4.31.6. Investor Level Statute Control (ILSC) Pass-Through Examinations - CPF Procedures

(1) If you need to contact a taxpayer designated as Contact with Potentially Dangerous Taxpayers (PDT) or Caution Upon Contact (CAU), please refer to IRM 25.4, Employee Protection, for the most current guidance.

(1) The key case examiner will forward the Form 14092, Investor Level Statute Control (ILSC) Linkage Check Sheet (SBSE), or Form 14093, Investor Level Statute Control (ILSC) Linkage Check Sheet (LB&I), directly to the campus using the group email box. The linkage check sheet must be signed by the manager.

(2) A complete package must be submitted or the campus may return it to the examiner.

(3) The check sheets provide instructions on the contents that need to be provided to the campus. This includes a spreadsheet with a reconciliation of the Schedules K-1.

(4) All information must be provided electronically. If the information is too large to e-mail, the examining agent should contact the ILSC Coordinator to determine the best method for submitting the information. A list of campus TEFRA - ILSC Contacts can be found in the Other Related Resources section, on the ILSC (Non TEFRA) Linkage page in the PCS Linkage Book on the Partnership Knowledge Base. .

(5) An acknowledgement will be sent to the examining agent when the completed package is received.

(6) The CPF will input an H freeze on the key case AIMS record using command code (CC) AMFRZ. An IDRS control is established on the key case using TXMOD.

(7) The CPF will establish a key case administrative file after reviewing the package for completeness, statute consideration, and compliance with procedures.

(8) The ILSC Coordinator will check to ensure a partnership is an ILSC case and that the examining agent made the correct audit regime determination. If not an ILSC partnership, the examining agent will be informed if the return should be worked under TEFRA or BBA.

(9) Prior to linking the investors a Revenue Agent in the Technical Team will complete a preliminary build out analysis based upon local criteria using the Tier Structuring Tool (TST), or other method. This could include:

1. Analyzing the build out to identify the material investors throughout the ILSC structure.

   Note: Materiality is defined in ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡, ILSC Report Writing Assessment Cases, and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡, ILSC Report Writing Refund Cases. See IRM 4.31.6.2.1.5.2, Intent Not to Pursue - Statute Protection.

2. Identifying any unknown investors and looking for special allocations.

3. Direct any Schedule K-1 perfection that needs to be started immediately. This could be the K-1 of an unknown investor that has a large percentage of ownership.

4. Determine if there will be more than 100 material investors (direct and indirect).

(10) The CPF will research and verify the Schedules K-1 Taxpayer Identification Numbers (TINs) are correct. If the TIN is incorrect, the CPF will attempt to obtain the correct TIN. If the CPF is unsuccessful, the field agent may be contacted for assistance on direct level investors that need to be linked. The preliminary build out will be updated as new information is received.

(11) The CPF will perform the research to verify that an investor return has been filed by using CC IMFOL or CC BMFOL. If no Transaction Code (TC) 150 is posted on Master File (MF) and the investor is material then non-filer procedures should be followed. A NMF AIMS will need to be established prior to linkage.

(12) Only material investors should be linked. No investor (direct or indirect) should be linked if they are not on the build out. Immaterial investors not linked should be listed on the Form 15041, ILSC Pass-Through Entity Intent Not to Pursue Investor - Statute Protection. Linkage of additional investors should only be done after consultation and approval of the Revenue Agent Reviewer.

(13) The Revenue Agent Reviewer will ensure Schedule K-1 perfection is complete. A perfected Schedule K-1 is one that has the correct entity information. Schedules K-1 may be secured using LB&I K-1 Imaging Network (KIN), Employee User Portal (EUP) or using data from yK1.

(14) The Revenue Agent Reviewer will initiate partner linkages by providing the final build outs to the linkage TEs.

(15) Key case administrative files must be filed in TIN sequence or may be uploaded on RGS/CEAS.

(16) A history sheet must be included in each key case administrative file to show significant dates of key case and investor activity.

(1) If the key case partnership has elected out of BBA, the examining agent must verify the election is valid before submitting a linkage package. The CPF should also verify the election out is valid to ensure the correct partnership regime is being used. See IRM 4.31.5.2.2.1.1, Identification of Partnerships Electing out of BBA and IRM 4.31.5.2.2.1, BBA Elect Out (BEO) Partnerships.

(1) The CPF will perform basic research of the Schedule K-1 reconciliation or Form 1065 Schedule B-2, Election OUt of the Centralized Partnership Audit Regime, also known as BBA Elect Out (BEO) to find the ultimate taxpayer before establishing linkage, including where applicable:

1. NMF for non-filers

   Note: NMF investors must have their filing status monitored every six months. CC IMFOL and CC BMFOL must be checked to see if a TC 150 has posted for the investor. If a TC 150 posts, delete the NMF and link the MF record. Requests to delete a linkage due to an error are submitted to the PCS Coordinator using Form 14520, PCS Linkage Deletion Request.

2. Estate of deceased taxpayer

3. Identity Theft Returns

4. Grantor Trusts or Electing Small Business Trusts (ESBT)

5. Parent/Subsidiary

6. Spouse’s SSN

7. Individual with joint filing

8. Parent/ Minor

9. Employee Plan (EP)/Exempt Organization (EO) investors

10. S corporation Investors

11. Foreign C or S corporation

(2) Check INOLE to verify that the name and TIN match. If there is a mismatch, check to see that the SSN/EIN is input in the correct format.

(3) The CPF will contact the examining agent if any direct or indirect investor cannot be identified.

(1) Check CC IMFOLT or BMFOLT to determine there is at least one year on the statute for all direct and indirect investors.

(2) If any investors have less than a year on the statute, the ILSC Coordinator will contact the examiner and request a statute extension, or the examiner must control the investor in the field.

(3) Once the extension is received, or the AIMS control on the investor is established, the linkage package will be processed.

(4) The package may be rejected back to the examining agent if the statute extension or AIMS control issue cannot be resolved within two weeks.

(5) When an investor has not filed, the examiner should be contacted to see if they will be pursuing an SFR. Investors with larger percentages of ownership should be controlled in the field. When the ownership is small, the CPF may pursue the SFR.

(6) When the Schedule K-1 is issued to a grantor trust or Qualified Subchapter S Trust (QSST), the statute of the beneficiary must be verified.

(1) A Revenue Agent Reviewer will complete a build out document as a way to communicate linkage instructions. The build out will consist of a list of all investors that will be linked along with their EIN, TIN, Year, name, percentage of ownership and other pertinent information. The completed build outs will be kept locally on a shared drive.

(1) A BEO tier is an S corporation that is an investor in a partnership that elects out of BBA.

