheets and Workpapers job aid for procedures on how to document fraud in the case file.

(1) During every audit where the tax return was prepared by a tax return preparer, examiners must determine if return preparer penalties are warranted. See IRM 20.1.6.4.2, Tax Return Preparer Defined. This determination is based on the facts and circumstances of the case, including oral testimony and written evidence developed during the audit.

(2) Examiners must exercise caution when documenting consideration of return preparer penalties in the related income tax case because the income tax audit is separate and distinct from the return preparer penalty case. Examiners must not propose or discuss return preparer penalties in the presence of the taxpayer.

(3) When the return was prepared by a tax return preparer and the audit results in a deficiency, examiners must document consideration of return preparer penalties in the income tax case. Examiners must reference the workpapers containing the facts on lead sheet 300-01 (in the "Preparer/Promoter/Material Advisor Penalties" section).

(4) The income tax case should reflect the return preparer's involvement in and responsibility for the preparation of the tax return. Documentation should be limited to the information necessary to demonstrate the return preparer’s actions, such as:

1. Assertions by the taxpayer that penalties are not applicable because they relied on their return preparer.

2. Factual information received from the taxpayer about the return preparation.

3. The taxpayer’s statements about his or her interaction with the preparer.

4. The return preparer's statements and explanations related to the preparation of the return.

(5) Examiners should not document:

1. Information about the return preparer’s conduct gathered from other sources, or

2. Conclusions regarding the return preparer’s responsibility for errors and the assertion or non-assertion of the return preparer penalty.

(1) When available, the taxpayer’s accounting software backup data file (e.g., QuickBooks®, Sage® (formerly Peachtree®)) is used to create spreadsheets or PDF files that contain numerous financial statement reports (e.g., trial balance, general ledger, journal, etc.) that are used to conduct the audit. During the audit, the examiner should determine what electronic records should be included in the case file. In many circumstances, the spreadsheet or PDFs, indexed to the lead sheets and workpapers, may be sufficient to support the audit adjustments.

(2) Due to the nature of the software, the accounting software backup data file may contain a significant amount of information about transactions that are not relevant to the years under audit. Generally, the electronic accounting software backup data file should not be included in the case file when the case is closed.

(3) Examiners should consult with their group manager regarding saving the accounting software backup file to RGS in situations where it may be critical to the case file. The facts and circumstances of the case will determine whether the accounting software backup file is critical to the case file. If the decision is made that the backup data file should be saved in RGS, the examiner should create a sub folder in the RGS Case File Documents (CFD) folder and save the backup file to a sub folder. See Sub folders in RGS for instructions on creating subfolders in RGS and saving files to the sub folder. The sub folder and backup file should be saved using required RGS file naming conventions. See IRM 4.10.15.10.1, File Naming Conventions.

(4) Original portable storage devices (PSD) (e.g., CDs, DVDs, thumb drives) containing the accounting software backup data files received from taxpayers should be handled in accordance with IRM 4.33.1.9.1, Disposing of Portable Storage Devices (PSDs).

(1) When the following forms are required, they must be attached to the outside of the case folder and placed in the following order (top to bottom):

1. Form 3210, Document Transmittal

2. Other Gov TDF 15-05.11, Sensitive But Unclassified (SBU) Cover Sheet. See IRM 4.10.9.8.3.1.

3. Form 895, Notice of Statute Expiration

4. Form 3198, Special Handing Notice for Examination Case Processing

   Note: For cases with agreed and unpaid deficiencies over $100,000, examiners must check the "Over $100,000 Agreed and Unpaid" box in the "Expedite Processing" section.

5. Form 10329, Transmittal Sheet-Related Cases (companion to Form 3198)

6. Form 3185, Transfer of Return

(1) Forms and other documents to be attached to the inside left of the case folder should be assembled in the following order (top to bottom):

1. Form 2363, Master File Entity Change

2. Information On Line Entity Summary (INOLES), Audit Management Display System All (AMDISA), and a TXMODA (current within 30 days of closure)

3. Copy of the approved Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users

   Note: See IRM 4.10.9.12.4 for Form 5345-D with certain source codes that must be attached to the tax return.

