4.24.17. Excise Summary Terminal Activity Reporting System (ExSTARS) Compliance Examination Procedures

(1) The need for a system to monitor the movement of motor fuel was made evident by well-publicized reports detailing extensive evasion of federal and state excise taxes on motor fuel during the 1980s and 1990s. Representatives of the motor fuel industry cooperated with state and federal governments to analyze and find a solution to the problem of motor fuel tax evasion. What emerged from that cooperation is a system termed the Excise Summary Terminal Activity Reporting System (ExSTARS), which is designed to attempt to prevent and detect the existence of illegal tax evasion schemes involving the federal and state excise taxes on motor fuel.

(2) ExSTARS is a key component (subsystem) of the Excise Files Information Retrieval System (ExFIRS) project. The ExSTARS system processes data provided by information providers, which is forwarded to the ExFIRS data warehouse for review by the IRS. The ExSTARS Gateway application provides access to the ExSTARS system for approved industry users, who have a need to upload data into the ExSTARS system.

(3) ExSTARS is used to track the movement of fuel to and from approved terminals by electronically filed monthly Form 720-TO, Terminal Operator Report, and Form 720-CS, Carrier Summary Report, (collectively known as "information returns") reflecting fuel quantity and type as it moves through the bulk fuel distribution system. This information is used to analyze quarterly fuel volumes and is compared to the fuel tax information entered on Form 720, Quarterly Federal Excise Tax Return. All significant discrepancies are referred to the Excise Tax Program for further analysis. The Excise Tax Program will use the results of the analyses to identify entities that appear to be in noncompliance and to direct compliance resources to those entities.

(4) ExSTARS is also used by approved State users, who have a need to download state reports prepared for them. Primarily, an approved State will use the data to compare a terminal's tax payments and filings to the gallons that are removed from the bulk transfer/terminal system. They also use it to track shipments into neighboring states and imports of product into their state.

(1) Internal Revenue Code (IRC) 4101(d) authorizes the IRS to require information reporting from any person who is registered under IRC 4101 and from any other person who the IRS deems necessary to administer fuel tax rules.

(2) Under Treas. Reg. 48.4101-2, each information report under IRC 4101(d) must be made in the form required by the Commissioner, made for a period of one calendar month, and filed by the last day of the first month following the month for which the report is made.

(1) Director, Examination - Specialty Policy, is responsible for the procedures and policies addressed in this section.

(2) Program Manager, Excise Tax Policy, is responsible for ensuring the procedures are accurate and updated regularly as needed.

(3) The Chief, Estate & Gift/Excise Tax, is responsible for ensuring the procedures within this section are adhered to by employees in Excise Tax Examination.

(4) Territory managers are responsible for ensuring group managers are aware and adhere to the procedures in this section.

(5) The group managers are responsible for ensuring their employees have current copies of this section and are adhering to the procedures in this section.

(6) Examiners are responsible for following the procedures and policies addressed in this section.

(1) Program Reports - Information regarding the reporting of program objectives are included on, but not limited to:

• Examination Headquarters Monthly Briefing

• Program Manager Monthly Briefing

• SB/SE and Examination Operational Reviews and Business Performance Review

(2) Program Effectiveness - Program effectiveness may be measured by the Exam Quality Review Staff, located in Field and Specialty Exam Quality (FSEQ). FSEQ supports the SB/SE Quality Improvement Program utilizing National Quality Review System (NQRS) to conduct independent case reviews from statistically valid samples of examination case work. National, area, and territory trend analysis on the quality attributes are used to establish baselines to assess program performance, identify opportunities to improve work processes, analyze causes for failure, assess the feasibility of possible solutions, and measure the success of quality improvement efforts.

(3) Annual Review - Program Manager, Excise Tax Policy is responsible for reviewing annually the information in this section to ensure accuracy and promote consistent tax administration.

(1) Below are definitions for terms frequently used throughout this section:

(1) Below are the acronyms and their definitions used throughout this section.

(1) Refer to IRM 4.24.1, Introduction to Excise Taxes, for general information about basic examiner responsibilities, excise IRM sections, primary returns and claim forms.

(2) Refer to IRM 4.24.2, Form 637 Excise Tax Registrations, for an overview of Form 637, Application for Registration (For Certain Excise Tax Activities), and penalty procedures for Failure to Register or Reregister under IRC 6719.