(2) The Form 1120-S may also have trusts as shareholders. However, Electing Small Business Trusts (ESBT) are taxed at the trust level. Grantor trusts and Qualified Subchapter S Trusts (QSST) are by-passed and the sole beneficiary is linked. There should be no tiering beyond the shareholders of the S corporation.

(3) When an S corporation is linked as a tier and the return is controlled in the field, the CPF will contact the field agent to request they submit a linkage package.

(4) The ILSC Coordinator will monitor for receipt of the linkage package. Any tier files will convert to the key case file.

(1) The CPF will process the linkage package within 30 days after receipt. After 30 days, the key case agent will verify the investor linkages by pulling up a TSUMYP.

(2) The CPF will input CC TSLOD, using Form 8341, PCS Establish or Add. CC TSLOD accesses the MF to verify the investor TIN, name control, and Master File Tax Code (MFT). It rejects any input that does not match.

(3) A successful linking of the key case on PCS will generate AIMS control and two Forms 5546, Examination Return Charge Out, for each investor. These are referred to as a "Notification Charge-Out" and a "Flow Through Notification Charge-Out". If there is no AIMS record anywhere prior to the link, the investor return will go to the key case CPF to be suspended. If the investor has an AIMS record prior to the linkage, the link will go to the existing AIMS record. Linking the record creates a Partnership Investor Control File (PICF) code of 6 on the investor account record unless the investor is also linked to another audit regime in which case the PICF code will systemically change to 4. When only one type of linkage remains, the PICF code will systemically update to reflect remaining linkage. The PICF code of the CPF key case will be 2.

(4) A CPF code is established on the linkage record for each investor based upon where the linkage is input. The CPF code determines the campus where PCS notices are generated and on which campus reports the returns appear.

(5) The investor’s percentage of profits will be entered on all linked material direct and indirect investors. (CC TSLODK or CC TSCHG Item 06). The input of the percentage of profits is important as they will be used to determine materiality once the pass-through adjustments are finalized.

(6) To expedite linking of the indirect investors, use CC AM424 to establish AIMS prior to linkage.

(7) When complete, PCS linkage must match the build out. Verify that the AIMS record is fully established before building case files for the investor returns.

(8) If a return is linked in error, prepare Form 14520, PCS Linkage Deletion Request. Form 14520 is to be approved by a manager, lead, or CPF Coordinator prior to submitting to the PCS Coordinator for processing.

(1) Letter 3457, Pass Through Audit Notification, was created to notify ILSC investors of a pass-through audit. This letter is not required by law but is available to send as a courtesy to taxpayers that may not otherwise be aware of a pass-through audit.

(2) ILSC Investors may be unaware of an examination until they receive an audit report or a request to extend the statute. These letters were created to help keep taxpayers informed and avoid any surprises.

(3) A notification of the beginning of an ILSC pass-through audit will be issued to each ILSC investor controlled by the campus unless the field agent requests no notification be provided.

(4) The CPF will send a Letter 3457, Pass Through Audit Notification Letter, to all investors unless specifically told not to send them on the linkage check sheet.

(5) Do not contact the taxpayer if there is "Z" Freeze or a TC 914 on the taxpayer account. If there is a "Z" Freeze or a TC 914 on the taxpayer account, give the ILSC entity and investor information to the ILSC Coordinator for immediate, appropriate action.

(1) PCS 22-3 Report with 424 drop date.

(2) AIMS TC 424 Reject Register. Created weekly on Control-D when a TC 424 fails to post to master file (MF). See IRM 4.4.27.5.11, TC 424 Reject Register.

(3) When accounts loaded through CC TSLOD do not match at MF, they are listed on the AIMS transaction code 424 reject register as status 99 rejects.

1. These accounts do not establish on AIMS and do not produce a Form 5546, Examination Return Charge Out.

2. This condition may be caused by an incorrect TIN, name control, or MFT (a name control error will reject at terminal input if the LAP/NAP was up). This condition may also be caused by the lack of a TC 150 (filing of a tax return) posting on the tax module or when the requested module has moved to retention.

3. Status 99 rejects must be worked promptly by each CPF to ensure the correct taxpayer is linked and the statute is protected.

4. See IRM 4.4, Audit Information Management System (AIMS) – Validity and Consistency, for instructions on resolution of TC 424 rejects.

(4) The AIMS Duplicate Records Report is generated through the AIMS program if an attempt is made to link a taxpayer account through PCS while the account is in status 90.

1. These accounts are identified by the "CLP" message. See IRM 4.4.27.5.6.4.2, CLP.

2. A TC 421 must be input to the MF, allowed to cycle in, and then the account must be reestablished on AIMS using CC AM424.

(1) The CPF will perform the basic research to verify that no return has been filed by using CC IMFOL and CC BMFOL. If no TC 150 posted on the MF, the investor return is established on NMF AIMS and linked to the key case.

1. The AIMS NMF will be established and controlled in the CPF, and research performed utilizing Nation Access Information (NAI), CFOL CCs, NAMEE and NAMES.

(2) Research AMDISA to determine if an NMF record already exists.

(3) If there is not an investor record on NMF establish the record through CC AMNON.

(4) If the investor previously filed jointly or married filing separate, both spouses will be established separately.

(5) All ILSC investors will be established in EGC 5400.

(6) CC AMNON establishes a NMF record on AIMS. When the investor is linked, the record is complete and can immediately be set up and moved out of EGC 5400.

(7) The CPF will send a Letter 5639, Return Information Request, to obtain information regarding the loss, income or deduction taken on the corporation, trust or individual return. Use Letter 5662, Second Request for Taxpayer Information, if no response is received upon the first request.

(8) If the CPF cannot secure the return from the investor, the CPF will request an Information Returns Processing (IRP) transcript from the Information Returns Master File (IRMF). Use CC IRPTR to order the transcript. When the transcript is received, the CPF will associate it with the case file.

(9) The transcript and Schedule K-1 will be screened to determine if a Substitute for Return (SFR) needs to be established. SFR procedures can be found in IRM 4.19.17, Non-Filer Program, and IRM 4.4.9, Delinquent and Substitute for Return Processing. If it is determined that an SFR is needed, one will be prepared and sent for processing. A linkage will be established to the key case after the TC 150 posts to MF.

(10) The NMF record will be closed after the MF linkage is in place.

(11) If there is no filing requirement, the case will remain as a NMF record. However, the adjustments may require the need to pursue SFR procedures.

(1) The controlling area needs to be contacted immediately if an investor return is controlled outside the Campus Pass-through Function (CPF). The CPF either needs to secure control of the investor return, or ensure that the controlling area does not issue a Statutory Notice of Deficiency (SNOD). Generally, only one SNOD may be issued to a ILSC investor. If the area in control of the investor return issues a SNOD and does not include the ILSC pass-through results, a petition filed by the investor may result in barring any pass-through assessments.