4. Form 5346, Examination Information Report

5. Form 2725-A, Document Receipt/History and Custody of Documents

6. PSDs (when approved for use) enclosed in envelope(s) or protective jacket(s)

   Note: Examiners should refer to IRM 4.33.1.8.1, Labeling and Location of Portable Storage Devices (PSDs), for requirements pertaining to PSDs in the case file.

(1) In order to create a well organized, professional appearing case, the lead sheets and workpapers in the case folder should be arranged in packages (groups). The packages should be clipped or stapled together and placed inside the case folder in the following order (top to bottom).

1. Form 9440, Taxpayer Levy Source and Contact Information. See IRM 4.20.1.3.2, Form 9440, Taxpayer Levy Source and Contact Information.

2. Waiver and acceptance forms, such as:
   Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment
   Form 886-S, Partners’ Share of Income, Deduction and Credits
   Form 886-X, Shareholders’ Share of Income, Deductions, and Credits
   Form 886-Z, TEFRA Partners’ Shares of Income
   Form 2297, Waiver of Statutory Notification of Claim Disallowance
   Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment
   Form 3363, Acceptance of Proposed Disallowance of Claim for Refund or Credit

3. Form 4665, Report Transmittal

4. Form 3999, Statute Expiration Report

5. Taxpayer's protest and correspondence in unagreed cases

6. Form 3213, Engineer’s Memorandum Report

7. Form 3963, International Examiner’s Report

8. Examination report with appropriate attachments (agreed or unagreed)

9. Form 433-D, Installment Agreement, Form 9465, Installment Agreement Request, and Form 2159, Payroll Deduction Agreement, must be placed on top of Form 5344

   Note: When any of these forms are enclosed in a case file, Form 3198 should be flagged so CCP will remove the form and send it to the appropriate Campus.

10. Original tax return(s) or electronic prints if used in lieu of the original return and related attachments or CC ESTAB/ELFREQ prints reflecting the requesting of the original return. The oldest tax period should be on the top and progress down to the most current year.

11. Workpapers - Form 4318, Examination Workpapers Index, will be the first page followed by Form 9984, Examining Officer’s Activity Record, and then additional workpapers. See IRM 4.10.9.2 for additional guidance.

(1) Forms and other documents to be attached to the tax return include:

1. Form 5344, Examination Closing Record (one for each tax period) - must be attached to the face of the return

   Note: If partially agreed, see IRM 4.10.8.6, Partially Agreed Cases.

   Note: If the return you are closing must be recharged to a specific location, complete Form 2275, Records Charge and Recharge, and place it on top of Form 5344. Form 3198 must contain instructions regarding where to send (recharge) the return.

2. Compliance Evaluation print out. See IRM 4.10.16.1.2.5, Completion of the Compliance Evaluation Screen.

3. Form 1900, Income Tax Survey

4. Form 3244-A, Payment Posting Voucher - Examination - must be attached to first page of return

5. Consents to extend the time to assess tax (e.g., Form 872, Form 872–A, Form 872–B, Form 872–F, Form 872-M, Form 872–O, Form 872–N) - one of the two executed copies stapled to the reverse of the first page of the tax return on top of any other attached forms

6. Copy of an executed Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax Attributable to Partnership Items - must be attached to the back of the first page of the tax return to which it applies. See IRM 25.6.22.7.1.6, Location of Executed Form 872-T in Case File.

7. Form 56, Notice Concerning Fiduciary Relationship — stapled to reverse of the first page of the tax return

8. Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer

9. Form 2848, Power of Attorney and Declaration of Representative, or copy of CAF record (IDRS CC CFINK) —stapled to reverse of the first page of the tax return

10. Form 8821, Tax Information Authorization

11. Form 843, Claim for Refund and Request for Abatement, Form 1040X or Form 1120X, amended returns

12. Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund —stapled to the tax return giving rise to tentative carryback adjustment. Attach a copy of Form 1045 or Form 1139 to each carryback/carryforward year.

13. Form 906, Closing Agreement on Final Determination Covering Specific Matters

14. Copy of requests (e.g., Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users; Form 5346, Examination Information Report; or Form 5354, Examination Request Non-Master File) using source code 45 (reference and information return), source code 60 (examination information report), or source code 99 (other)

15. Form 5546, Examination Return Charge-Out Sheet, and applicable transcripts

16. Form 2198, Determination of Liability for Personal Holding Company Tax