4.22.2. NRP Case Building

(1) One of the hallmarks of any NRP study is an enhanced focus on electronic case building. Case building is the process of adding information to the case file, from both IRS and non-IRS sources, prior to classification. Use of this information during the classification process will identify or eliminate potential issues prior to contacting the taxpayer. The NRP approach maximizes the use of data available to the IRS and, to the extent possible, minimizes intrusiveness and taxpayer burden.

(2) Case building data provides:

1. Taxpayer specific research to identify possible compliance issues for examination.

2. A broader working knowledge of the taxpayer’s financial activities to make an informed decision to accept or examine specific items on the return.

3. Data which can corroborate items on the return to reduce redundancy.

(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 IRC sections:

• IRC 7602, Examination of books and witnesses

• IRC 7605, Time and place of examination

(2) Under the Reform and Restructuring Act of 1998 (RRA '98), Congress mandated the IRS to deliver service to taxpayers at a new and much higher level of performance in the most cost-effective and least burdensome manner possible. Data from NRP examinations enable the IRS to operate as a more efficient and effective tax administration organization.

(1) Director, Research Applied Analytics and Statistics (RAAS) has overall responsibility for all of RAAS operations and its’ variety of services.

(2) Director, Knowledge, Development, and Application has overall responsibility for the KDA division within RAAS and is the policy owner.

(3) Chief, National Research Program oversees all aspects of NRP examinations. The NRP chief manages and monitors NRP operations and provides guidance. This is the office with primary responsibility for administering the NRP program.

(4) Director, Data Management Division (DMD) oversees the Compliance Data Warehouse (CDW).

(5) Compliance employees under Small Business and Self Employed (SB/SE) perform the examination.

(1) NRP is a comprehensive effort by the IRS to measure compliance for different types of taxes and various sets of taxpayers. NRP will provide a statistically valid representation of the compliance characteristics of taxpayers. Types of voluntary compliance include filing compliance, payment compliance, and reporting compliance. Payment and filing compliance data is generated annually.

1. The measure of filing compliance is the percent of reported tax on returns that are timely filed. The IRS measures filing compliance by comparing known filers (using IRS records) with expected filers using Census Bureau current population surveys. The IRS receives no taxpayer specific data from the Census Bureau.

2. The measure of payment compliance is the percent of reported tax on returns that are timely filed and paid and is generated annually. NRP measures payment by analyzing IRS Master Files for timely payment of taxes.

3. The measure of reporting compliance is the percent of true tax liability that is correctly reported on timely filed returns.

(2) Emphasis in this IRM is given to measuring reporting compliance as it is the most sensitive, presents the most challenges, and represents the largest share of the gap between what the IRS estimates is owed to the Treasury and what is actually collected. Similarly, the IRS reporting compliance measures and tax gap estimates depend on proper accounting of both accurately reported returns and returns with adjustments. The tax gap does not arise solely from tax evasion or cheating. It includes a significant amount of noncompliance due to tax law complexity that results in errors of ignorance, confusion, and carelessness. This distinction is important even though, at this point, the IRS does not have sufficient data to distinguish clearly the amount of noncompliance that arises from willful intent, as opposed to unintentional mistakes. Moreover, the line between intentional and unintentional mistakes is often a grey one. See Reducing the Federal Tax Gap: A Reporting on Improving Voluntary Compliance, IRS, August 2, 2007, Page 6.

(3) The data compiled from the studies are housed on the Compliance Data Warehouse (CDW) where IRS and external researchers analyze the data. This data helps produce tax gap and Discriminant Function (DIF) formulas.

(1) Following is a list of the defined terms applicable to case building:

1. Case building is the process of collecting information for classification and adding information to the case file from both IRS and non-IRS sources. Use of this information during the classification process will help identify or eliminate potential issues and provide the examiner with the maximum amount of information to guide the examination activity.

2. Classified Issue List is a list of the classified issues identified during classification and included in each electronic case file. For NRP, each issue includes the IMF/SAIN code, issue name, per return amount, form/schedule, line number and any issue-related comments entered by the classifier. Any case related comments entered by the classifier will also be included at the bottom of the document.

3. Classification is the process of identifying cases and issues for examination.

4. Compliance Data Environment (CDE) is a security-certified, menu driven database that contains a combination of all transcribed lines from returns and selected entity information for IMF. CDE does not include all the line items of the return; it’s limited to what is transcribed for RTVUE. CDE generates three years of tax return data in a side-by-side tax return format so returns are easy to compare.

5. Integrated Data Retrieval System (IDRS) is an internal database accessed by various command codes, each of which provides specific information about the return and return activity.

6. Report Generation Software (RGS) is a comprehensive software program used throughout the examination process to perform a variety of audit and review tasks. In addition to computing tax, penalties and interest on the examination report, RGS generates correspondence, work papers and case closing documents.

(2) Following is a list of acronyms relating to case building:

1. AIMS – Audit Information Management System

2. BMF – Business Master File

3. BOD – Business Operating Division

4. CDE – Compliance Data Environment

5. CP – Computer Paragraph

6. DCI – Data Capture Instrument

7. IDRS – Integrated Data Retrieval System

8. IMF– Individual Master File

9. MFT – Master File Transactions

10. RGS – Report Generation Software

11. SAIN – Standard Audit Index Numbers

12. SB/SE – Small Business and Self Employed Division

13. SSA – Social Security Administration

14. TIN – Taxpayer Identification Number

(3) See Exhibit 4.22.2-1 for a list and description of the IDRS command codes referred to in this IRM.

(4) For additional information on the terms and acronyms relating to the NRP program, refer to IRM 4.22.1.

(1) IRM 4.22.1, National Research Program Overview

(2) IRM 4.22.3, Classification

(3) IRM 2.3, IDRS Terminal Responses, for command code information

(4) IRM 2.4, IDRS Terminal Input

(1) Following is information about each of the key case building elements applicable to specific NRP case study files.

1. Original Tax Return - Each case file contains a facsimile of the original tax return, an imaged copy of the original tax return, or a return facsimile, if e-filed.

2. Classified Issue List - Each case file contains a list of the classified issues identified during the classification and included in each electronic case file. This list identifies the issues the examiner is required to examine.

3. Information Data Retrieval System (IDRS) - A database, accessed by various command codes, containing return information that, when compared against the filed return, will identify any discrepancies or questionable items.

4. Compliance Data Environment (CDE) - CDE generates three years of tax return data in a side-by-side tax return format so returns are easy to compare. Three year comparison data enables the examiner to readily see changes from year to year but only for identical tax return forms. The CDE print also provides helpful and informative specially calculated fields. Variances and trends (in income, deductions or other information) can be detected through correlation of CDE with other case building data.

5. Taxpayer Correspondence (letters, notices, publications) - Letters, notices and publications sent to taxpayers as part of the initial taxpayer contact in every examination.

6. Data Capture Instruments (DCI) and NRP Lead Sheets - DCI and lead sheets are used to collect taxpayer and examination data. They are developed by NRP with assistance from subject matter experts.

7. Examiner Case Closing Checksheet - This document serves as a guide for examiners to ensure that all NRP-specific elements of a case are completed. A completed checksheet is a required part of the case file on all NRP cases.

8. Manager Case Closing Checksheet - This document serves as a guide for managers to ensure the quality of the audit and adherence to NRP-specific guidelines. A completed checksheet is a required part of the case file on all NRP cases.

9. Transcript of Summary Data for Schedule E - This document displays the calculated Per Return amounts used in the NRP RGS case data for the summary of all Schedule E Rental Real Estate income and expense line items, as part of the Form 1040 case study.