(2) The CPF will send a copy of the Schedule K-1 using Form 6657, Related ILSC Pass-through Examination to:

1. the examining agent (Status 10 to 19) unless that agent is also examining the key case,

2. the other CPF, or

3. Appeals.

(3) Securing cases in status code 06 or 08.

1. Contact the PBC/EGC owner using the AIMS/ERCS website to get the AIMS transferred.

2. Many returns are now electronically filed, so you may not receive a paper return.

3. Returns selected due to an amended return should not be requested, and allowed to be sent to the field.

4. Newly secured investor returns that are within the 26-27 month Examination Cycle should be classified for non-pass-through issues if the prior status was 06. Classification isn't required for other returns, but if large unusual items are noted, selection should be considered or referred for consideration.

(4) The ILSC Coordinator must be involved when notifying those outside the campus of an ILSC examination when the return is in status code 2X, 3X, 4X 5X or 8X.

(1) The key case CPF will receive a Form 5546, Examination Return Charge Out Sheet, labeled "Flow Through Notification" for each investor that is successfully linked on PCS and established on AIMS. If the investor's return was not previously established on AIMS, the investor's Form 5546 will generate with employee group code 5400 and will cause the income tax return to be pulled from files and sent to the key case CPF.

(2) An investor Form 5546 labeled "Related Investor Notification" will normally come attached to the return. The Form 5546 may be left in the investor case file, but is not required.

(1) Key case administrative files must be filed in TIN sequence whether electronic case file (ECF) or paper. The key case administrative file includes the following:

1. A history sheet must be included in each key case administrative file to show significant dates of key case and investor action.

2. Copy of the key case return. (electronic or paper)

3. Form 14093 (LB) or Form 14092 (SB), Investor Level Statute Control (ILSC) Linkage Check Sheet.

4. Schedule K-1 Reconciliation.

5. Build Out.

6. Form 15041, if applicable.

7. Technical Lead sheet.

8. AMDISA and TSUMYP.

(2) Quarterly, each CPF will review their linkages for each pass-through record for which it has an administrative file and for which one or more investors were linked. The linkages should be compared to the build out. There are several PCS reports that can be used for this purpose which are created weekly, monthly or quarterly on Control-D. The PCS 22-3 Report is generated quarterly on Control-D for all pass-through entities even if no new investors were linked to that pass-through entity during that quarter. When monitoring the investor linkages it is important that:

1. Investor linkages without a full AIMS data base which appear with a name control and no statute date (424 Reject) should be reviewed to ensure the correct taxpayer was linked before they drop off AIMS or PCS;

2. Each Schedule K-1 investor that does not appear per the build out must be researched to determine if it needs to be re-established; and

3. Investors in status 90 must be checked to ensure that they have not closed prematurely.

(3) Report 21-3(N), NonTEFRA Key Case Action Report CPF, is a weekly report listing key cases whose status codes have been updated to 27, 28, 29, 8X or 90.

1. The CPF should follow up on key cases which were updated to status 90 (PCS 5-5(N) and PCS 5-5A(N)) to ensure that a key case report package was received by the CPF and that investors are having their 30 day letters sent timely.

(4) PCS reports are covered in IRM 4.29.4, PCS Reports.

(5) The key case administrative file if paper should be retained for 18 months after the last investor is closed.

(1) The distributive share of income or loss and other pass-through items reflected on the copy of the Schedule K-1 received from the key case CPF will be matched against the amount of the pass-through items reflected on the investor's return.

1. Where the amounts do not reconcile, appropriate action will be taken to clarify mismatched information through taxpayer contact using Letter 5640, Schedules K-1 Verification. Use Letter 5662, Second Request for Taxpayer Information, if no response is received upon the first request.

2. This mismatch may be attributed to a variety of situations (i.e., the name on the Schedule K-1 may be a nominee, actual losses may exceed the allowable loss limitation, etc.).

3. After contact, any pertinent information will be provided to the key case field examiner and/or key case CPF. Only information that would impact the audit computations should be forwarded.

4. If the taxpayer has not reported income or loss consistent with the Schedule K-1, and has not responded with information which explains the difference, the file will be noted for consideration of the IRC 6662 penalty. Any penalty recommended by the campus must be approved by the campus employee’s manager in writing before the statutory notice of deficiency is issued. See IRM 20.1.5.2.3, Supervisory Approval of Penalties - IRC 6751 Procedural Requirements.

   Note: Penalties established at the pass-through level by the field, must be approved by the field agent’s manager.

(1) Newly secured investor returns that are within the 26-27 month Examination Cycle must be screened for non-pass-through issues. If large, unusual or questionable items are identified, the CPF will coordinate with the key case examiner to have them possibly control and examine the return.

(2) Investor returns and transcripts will be screened to identify any adjustment documents, amended returns, carryback, and carryover returns that will be needed to process the ILSC pass-through adjustment. If the investor is a minor child, the parent's return will need to be worked with it. These must be secured before the investor file is considered complete.

(1) Investors outside the CPF, that are not controlled by the key case agent, must be sent a copy of the key case report package using Form 6657, Related ILSC Pass-Through Examination Information. Acknowledged Form 6657 is to be returned within 10 business days and is maintained in the key case administrative file. The examining agent or Appeals Officer controlling the return will need to prepare a report for the investors they control and issue the appropriate notices.

(2) Generally, only one statutory notice of deficiency may be issued on ILSC cases. See IRC 6212(c). Allowing the area that controls the investor on AIMS to incorporate the pass-through adjustments along with their exam ensures that the campus does not issue a statutory notice prematurely.

(1) Partnerships that elect out of BBA may have S corporations as partners in the taxable year in which a valid election is made. However, to be a valid election, the partnership and any underlying S corporations cannot be required to issue more than 100 Schedules K-1 combined for the taxable year the partnership seeks to elect out of BBA.

(1) Investor returns and transcripts will be screened to identify any adjustment documents, amended returns, carryback, and carryover returns that will be needed to process the ILSC pass-through adjustment. If the investor is a minor child, the parent's return will need to be worked with it. These must be established on AIMS before the investor file is considered complete.

(1) Secure investor returns that have not been received.

(2) If the DLN suggests an electronic return was filed, check EUP for a copy of the return. See the Document 6209, IRS Processing Codes and Information, for DLN information.

(3) The CPF will submit a Form 2275, Records Request, Charge and Recharge, to request a special search for paper documents.

(4) If no response, contact the taxpayer or their representative to request a copy using Letter 5639, Return Information Request. Use Letter 5662, Second Request for Taxpayer Information, if no response is received upon the first request.

(5) If a return cannot be secured, the CPF will use CC TRDBV, IMFOL, BMFOL, or yK1 to identify return information. The return information will be used as the starting point to create a report calculated at the highest rate without the benefit of any deductions.

