8.17.2. General Settlement and Rule 155 Computations

(1) This IRM section provides procedures for Appeals Tax Computation Specialists (TCSs) for preparing settlement computations (also known as audit statements) on cases worked in Appeals.

(2) Purpose: The purpose of this IRM section is to provide guidance to Appeals TCSs for the accurate and efficient preparation of settlement computations on cases worked in Appeals.

(3) Audience: The primary users of the IRM section are Appeals TCSs and Appeals Technical Employees (ATEs).

(4) Policy Owner: Policy, Planning, Quality and Analysis (PPQ&A) is under the Director, Case and Operations Support.

(5) Program Owner: Appeals Policy is the program office responsible for providing technical and procedural guidance to the Appeals organization and is under the Director of PPQ&A.

(6) Contact Information: Appeals employees should follow established procedures on How to Contact an Analyst. Other employees should contact the Product Content Owner shown on the Product Catalog Information page for this IRM.

(1) Settlement computations may contain the following four parts:

• Face or summary sheet;

• Adjustment schedule;

• Computation of tax schedule (generally the lower part of adjustment schedule); and

• Explanation of adjustments schedules (including supplemental schedules and exhibits).

(2) A settlement computation is an important part of Appeals' determination and disposition of a case. It must be mathematically and technically accurate, and include clear explanations and schedules for the following reasons:

1. It is a source document for tax amounts on agreement forms, Form 5402, Appeals Transmittal and Case Memo, and Form 5403, Appeals Closing Record;

2. It informs the taxpayer of adjustments resulting from Appeals' disposition of the case; and

3. It serves as a guide for subsequent years’ adjustments.

(3) "Audit Statement" is a term that is sometimes used to describe the settlement computation.

(1) A settlement computation is not required in the following situations unless needed for other computational purposes:

1. The findings of Compliance are completely reversed by Appeals.

2. The findings of Compliance are sustained in full by Appeals.

3. A statutory notice of deficiency is issued which adequately covers all adjustments.

4. The determination in the notice of deficiency is agreed in full either during the 90-day period or after filing a petition.

5. Generally, unagreed docketed cases.

   Note: However, an information statement or a settlement computation might be necessary or desired in an unagreed docketed case. An example of this would be if the ATE concedes an issue.

6. Cases where the only issues involve exempt status, private foundation classification, or employee plan qualification questions.

7. Cases involving Appeals Specific Dollar Settlements.

(2) Counsel's IRM is called the Chief Counsel Directives Manual, or CCDM. CCDM 35.5.2.9, Settlement Procedures in S Cases, allows Counsel attorneys to settle small cases on the basis of a specific dollar amount agreed upon by both parties without preparing any computations.

(1) Generally, taxes reportable on the same tax form number by the same taxpayer may be included in one settlement computation.

(2) However, to determine when separate settlement computations are needed, follow these guidelines:

1. Generally, if the cases involve similar type returns, prepare one settlement computation to cover all cases. For example, if a taxpayer files a Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents one year, a Form 1040A, U.S. Individual Income Tax Return the next year, and a Form 1040, U.S. Individual Income Tax Return the third year, all three years may be included on one settlement computation.

2. If there are years involving both joint and separate returns, prepare one settlement computation for joint return years and another settlement computation for separate return years. ("Separate" can mean filing single, head of household or married filing separate.)

3. If there are years involving both consolidated corporate and non-consolidated corporate return years, the facts and circumstances of each case will determine if one settlement computation may be prepared, or if separate settlement computations (one for the consolidated corporate return years and another for the non-consolidated corporate return years) will be needed.

(3) Additionally, apply the following restrictions when determining if separate settlement computations are required:

1. Do not combine fiduciary returns, Form 1041, U.S. Income Tax Return for Estates and Trusts, with individual returns, Form 1040, U.S. Individual Income Tax Return, in the settlement computation.

2. Do not combine Form 1120, U.S. Corporation Income Tax Return years with the taxpayer’s Form 1120-S, U.S. Small Business Corporation Income Tax Return, unless the Form 1120-S is being converted to Form 1120.

3. Treat Forms 1120-S as cases only when additional tax is due (IRC 1378) or an overassessment is determined.

(1) Prior to preparing the settlement computation, a preliminary review of the case file is needed. Listed below are recommended checks.
Preliminary Review

(2) A current transcript must be secured from Master File and/or Non-Master File.

1. A current transcript is generally determined to be one in which no more than two weeks have elapsed since it was secured.

2. If there are indications that transactions may have occurred since the date of the last transcript, request an updated transcript, regardless of how many weeks have elapsed.

3. See IRM 8.20.2.1, Integrated Data Retrieval System (IDRS) Transcripts of Account, for further information.

(3) The TCS must read the Request for Audit Work (generally Form 3608, Request for TCS Service) carefully and note the items checked.

1. If instructions are unclear or are incomplete, make a note of the questionable items.

2. If an answer is not found during examination of case file, ask the requester to complete or clarify the request.

3. Consider the effect of proposed adjustments on other items (so-called automatic adjustments).

(4) If providing technical assistance on prior findings is warranted, it generally can be incorporated in the technical work requested by the ATE, rather than being performed as a separate step. A technique for proving prior findings and revised findings is to prove the deficiency by computing tax at effective rates on income adjustments, taking into account changes in credits.