(3) Refer to IRM 4.24.10, Appeals Referral Procedures, for additional guidance and procedures under the Appeals referral process for unagreed cases.

(4) Refer to IRM 4.24.24, Form 637 Registration Files: Administrative Procedures for Initial Applications and Case Reviews, for administrative procedures for Form 637 reviews.

(5) Refer to IRM 4.24.25.5.2, Form 9984, Examining Officer’s Activity Record, for examiner responsibilities for documenting case activity record.

(6) For general guidance, procedures, tax law, and regulations on a wide variety of excise issues, refer to the Excise Tax Knowledge Base Homepage.

(7) Form 637, Application for Registration (For Certain Excise Tax Activities), status can be confirmed online at Confirm On-line Form 637 Registration Status.

(8) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accordance with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see Taxpayer Bill of Rights.

(9) For information relating to identity theft, see IRM 25.23, Identity Protection and Victim Assistance.

(1) If LUQs are identified, then the examiner may make a third party contact. For example, an examiner is unable to locate a corresponding bulk carrier disbursement report for a terminal receipt under examination, or a bulk carrier registration status is in question. The examiner will make a third party contact with the carrier reported to resolve the potential reporting issue or check the registration status of the carrier. The examiner must follow the notification requirements of IRC 7602(c), Notice of Contact of Third Parties. See IRM 4.11.57, Third Party Contacts.

(2) Taxpayer privacy rights must be protected when making third party contacts. The examiner must not discuss information that is subject to the third party notification requirements under IRM 4.11.57 until after the third party contact procedures have been followed.

(3) Examiners must not request third party information that would rise to the level of an examination of the third party.

(1) The IRS ExSTARS Coordinator receives FCN requests from facility operators, examiners, and FCOs.

(2) For FCN requests received by an examiner, the examiner will:

1. Verify whether the terminal operator or refinery operator is a taxable fuel registrant with a Form 637 Registration activity letter S. Form 637 Registration status can be confirmed online at Confirm On-line Form 637 Registration Status.

   Note: If the terminal operator or refinery operator does not have an activity letter S, then secure an initial Form 637 Registration application and forward the new application to the 637 Registration Group via secure e-mail. Refer to IRM 4.24.24.2(3), Creating, Maintaining and Monitoring Form 637 Registration Files, for additional guidance.

   Note: The Form 637 Registration activity letter S must be approved prior to issuance of the FCN.

2. Forward the request to the IRS ExSTARS Coordinator via secure e-mail at *SBSE Excise EXSTARS.

(3) The IRS ExSTARS Coordinator will:

1. Complete Form 5346, Examination Information Report, to make a referral for an FCO or FCA to complete a facility inspection.

2. Submit Form 5346 and a blank FCN Questionnaire to WSD. WSD forwards Form 5346 to the appropriate group manager to assign to an FCO or FCA. No controls are established on ERCS.

(4) The assigned FCO or FCA will:

1. Determine if the facility meets the definition of a terminal or refinery.

2. Conduct an on-site inspection to verify initial request.

3. Submit a completed FCN Questionnaire with their comments/recommendation to their group manager.

   Note: The FCN Questionnaire can be found on the Excise Tax Knowledge Base Homepage, under ExSTARS, see ExSTARS Compliance Examinations, refer to "Other Related Resources" on the right side of the web page.

(5) The group manager will:

1. Complete the FCN Questionnaire by entering their final comments in the group manager comment section.

2. Submit the FCN Questionnaire and all documents used in the determination to the IRS ExSTARS Coordinator via secure e-mail at *SBSE Excise EXSTARS.

(6) The IRS ExSTARS Coordinator communicates the final determination to the facility.

(7) The IRS ExSTARS Coordinator updates the applicable FCN locations found on the IRS.gov web page. For a current list of TCN locations see the TCN Location Directory, and for a current list of RCN locations see the RCN Location Directory.

(1) The IRS ExSTARS Coordinator receives FCN change of facility status requests from facility operators, examiners, and FCOs. Facilities are required to notify the IRS if there is a change in operator or business operations. Notification may be via fax, phone, or e-mail. Verification is required for any FCN status update.