(6) If no return information can be found, follow non-filer procedures.

(1) In general, credits, passive activity losses, capital losses and NOLs will indicate possible carryover adjustments. Reference your local desk guide for specific types of adjustments and forms that may involve carryover adjustments. It is important to identify carryover adjustments early so the statute can be protected. Unlike carryback years, each carryover year statute needs to be protected.

(2) Request carryback or carryover year returns.

(3) If the DLN suggests an electronic return was filed, check EUP for a copy of the return. See the Document 6209 for DLN information.

(4) If a paper return, the CPF will request the return using CC ESTAB.

(5) If no response, the CPF will submit a Form 2275, Records Request, Charge and Recharge, to request a special search.

(6) If no response, contact the taxpayer or their representative to request a copy using Letter 5639, Return Information Request. Use Letter 5662, Second Request for Taxpayer Information, if no response is received upon the first request.

(7) If a return cannot be secured, the CPF will use CCs TRDBV, IMFOL, BMFOL, or yK1 to identify return information. The return information will be used as the starting point to create a report calculated at the highest rate without the benefit of any deductions.

(8) If no return information can be found, follow non-filer procedures.

(9) If carryover/carryback year is controlled in the field, request the PCS Coordinator input an AIMS Freeze Code 6 to ensure the field controlled case cannot close.

(10) Once the return is secured, establish controls using CC TXMOD and input C/B or C/O in the IDRS Control Base.

(1) Care must be taken when investors are linked to multiple ILSC pass-through entities, or a BBA partnership with Chapter 2/2A linkages.

(2) An investor with ILSC pass-through and/or BBA Chapter 2/2A pass-through linkages will have a PICF code of 6.

1. The CPF will monitor the statute on the ILSC case and the IRC 6501(c)(12) date for Chapter 2/2A. A Form 3198, Special Handling Notice for Examination Case Processing, will be prepared and maintained with the case file. The "Other" block will be checked and the following statement added: "Dual Status Case: ILSC Pass-through Case EIN(s) and BBA Chapter 2/2A Case EIN(s)". Applicable EIN(s) will be listed on the form.

   Note: If multiple linkages exist, a copy of a TSUMYI print can be associated in lieu of writing out all of the EINs on the form.

(3) When more than one type of linkage exists, the key case campus must ensure that all campus controlled investors are in an ILSC EGC 54XX. The key case CPF may have to coordinate with the other campus.

(4) An ILSC investor’s statute is controlled by IRC 6501(a). A taxpayer linked for BBA Chapter 2/2A issues whose statute is controlled by IRC 6501(c)(12), must still have its IRC 6501(a) statute protected for ILSC adjustments.

(5) In general, only one statutory notice should be issued to that investor. If a statutory notice must be issued before all examinations are complete, the schedule of adjustments should include all adjustments for that taxpayer.

(6) Different actions will be required depending upon where the investor is controlled and the timing of the linkages. The following action should be taken when the ILSC linkage is established:

1. If the investor is controlled in field the CPF will send a copy of ILSC Schedule K-1 using Form 6657, unless the investor is controlled in the same field group that controls the ILSC key case. See also IRM 4.31.6.2.4.4, Investor Returns Controlled Outside of CPF.

2. If an investor linked by Brookhaven is controlled in Ogden, Brookhaven will send Ogden a copy of ILSC Schedule K-1.

   Note: If an ILSC investor controlled by Brookhaven becomes linked to a BBA partnership, Ogden will send Brookhaven a copy of the BBA Schedule K-1 with BBA guidance.

3. If an investor is already controlled in Ogden’s BBA Chapter 2/2A team, Ogden will convert the BBA investor case file to an ILSC case file for statute protection.

(7) Investors transferred from the field into the CPF need to be reviewed to verify the linkages. All mis-routed returns with only BBA Chapter 2/2A linkages should be sent to OSC.

(8) BSC will forward investors with only BBA Chapter 2/2A linkages to OSC.

(9) Special care must be taken when protecting the statutes of investors linked to both a BBA Chapter 2/2A and ILSC key case. See IRM 4.31.6.5.1.4.2, Restricted Consents.

(1) A case containing both ILSC pass-through and TEFRA pass-through linkages will have a PICF code of 4. The CPF will monitor the statute on the ILSC case and the one-year date on the TEFRA case. A Form 3198, Special Handling Notice for Examination Case Processing, will be prepared and maintained with the case file. The "Other" block will be checked and the following statement added: "Dual Status Case: ILSC Pass-through Case EIN(s) and TEFRA Pass-Through Case EIN(s)". Applicable EIN(s) will be listed on the form.

(2) When dual linkages exist, the key case campus must ensure that all campus controlled investors are in an ILSC EGC 54XX. The key case CPF may have to coordinate with the other campus.

(3) Special care must be taken when protecting the statutes of investors linked to both a TEFRA and ILSC key case. See IRM 4.31.6.5.1.4.2, Restricted Consents.

(1) If it can be shown that a taxpayer understated his/her gross income by more than 25%, a special 6-year statute applies per IRC 6501(e). On a non-taxable, ILSC return, the computation of the substantial understatement will be made at the investor level.

(2) The general rule is the investor’s gross income includes the investor's pro rata share of the pass-through entity's gross income. Treas. Regs. 1.1366-1(c)(1) and 1.702-1(c). Trade or business gross income is the total amount of sales received or accrued prior to the reduction for cost of goods sold. Gross income in other cases is reduced by basis.

(3) In determining whether an individual has a substantial understatement of income, you would total the gross income reported on the individual tax return and compare it to the correct total of gross income.

(4) The following items would be totaled in arriving at the investor’s gross income:

• Wages, Salaries, Tips, etc.,

• Interest Income (not including tax exempt interest),

• Dividends,

• Gross Income from Business or Farm (before cost of sales),

• Net Gains from the Sales of Property (not the gross sales price),

• Proportionate Share of Gross S Corporation and Partnership Income, (Gross Receipts (before cost of sales), Gross Rents, Net Gain from Form 4797, Other Income Included in Total Income, Gross Income from Farm Included in Total Income),

• Gross Rents or Royalties, and

• Other Income.

(5) In establishing a 25% omission of income case, the burden may be on the government. An item other than an overstatement of basis is not considered omitted from gross income if the taxpayer adequately disclosed the item on the return or on an attached statement. The disclosure must adequately apprise the Service of the nature and approximate amount of the item; the actual dollar amount of the omission need not be disclosed. An understatement of gross income caused by an overstatement of basis is an omission from gross income for the tax period for which the assessment statute was open on July 31, 2015 and for returns filed after July 31, 2015.

(6) Due to the requirement to use the proportionate share of gross income, it may be difficult to trigger the 25% omission rule where the individual taxpayer reports the distributive share of income or loss of the ILSC key case ownership interests.

(7) On the other hand, this gross income test could actually trigger the 6-year statute if the investor failed to report his entire share of the entities pass-through income.

(8) Based on Treas. Regs. 1.1366-1(c)(2) and 1.702-1(c), the amount of gross income reported by the investor depends on whether the investor reports all of his/her pro-rata share of pass-through income. If all of the pass-through income is not reported, then all of the gross income for the 25% omission test has not been reported.

(9) Be careful when computing substantial understatement of income, especially relating to pass-through entities. The pass-through entity’s gross income versus pass-through taxable income should be used in the calculation. Situations where an individual fails to include his/her entire share of ILSC pass-through income can result in a 25% omission of income.

(1) Generally, ILSC taxable investor returns are controlled using their numeric IRC 6501(a) statutes. There are situations where updating an investors statute to an alpha statute may be appropriate, but most of the time it will not apply. The key case statute is generally controlled with an Alpha Code "GG" statute. See IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS, for a full list and explanation of each alpha statute.

(2) Generally, ILSC tier investor returns are controlled using an Alpha Code "GG" statute. The tier entity must be screened to ensure there are no taxable issues and investor linkage is complete per the build out before applying the alpha code statute.

(3) When an unagreed key case is transferred to the CPF, the ILSC Coordinator should ensure that any taxable issues were assessed (if applicable) and update to the Alpha Code "GG" statute.

(4) See IRM Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS, for a full list and explanation of each alpha statute.

(1) For ILSC pass-through cases, the statute of limitations is not controlled at the entity level, but at the taxable investor level.

(2) Statute extensions should be secured for trusts and S corporations that are subject to tax. The tier level extension protects the entity level statute, but will not extend the period for beneficiaries or shareholders. The beneficiary or shareholder level extensions are still needed.

(1) The CPF, through local procedures, will determine if contacting the key case agent is necessary before requesting extensions. Generally, the ILSC Coordinator will make the contact unless delegated to others.

(2) When it is determined that an investor return has less than 210 days on the statute of limitations, an extension is needed to extend and protect the assessment period. See IRM 25.6.22, Extension of Assessment Statute of Limitations By Consent.

1. The CPF will prepare a Form 872, Consent to Extend the Time to Assess Tax, for each tax period and Letter 907-F, Request to Extend Assessment Statute Related to Pass-through Entity Examination, to send to the investor(s) at the current address. On a joint return, a Form 872 must be prepared and mailed to each spouse. One copy is maintained in the case file, one copy will be mailed to each spouse separately.

2. The Service must notify the taxpayer (or authorized representative executing a consent) as to the following rights as required by IRC 6501(c)(4)(B) on each occasion when the taxpayer is requested to extend the statute by consent:

The right to refuse to extend the limitations period. The right to request the extension be limited to particular issues held open for further examination or appeal. The right to request the limitations period be extended only to a particular period of time. The notification should be provided by sending Letter 907-F, Request to Extend Assessment Statute Related to Pass-through Entity Examination.

3. The returned consent should be signed by the taxpayer, as it appears on the return, unless there was a name change. The consent should then be prepared as "Jane Cod, formerly Jane Bass" on the name line with the new name on the signature line.

4. If the consent is not received in the allotted time, the examiner will prepare Letter 928-E, Request to Extend Statute Related to Pass-through Examination Follow-Up, to send to the taxpayer.

   Note: An authorized Service official must sign the consent before the Assessment Statute Expiration Date (ASED) expires.

5. The taxpayer or the taxpayer's representative may request, verbally or in writing, restrictive wording on the extension. The ILSC Coordinator will review the return for other issues and verify the use of a restrictive paragraph. Refer to IRM 25.6.22.8, Restricted Consents, for instructions in preparing and securing approval of the restrictive paragraph consent.

(3) When the signed consent is received by the CPF, it will be reviewed for accuracy. The consent will be signed by one authorized to sign on behalf of the Commissioner per Delegation Order 25-2 as set forth in IRM 1.2.2.14.2.

1. One executed original consent form will be sent to the taxpayer with Letter 929(SC), Letter Transmitting Signed Consent Form Extending Statute of Limitation. One will be retained in the case file.

2. The copy of the executed original consent will be associated with the return.

3. The Letter 907-F will be maintained in the case file as it serves as documentation that the taxpayer was provided with their rights as required by IRC 6501(c)(4)(B).

4. The AIMS database statute should be updated with the extended date. When this is done, a TC 560 is automatically generated to MF to reflect the new date.

5. The Form 895 will be updated to the date extended or the appropriate database will be updated.

(4) If the Form 872 received from the taxpayer is not complete, use Letter 1817, Letter to Taxpayer Regarding Consents, to request the necessary changes.

(5) If a partner is a parent corporation or a subsidiary in a consolidated group, the common parent must sign the consent as the agent that is authorized to act in its own name with respect to all matters relating to the tax liability for that consolidated return year. IRM 25.6.22.6.2.2, Subsidiary as Partner and as Member of a Consolidated Return.

(6) One consent may be used to extend the statute for partners that are parent corporations and any or all its subsidiaries that filed separate returns provided that the procedures in IRM 25.6.22.6.2.3, Parent and Subsidiary Corporations, are followed.

(7) For the preparation, signing and execution of consents, see IRM 25.6.22.5, Preparation of Consent Forms - General Procedures.

(1) Review Form 4605-A, Examination Changes - Partnerships, Fiduciaries, S Corporations, and interest Charge Domestic International Sales Corporations. The top of Form 4605-A or the Remarks section at the bottom the form should notate "NO CHANGE SUBJECT TO [AREA DIRECTOR (for SB/SE cases) or DIRECTOR, FIELD OPERATIONS (for LB&I cases)] APPROVAL".

(2) Be aware that packages from Appeals may state they are no changes, but in reality may be upholding the examination adjustments. While Appeals did not make a change to the adjustments, there are still adjustments to be processed.

(1) An agreed package is where the entity has indicated they agree with the adjustments the examiner proposed by signing Form 4605, Examination Changes - Partnerships, Fiduciaries, S Corps., & Interest Charge Domestic International Sales Corporations. The signature on Form 4605 does not bind any of the investors. Each investor must agree to the entity level findings by signing their individual Form 4549 , Report of Income Tax Examination Changes, which incorporates the pass-through entity’s adjustments..

(2) The entity return will not be sent to the CPF for suspense as the investors almost always agree when the key case indicates approval to the adjustments. The key case will be closed by CCP. The entity return will need to be secured if any of the investors protest.

(1) The entity has not agreed and it is expected that one or more investors will not agree. The key case is sent to the campus for suspense. Sometimes the key case will include an entity level protest and rebuttal. The key case is not sent to Appeals until there is at least one protesting investor.