(2) For FCN change of facility status requests received by an examiner, the examiner will:

1. Verify whether the change of facility status impacts the facility's Form 637 Registration.

   Note: If the change impacts the facility's Form 637 Registration, then secure an updated Form 637 Registration application and forward the new application to the 637 Registration Group via secure e-mail. Refer to IRM 4.24.24.2(3), Creating, Maintaining and Monitoring Form 637 Registration Files, for additional guidance.

2. Forward the change of facility request to the IRS ExSTARS Coordinator via secure e-mail at *SBSE Excise EXSTARS.

(3) The IRS ExSTARS Coordinator will:

1. Complete Form 5346, Examination Information Report, to make a referral for an FCO or FCA to complete a facility inspection.

2. Submit Form 5346 and a blank FCN Questionnaire to WSD. WSD forwards Form 5346 to the appropriate group manager to assign to an FCO or FCA. No controls are established on ERCS.

(4) The assigned FCO or FCA will:

1. Determine if the facility still meets the definition of a terminal or refinery.

2. Conduct an on-site inspection to verify change of facility request.

3. Submit a completed FCN Questionnaire with their comments/recommendation to their group manager to update the facility status. This includes but is not limited to a change in ownership, change in operator, or a request for a change in status of an FCN, (e.g., active, inactive, delete).

(5) The group manager will:

1. Complete the FCN Questionnaire by entering their final comments in the group manager comment section.

2. Submit the FCN Questionnaire and all documents used in the determination to the IRS ExSTARS Coordinator via secure e-mail at *SBSE Excise EXSTARS.

   Note: For an FCN suspension, the agent only needs to complete the "Facility" information section and describe the dismantling actions taken, by the operator, under the "Agent Additional Comments" section.

(6) The IRS ExSTARS Coordinator makes the final determination for all FCN status change requests and will communicate the final determination to the facility.

(7) The IRS ExSTARS Coordinator’s determination will be communicated to the group manager and examiner via e-mail.

(8) FCN numbers are not removed from the ExSTARS database; however, the IRS.gov web page only displays approved FCN location directories.

(1) Procedures for when the Form 720 (MFT 03) examination is in status 12 and related ExSTARS compliance examinations are identified for classification:

1. WSD Classification Check Sheets for the selected ExSTARS compliance examinations will be noted that, "Case coordination is required with the examiner assigned to the MFT 03 examination case."

2. The examiner conducting the Form ExSTARScompliance examination must inform the controlling case examiner of their intent to contact the information provider and will forward to the controlling examiner a copy of the Form 4564, Information Document Request (IDR), issued to the facility.

3. The examiner assigned to the MFT 03 case will schedule a conference call with the examiner assigned to the related ExSTARS compliance examination to share any pertinent information.

4. The examiner assigned to the ExSTARS compliance examination will arrange a conference call with their group manager and the examiner assigned to the Form 720 to discuss findings prior to issuance of any reports.

5. The examiner will provide a copy of the ExSTARS compliance examination results via secure e-mail to the examiner assigned to the MFT 03 examination case for possible use/inclusion in the audit file.

6. The examiner assigned to the MFT 03 case will ensure consistency is achieved across all entities. Concerns will be addressed by the field group managers.

(2) Procedures for when the MFT 03 examination case is in status 10 and related ExSTARS compliance examinations are identified for classification:

1. WSD Classification Check Sheets for the selected ExSTARS compliance examinations will be noted that, Case coordination is required with the field manager of the group in which the MFT 03 examination case resides.

2. The examiner conducting the ExSTARS compliance examination will notify the assigned field examination group manager of their intent to contact the information provider and will forward to the manager a copy of the IDR being issued to the facility.

3. The examiner assigned to the ExSTARS compliance examination will arrange a conference call with their group manager and the assigned Form 720 field group manager to discuss findings prior to issuance of any reports.

4. The examiner will provide a copy of the ExSTARS compliance Examination results via secure e-mail to the assigned field examination group manager for possible use/inclusion in the audit file.

5. The field examination group manager will ensure consistency is achieved across all entities. Concerns will be addressed by the field group managers.

(1) In cases where the ExSTARS information reports were substantially correct and no penalty is applicable, the examiner will issue Letter 4574-A, No Deficiency Letter for ExSTARS Information Report, to inform the information provider that an examination has been completed and no further action is required.