(2) Taxable S corporations may be sent directly to Appeals when the entity protests the taxable entity adjustments. This is not to be confused with normal pass-through adjustments which may only be protested by shareholders. If a taxable S corporation is received in the CPF, the CPF should verify that a partial assessment was made for the entity level tax before putting the return in suspense.

(1) The entity has not agreed and one of the investors controlled in the field has protested. Technical Services will send the entity and the protesting field controlled investor to Appeals.

(2) Technical Services will submit a key case report package, Form 14729, Investor Level Statute Control (ILSC) Key Case Report Package Check Sheet, to the CPF so they can address preparing reports on the remaining investors.

(1) A Form 4605 and Form 886-S/X will not be completed by Appeals if the case is no changed. This means appeals did not uphold any of the field’s proposed adjustments.

(2) On occasion Appeals will request that SNODs be issued to all investors so they can petition the courts. Appeals should note this request in the Comments section of the Form 14729. These should be sent to all investors even if they had not previously been issued a 30-day letter. The letters should be issued to the investors within 30 days.

(1) Partnerships electing out of BBA may have an S corporation as a partner. An S corporation may be subject to its own examination.

(2) When the examined S corporation is a tier in a BEO partnership the partnership adjustments should be included in the S corporation report prior to sending reports to the S corporation indirect partners.

(3) When the partnership and the S corporation close together, which will generally happen when they have the same examiner, the CPF will receive a Form 14729for each entity. The ILSC Coordinator must ensure the partnership adjustments are included on the Form 4605 for the S corporation. If they are not included or both entities are not closing at the same time, contact should be made with the TSPC or examining agent to determine if a new report for the S corporation needs to be prepared. The entities will be closed or transferred to the CPF based on the following criteria:

1. If both the partnership and S corporation are agreed or a no change, the entities can be full closed. Input Form 8339 to resolve the S corporation linkage to the partnership and mark the TSCLS box on the Form 5344.

2. If both are unagreed, transfer the entities to the CPF.

3. If the partnership is agreed or a no change and the S corporation is unagreed, full close the partnership and transfer the S corporation to the CPF as an unagreed key case. The S corporation linkage to the partnership will remain open until the S corporation audit is concluded. Associate a copy of the partnership key case report package to the S corporation key case admin file. The partnership adjustment will be included in the S corporation key case report package.

4. If the partnership is unagreed and the S corporation is agreed or a no change, transfer both entities to the CPF.

(4) When the partnership closes before the S corporation and the partnership report is a no change, input Form 8339to resolve the S corporation linkage to the partnership. Associate a copy of the partnership key case report package to the S corporation key case admin file. For change cases, the partnership adjustments will be included with the S corporation report at the conclusion of the S corporation’s examination. The S corporation linkage to the partnership will remain open. If the examiners are not the same, e-mail a copy of the partnership report to the examining agent or Appeals Officer who has control of the S corporation. It should be communicated that the partnership adjustments need to be included in the S corporation report.

(5) When the S corporation closes before the partnership the ILSC Coordinator will need to review the facts and circumstances and make processing determinations.

(6) Instructions on how to proceed on the tier investors reports should be clearly communicated to the ILSC unit.

(1) The H freeze will be released from the key case within 14 days and documented on the Form 14729, when the CPF receives a complete package for the following:

1. An agreed package where the entity is in agreement with the changes and it is assumed the investors will agree,

2. A no change package,

3. A report from Appeals, or

4. A request from Appeals to issue SNODs to all investors.

(2) The CPF will release the H freeze after receiving an unagreed package when all partners agree after receiving a 30 day letter or their SNOD defaults.

(1) The CPF will send a copy of the key case or tier report package using Form 6657, Related ILSC Pass-through Examination, to:

1. the examining agent (Status 10 to 19) unless that agent is also examining the key case, or

2. Appeals.

(2) If the investor is in status 06 or 08, the CPF should request AIMS control to make the changes.

(3) Prepare Form 6657, Related ILSC Pass-Through Examination Information, and check the Pass-through report Form 4605 box and the Type of Examination.

(4) The Form 6657 must be acknowledged by the recipient within 10 business days.

(5) The report code must be updated to an "R" (for the field) or "A" (for Appeals) on PCS once the Form 6657 is acknowledged.

(6) If the investor is in the other CPF, e-mail a copy of the key case or tier report package to the ILSC Coordinator. Ensure they acknowledge receiving it.

(1) When the tier has no open ILSC or BBA Chapter 2/2A linkages and all tier investor linkages have been resolved, the tier can fully close.

(2) Input Form 8339.

(3) Determine the disposal code for the tier and update the Form 5344. The disposal code will depend on the type of investor closure.

• DC 02 - Use when the examination results in no changes to the key case entity.

• DC 04 - Use when an agreement is obtained from all tier investors.

• DC 08 - Use when all tier investors did not sign a report. This includes when an investor SNOD defaults.

(1) When a tier investor files a protest, the report writer will notify their ILSC Coordinator.

(2) If the investor filing the protest is an indirect investor, the tier will be sent to Appeals along with the key case and a protesting investor. More than one protesting investor may be sent if they have different power of attorneys or they raise additional issues. IRM 4.31.6.10.7.3, Request for Appeals, provides additional processing information.

(3) The remaining investors will be held in suspense, tier investors in EGC 5469 and taxable investors in EGC 5474 or 5475 until an Appeals decision is made.

(1) IRC 6751(b)(1), Approval of Assessment, provides in general, that no penalty under the IRC shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. If the field agent is asserting a penalty on pass-through adjustments, then their manager needs to approve that assertion. No additional approval is needed by the CPF as long as all applicable tax years are covered. The CPF should not approve a penalty on pass-through adjustments being asserted by the agent. The examining agent’s immediate supervisor must approve the penalty.

(2) IRM 20.1.5.3.4, Carrybacks and Carryovers, explains that the application of a penalty in the exam year will apply to the carryback and carryover years. Supervisor approval must cover all tax years and penalties for compliance with IRC 6751(b). If a carryback or carryover year is not listed on the approval form, the CPF can approve the penalty based upon the examining agent’s approval in the exam year.

(3) The CPF may assert penalties on an investor for items unrelated to the pass-through adjustments. For example, the investor failed to report a significant amount of income unrelated to the pass-through examination. Because the CPF is asserting the penalty, the supervisor of the CPF employee asserting the penalty must give the approval. See IRM 20.1.5.2.3, Supervisory Approval of Penalties - IRC 6751 Procedural Requirements. Approval is required before issuing any written communication of penalties to a taxpayer that offers the taxpayer an opportunity to sign an agreement or consent to assessment or proposal of the penalty. Manager approval is not needed for any penalties automatically calculated through electronic means. See IRM 20.1.1.2.3, Approval Prerequisite to Penalty Assessments.

(1) If, due to the complexity of the case, an employee believes that he/she cannot adequately prepare an investor audit report, the employee should consult with the ILSC Coordinator. The ILSC Coordinator will provide the employee with assistance, or work with the appropriate Technical Services Pass-through Coordinator in order to have the case worked in the field. Campus personnel should make every effort to work all campus controlled investors at the campus. However, there are times when the complexity of the case will require assistance from the field. It is the complexity of the issues, not the size of the case, that will dictate whether a case gets sent back to the field.

(1) In "Munro v. Commissioner, 92 T.C. 71 (1989)", the Tax Court held that the partnership items (whether income, loss, deduction or credits) included on a taxpayer's return should be completely ignored in determining whether a deficiency exists that is attributable to non-partnership items. Moreover, the court ruled that the Service may not assume the correctness of its proposed adjustments to partnership items for computational purposes in determining a deficiency, and that taxpayers may not offset net partnership losses against their taxable income for purposes of deficiency proceedings.

(2) Non-oversheltered returns (and oversheltered returns related to partnership returns with tax years ending before August 6, 1997) are returns that will have a tax deficiency after the proposed adjustments (for other than TEFRA partnership items).

(3) For non-oversheltered returns, Munro computations will continue to be used if there is an open, related TEFRA partnership proceeding.

1. When adjusting a taxpayer’s return for ILSC pass-through issues and the Form 4549 results in a reduced deficiency because of large TEFRA partnership losses, the report writer will prepare a report without consideration of any TEFRA partnership income or losses.

2. Prepare a report starting with the original return, or as amended, and remove all TEFRA issues from open TEFRA proceedings. Label this report as: "Information Only – Do Not Process". Using this report as the starting point, prepare a report making the ILSC pass-through adjustment.

(4) When there is an open TEFRA proceeding, the following paragraph should be used on the SNOD:

1. In computing the deficiency attributable to the adjustments in this notice, which adjustments are neither partnership items nor affected items, as defined by IRC 6231 (prior to amendment by the Bipartisan Budget Act of 2015 (BBA)), all TEFRA partnership items subject to an open TEFRA proceeding, whether income, loss, deduction or credits have been ignored exclusively for the purpose of computing the deficiency which is attributable to the adjustments set forth herein. All TEFRA partnership items subject to an open TEFRA proceeding have been ignored in this notice of deficiency for computational purposes only and this notice is not a substitute for any FPAA which may be issued in regard to the TEFRA partnerships. This computation is being made pursuant to the Tax Court decision in "Munro v. Commissioner, 92 T.C. 71 (1989)".

(5) The following sample paragraph should be included in the explanation of items when there is an open TEFRA proceeding:

1. The following TEFRA partnerships are subject to partnership level proceedings pursuant to the partnership audit and litigation procedures of IRC 6221 through IRC 6234 (prior to amendment by the Bipartisan Budget Act of 2015 (BBA)) with respect to the taxable year(s) and accordingly, all partnership items, whether income, loss, deductions or credits, have been disregarded for purposes of computing a deficiency attributable to the adjustments in this notice:

(6) A Munro computation may result in an inflated deficiency due to a change in tax bracket until treatment of the TEFRA items is finally determined.

(1) When an investor has not filed a return, the report writer will proceed with SFR procedures.

(2) Special computations exist for non-filer investors.

1. Non-filer investors with an Information Returns Processing (IRP) transcript in the case file will have a substitute for return processed and the account will be controlled and adjusted on MF. The report writer should input a Form 4549 containing both the IRP adjustments and the ILSC pass-through adjustments. Continue processing per the ILSC procedures.

2. Non-filer investors without an IRP transcript will be controlled and adjusted on NMF. The report writer will prepare a Form 4549 for the ILSC pass-through adjustment applying the highest tax bracket applicable for the tax period without the benefit of exemptions or deductions. Continue processing per the ILSC procedures.

(1) In general, the notice date for purposes of IRC 6404(g) is the date adequate notice is mailed or provided to the individual investor. For ILSC purposes it is the date a report is given to the investor. All other IRC 6404(g) rules apply.

(2) Notification for ILSC investors will be their initial audit report. Typically, this will be a 30-day letter.

(3) In the case of an individual who files a return on or before the due date for the return (including extensions), the Service has a 36-month period (18 months effective for tax years where the 18 month period ended on or before November 25, 2007) beginning on the later of:

1. the date on which the return is filed; or

2. the due date of the return without regard to extensions,

(4) If notice is not provided to the taxpayer before the close of the 36-month period, then any imposition of interest, penalty, additions to tax or additional amounts that are calculated in reference to the 36-month period (18 months effective for tax years where the 18 month period ended on or before November 25, 2007) are suspended.

(5) The term suspension period means the period:

1. beginning on the day after the close of the 36-month period under (3) above and

2. ending on the date which is 21 days after the date on which notice is provided to the taxpayer.

(6) The exceptions to the general rule for suspension of interest and certain penalties where the Service fails to contact the taxpayer are:

1. any penalty imposed by IRC 6651, Failure to file tax return or to pay tax;

2. any interest, penalty, addition to tax, or additional amount in a case involving fraud;

3. any interest, penalty, addition to tax, or additional amount with respect to any tax liability shown on the return;

4. any interest, penalty, addition to tax, or additional amount with respect to any gross misstatement;

5. any interest, penalty, addition to tax, or additional amount with respect to any reportable transaction with respect to which the requirement of IRC 6664(d)(3)(A) is not met and any listed transaction (as defined in IRC 6707A(c)); or

6. any criminal penalty.

(7) The notice date must be annotated by the TE on the history sheet in the case file, and also annotated on the case file copy of the Examination report in the "Remarks" area with the following statement: "IRC 6404(g) does apply and notice was provided on (mail out date)".

(8) TC 971 with Action Code 064 will be input on MF for the identified cases to record the notice date. MF will automatically compute the interest with only one notice date. Cases with additional notice dates will require manually computed restricted interest (TC 340).

(9) All IRC 6404(g) cases where an assessment is being made will require special instructions on Form 3198. If another assessment is necessary, it must again be stated whether IRC 6404(g) applies, and if it does, the notice date for the subsequent assessment must be entered in the "Special/Restricted Interest Features" section of the Form 3198.

(1) The report writer will complete Form 4700-T, CPF Pass-Through Investor Workpapers, on all cases (see IRM 4.10.9.8, Special Situations Requiring Documentary Evidence, and IRM 4.19.13, General Case Development and Resolution) to reflect the partner's applicable adjustment from the pass-through return. The report writer will maintain Form 886-S, Form 886-W, or Form 886-Z (or equivalent spreadsheet), and other documents received from the key case CPF, with the Form 4700-T as part of the workpapers.