(2) In cases where the ExSTARS information reports were substantially correct, immaterial error(s) were found, and no penalty is applicable, the examiner will issue Letter 4574, Deficiency Warning Letter for ExSTARS Information Report, along with supporting documentation as warranted. Letter 4574 is used to inform the information provider that an examination has been completed, but a deficiency requires corrective action by the information provider.

1. In most cases, a deficiency may be summarized on the letter, but in cases where more space is needed, Form 886-A, Explanation of Items, or an attachment is appropriate.

2. Letter 4574 must be sent via secure e-mail to the Form 637 Registration Lead Technician (LT) to be associated with the IMS Form 637 Registration case file. There is a current list of Form 637 Registration LTs, on the Excise Tax Knowledge Base Homepage, under Form 637 Registrations, see Registration Information. Refer to the Form 637 Registration Group Contact Information under Other Related Resources on the right side of the web page.

3. In addition, the examiner will send a copy of Letter 4574 and the supporting documents to the IRS ExSTARS Coordinator by sending a secure e-mail to *SBSE Excise EXSTARS.

(3) In cases where no penalty is applicable, no examination report is issued, similar to no liability case procedures. Examiners should follow the procedures for closing no penalty case files using the procedures below.

(1) In general, no penalty will be imposed if reasonable cause is established. If reasonable cause is established, then follow the no penalty procedures in IRM 4.24.17.10.1. Penalty assertion requires careful consideration of the facts and circumstances of each case. The examiner will consider and document the examination issue and any reason, related to the penalty issue, furnished by the information provider.

(2) In the event a penalty proposal is warranted, the examiner will prepare and submit the following documents to the group manager:

1. Mandatory Admin Form 400, Penalty Approval Form – Form 720-TO/CS Compliance Examination.

   Note: Additionally, the examiner will provide the group manager with information regarding any other penalty proposals under consideration from other examiners, pertaining to the controlled TIN and any related TINs. Efforts must be made to coordinate the issuance of penalty reports.

2. Form 886-A, Explanation of Items.

(3) Once the Form 400 is approved and signed by group manager, the examiner will complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, to request control of the penalty period(s). For additional guidance see IRM 4.24.17.11.2.

(4) The group manager will establish the ERCS penalty period(s) and return the executed forms to the examiner. The completed documents are placed in the original ExSTARS compliance examination IMS case file. A copy of each document is also included in a newly established IMS penalty case file.

(5) Only after completion of the steps listed above (Mandatory Admin Form 400 and Form 5345-D), the examiner will discuss the proposed penalty with the ExSTARS information provider. If the contact person is unavailable, address the penalty proposal(s) with the entity’s principal or officer.

(1) Appeals has jurisdiction over unagreed penalties provided by Chapter 68, Subchapter B (Additions to the Tax, Additional Amounts, and Assessable Penalties). Unless specifically excluded from Appeals consideration, all cases are eligible for an Appeals conference if the ExSTARS information provider has requested Appeals Office consideration and, if required, has either made a small case request (total amount of penalties for each tax period is $25,000 or less) or submits an adequate formal written protest.

(2) To be considered "adequate," a formal written protest and a small case request must contain all information required by Publication 5, Your Appeal Rights and How to Prepare a Protest if You Disagree. Adequacy of a protest is generally not determined based on its substantive content, such as whether the protest contains sufficient factual or legal support. Determine if a rebuttal is needed prior to forwarding the case for Appeals consideration. The examiner must follow the applicable procedures found in IRM 4.10.8.12.9.3, Request for Appeals Conference.

(3) The examiner will close appeal protest cases using disposal code 07.

(4) Appeal of an IRC 6725 penalty may be made before or after payment, but it must be made before a claim for refund is filed.

(5) Letter 2280-X, Transfer to Appeals, must be prepared, signed and dated by the group manager. Letter 2280-X notifies the information provider of the case transfer to Appeals for consideration. If a rebuttal is prepared by the examiner, it must be sent to the information provider with Letter 2280-X.

(6) Appeals case routing procedures found in IRM 4.24.10.7, Case Routing Procedures for Unagreed Excise Tax Examination Cases to Appeals, apply to ExSTARS penalty cases.