(1) Examiners need to ensure that all applicable forms are completed when computing the Passive Activity Losses (PAL) adjustments. The Form 8582, Passive Activity Loss Limitations worksheets do not need to be completed for all cases, but should be completed when needed. For example, they should be completed to communicate changes to the taxpayer in the case of dispositions or PAL carryovers.

(1) Case files for carryback and carryover years need to have copies of workpapers from the source year supporting the adjustments. Adjustments such as Schedule A (contributions), NOL, possibly credits and PAL credits would also require the closing documentation from the source year and computations for any carryback or carryover.

(2) When there are PAL carryovers, for example, the case files for those years need to have all of the necessary workpapers to support the PAL adjustment. The carryover case file should have the closing documents from the source year as well as the Form 8582 reflecting the PAL carryover changes. Without the source documentation, there is nothing in the carryover year file to support the changes. This information is necessary in the event a subsequent taxpayer inquiry is made.

(1) If a carryforward adjustment is possible, the investor's statute will need to be protected on all carryforward years. For example, a capital loss carryforward is governed by the investor's IRC 6501 statute for the carryforward year. IRC 6501(h) would extend the investor's statute based on the loss year only for carrybacks.

(1) When making adjustments to tax year 2018 or later campus controlled Form 1040 investor returns linked to ILSC key case closures, the CPF will have to consider QBID.

(2) The CPF will review the investor return to determine if the investor claimed a QBID on their original or subsequently filed tax return, currently found on page one of the Form 1040. The same process will be followed for Form 1041 taxpayers who claim a QBID deduction on their originally filed return. For 2018, QBID was reported as an "other deduction", but later years have a QBID line on page one.

(3) When applying these procedures, any adjustment to QBI items included on key case examination reports will be disregarded by CPF in lieu of the following procedures:

1. If there was no QBID claimed on the taxpayer's filed return, skip the following steps and take no action relative to the QBID.

2. If there was a QBID claimed on the taxpayer's filed Form 1040 return, add a Qualified Business Income Deduction issue in RGS using IMF Code 51040. Add an adjustment using the "Net qualified business income deduction" categorization in RGS. RGS is not used for Form 1041 adjustments.

3. Input ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

4. Add a Form 14997, Adjustment to the Qualified Business Income Deduction, to the report package sent to the taxpayer.

(4) When applying the procedures above, any adjustment to QBI items included on key-case examination report (Form 4605) by the examining agent will be ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡. Following the above procedures will ensure the QBID adjustments are computed consistently.

(5) If the taxpayer corresponds with Examination Field Support in response to the Form 14997, employees will review the information provided by the taxpayer and consider the proposed adjustment to QBID in light of the additional information received. If an adjustment to the QBID is warranted, the employee will make the adjustment in RGS using the issue established in paragraph (3), inputting the corrected value in the per exam field of the "Net qualified business income deduction" categorization.

(1) The assessments must be made as soon as possible after the agreement is received. Case may also be closed agreed without an executed agreement form if a full payment not specifically designated as a “6603 Deposit” is received in response to a proposed tax and penalties, and there is no evidence the taxpayer intends to file a protest. For additional agreed closing information see IRM 4.10.8.2.4.2, Execution and Receipt of Audit Reports and Waivers.

1. Prepare and input Form 8339, PCS Change, to enter the amount of the assessment. Box 11, Change(s), will be completed with Item 5, (the investor one-year date field) with 22222222, assessment amount and time. The investor case will not be allowed to close without this entered on the investor linkage.

   Note: The PCS will not allow anything other than 22222222 to be entered in the one year date field. An attempt to enter a real date will result in an error message.

2. If the case is to be full closed (no TEFRA, ILSC, or BBA Chapter 2/2A linkages), the case is prepared for final closure. If there are open linkages (either TEFRA, ILSC or BBA Chapter 2/2A), a partial assessment will be made and the case will be sent to suspense to await additional packages. (See the Form 5344 procedures at IRM 4.31.6.11, Investor Closing Procedures.)

(1) Consents to assess additional tax (Form 4549, Form 870, and others) can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax.

(1) If an investor does not agree to the proposed key case adjustments and files a protest, both the key case and the investor return will be sent to the Appeals office identified in the taxpayer’s protest. If the protest includes a tier return, that return will need to be sent to Appeals as well as the investor and key case. This will usually be the Appeals office that services the operation unit that examined the key case return. The protest should be reviewed to ensure the protest is complete and meets the requirements as shown in Publication 5. There must be at least 365 days remaining on the statute of limitations of any investor return received in Appeals. See Appeals IRM 8.21.2.4, Cases Not Accepted by Appeals.

(2) Only those investors that file a protest may be sent to Appeals. To conserve the Service’s overall resources, generally the key case and one protesting investor (and tier return when applicable) will be sent to Appeals for review of the protested issues. However, Appeals will accept protesting investors with different representatives, protesting investors without representation and protesting investors with unagreed non-pass-through issues. All other investor returns should be held in suspense pending an Appeals resolution, even if the investor does not respond to the 30-day letter provided there is sufficient time on the investor statute.

(3) Form 8339, PCS Change, will be input updating item 22, to the literal "A" on all investors sent to Appeals. This will identify that the investor is in Appeals and they will resolve the linkage. If there are no remaining open linkage the case will be closed by them.

(4) Issue a statutory notice of deficiency when none of the unagreed investors file a protest, or there is a short statute. It is difficult to successfully resolve disputed issues when some investors are non-docketed and others are docketed.

(5) If no investor protests were received, but there was a protest prepared at the key case level, the ILSC Coordinator should contact the POA to make sure they understand that an investor needs to file the protest.

(1) If a petition is filed with the Tax Court, the petitioning investor will be sent to the requesting Appeals area. Update the petitioning investor on AIMS to EGC 5476 before transferring to Docketed Appeals (DC 11). Appeals will fully close the investor when the tax court decision is final.

(1) If no response is received from the investor, and no petition to the Tax Court is filed, the SNOD will be defaulted and the tax assessed per the SNOD. The statute expiration date will need to be recalculated based on the defaulted SNOD.

(2) Prepare and input Form 8339, PCS Change, to enter the amount of the assessment. Box 11, Change(s), will be completed with Item 5, (the investor one-year date field) with 22222222, assessment amount and time. The investor case will not be allowed to close without this.

(3) If the case is to be fully closed (no other TEFRA, ILSC or BBA Chapter 2/2A linkages), the case is prepared for final closure. If there are open linkages (either TEFRA, ILSC or BBA Chapter 2/2A) a partial assessment will be made and the case will be sent to suspense to await additional packages. (See Form 5344 procedures at IRM 4.31.6.11, Investor Closing Procedures.)