(7) Unagreed penalty cases are routed to Appeals via Tech Services. The group clerk updates the case to Status 21 and forwards the case to Technical Services.

(8) As prescribed by IRM 25.6.23.7.1, Minimum Time Remaining on ASED, unagreed cases received in Appeals must have 365 days, minimum, remaining on the assessment statute. However, cases must have 395 days remaining on the statute at the time the case is received in Technical Services to allow sufficient processing time.

(1) The examiner must complete a Form 5345-D to establish ERCS controls for an ExSTARS compliance examination file if it is expanded from a Form 637 Registration review, a Form 720 examination or to pick-up prior or subsequent periods.

(2) In addition to the taxpayer’s name, name control, street, city, state and ZIP code, the examiner must include the following information on Form 5345-D:

1. Check appropriate box for Transcripts Reviewed

2. Check the "Control Non-AIMS Direct Examination Time (DET) Items" box

3. Enter 214 in the PBC field

4. Enter the examiner's territory Business Code in the SBC field

5. Enter the examiner's group code in the EGC field

6. Enter the examiner's ERCS Employee ID and Name

7. Enter the Carrier Summary TIN or Terminal Operator TIN for the entity under examination

   Note: If the entity has only one TCN, use the TIN. If an entity has multiple TCNs use a substitute TIN to identify the specific facility. See 4.24.17.6(2).

8. MFT – B1

9. Form Type – Form 720-TO or Form 720-CS

10. Tax Period – YYYYMM (for each monthly period)

11. Activity Code – 547 Form 720-TO/CS

12. Source Code – 99 Non-AIMS Miscellaneous Penalty

13. Status Code – 10 Assigned - No Time Applied, (once time is applied, status will update to 12)

14. Statute Date – Contact the IRS ExSTARS Coordinator at *SBSE Excise EXSTARS for ExSTARS filing information to calculate the statute date

15. Tracking Code – Enter the Tracking Code identified on the classification sheet for the primary period

    Note: If expanded from a Form 637 Registration review, use Tracking Code 0637. If expanded from a Form 720 examination use the Tracking Code from the classification sheet from the Form 720 primary case.

16. Project Code – 0063 Fuel Terminal (TO’s only)

17. POD

18. Related Return Indicator (if applicable)

19. Aging Reason Code (if applicable)

    Note: FCA use 062.

20. Enter "N" for TEFRA Indicator, original return, labels, Joint committee, foreign control and LB&I/CIC

21. Related Return Information - Enter the primary period information

    Note: If expanded from a Form 637 Registration review or a Form 720 – Leave blank. The examiner must note the reason for request.

22. Examiner’s name, signature and date

(1) The examiner must complete a Form 5345-D to establish ERCS controls for a penalty case file.

(2) In addition to the taxpayer’s name, name control, street, city, state and ZIP code, the examiner must include the following information on Form 5345-D:

1. Check the "Control Penalty Investigation" box

2. Tax Identification Number (TIN)

   Note: Penalty cases require an actual TIN. Form 5345-D must reflect the actual TIN of an approved location and not the substitute TIN used for controlling the ExSTARS compliance examination.

3. MFT– PH (when the penalty is assessed it will post to MFT 13)

4. Form Type - 8278

5. Tax Period - YYYYMM, for each applicable monthly period

6. Activity Code - 555 - Other Penalties - Form 8278

7. Source Code - 99 Non-AIMS Miscellaneous Penalty

8. Status Code - 10 Assigned - No Time Applied, (once time is applied, status will update to 12)

9. Statute Date - Enter the statute date provided by the Workload Selection and Delivery (WSD) as reflected in the B1 case

10. Tracking Code - For a Form 720-TO case use 7664 (Form 720-TO Penalty Case); for a Form 720-CS case use 7770 (Form 720-CS Penalty Cases)

11. Project Code - Leave blank

12. POD

13. Related Return Indicator (if applicable)

14. Aging Reason Code (if applicable)

    Note: FCA use 062.

15. Enter "N" for TEFRA Indicator, original return, labels, Joint committee, foreign control and LB&I/CIC

16. Related Return Information - Leave blank

    Note: The examiner must note the reason for request.

17. Examiner’s name, signature and date