(5) Bring adjustments improperly handled or omitted in the examination report or notice of deficiency, including those that are automatic or mathematical in nature, to the attention of the ATE when warranted. See IRM 1.2.1.9, Policy Statement for the Appeals Process and IRM 8.6.1.7 , New Issues and Reopening Closed Issues.

(1) Suspense reason codes are used and input into the Appeals Centralized Database System (ACDS) when the TCS cannot work on an assigned case due to specific circumstances beyond their control, such as waiting for information needed to complete the case. When the TCS places a case in suspense, it:

• Stops additional TCS lapse time from accumulating on that case until the suspense reason code is removed; and

• Removes the case from active inventory counts.

(2) The TCS will remove the suspense reason code once the case is either returned to active inventory or closed as a premature submission.

(1) The Internal Revenue Code, treasury regulations, revenue rulings, tax rate tables and the tax return forms are excellent guides when applying the law in effect for tax credits, tax rates and other computations affecting tax liability. Often it is necessary to modify tax computation forms or create schedules to support tax computations. Following are general rules for computing all taxes.

1. Compute tax at rates in effect for the taxable year, period, etc.

2. Recompute, if necessary, other taxes and credits.

(2) Interest provisions - The settlement computation requires a special notation if certain interest provisions apply. When the following interest provisions apply, include a statement on Form 3610, Audit Statement, (if prepared) or tax computation form such as Form 5278, Statement - Income Tax Changes, Form 4549, Report of Income Tax Examination Changes, etc. See below:

• Restricted interest - When Form 2285, Concurrent Determinations of Deficiencies, has been prepared and restricted interest applies, see IRM 8.17.6.4.4, Annotating the Settlement Computation When Form 2285 Prepared, for suggested language to use for the statement.

• IRC 6404(g) - If IRC 6404(g) applies, see IRM 8.17.6.9.7, IRC 6404(g) in Settlement Computations, for suggested language to use for the statement.

• IRC 6621(c) - If IRC 6621(c) applies, see IRM 8.17.6.6.2, Annotating the Settlement Computation for Large Corporate Underpayment Rate, for suggested language to use for the statement.

(1) Many of the forms used in preparing settlement computations are available in different formats including computer generated or fillable Adobe Acrobat, Word, and Excel. They can be generated through the Report Generation Software (RGS) or BNA software, and accessed on the Appeals TCS web site and on the Electronic Publishing web site.

(2) The following forms are commonly used in settlement computations:

• Form 5278, Statement - Income Tax Changes

• Form 4549, Report of Income Tax Examination Changes

• Form 4549-A, Report of Income Tax Examination Changes (Without Taxpayer Signature)

(3) See Exhibit 8.17.2-1 for other forms used in preparing settlement computations.

(1) Form 3610, Audit Statement, may be used as the face or summary sheet in the settlement computation package when needed. Most of the items to be completed are self-explanatory.

(2) The settlement computation may omit Form 3610, Audit Statement, provided all needed information is clearly and adequately presented in other parts of the settlement computation.

1. For more information about Form 3610, Audit Statement, requirements for specific types of cases, click on the TCS Website and then see the TS Audit Statement Notations and Form 3610 folder.

2. Form 3610, Audit Statement, is not prepared for Rule 155 cases. See IRM 8.17.2.12.1 for information about the Summary Page (Face Sheet) that is required instead for Rule 155 computations.

(3) If Form 3610, Audit Statement, is prepared, see below for instructions:

1. In the first column of Form 3610, Audit Statement, list the tax years or periods covered by the Appeals or Counsel determination in the case. If the year is less than 12 months, or a 52–53 week year, include the beginning and ending dates. Additional columns are provided for listing deficiencies or overassessments in tax, additions to tax, and penalties. If necessary, alter columns to fit the circumstances but make sure they are properly identified.

2. Enter the tax deficiency or overassessment amount in a column to the right of the tax year or period listed.

3. Specify applicable penalties or additions to tax by IRC section in the column headers and enter any amounts in the columns to the right of the tax deficiency or overassessment column for the particular tax year.

(4) Form 3610, Audit Statement, and penalties/additions to tax:

1. Form 3610, Audit Statement, does not need to be prepared just to show penalty/addition to tax information.

2. If Form 3610, Audit Statement is prepared, no penalty or addition to tax information is required to be included on the Form 3610, Audit Statement for penalties/additions to tax no longer asserted in the settlement computation (they are conceded in full or no longer applicable). Information such as the penalty code sections, and zeroes or "None" for amounts is not required.

(5) If Form 3610, Audit Statement is prepared, the space at the bottom of Form 3610, Audit Statement may be used for additional explanation. If this space is not sufficient, a continuation sheet may be used. The following are some examples of additional explanation that may be added:

1. Unassessed advance payments: When there are multiple years, multiple payments, or payments that have been separated by the taxpayer into categories, i.e. tax, penalty and interest, it is recommended that an explanation similar to the example shown below be provided on Form 3610, Audit Statement.

The deficiency shown above has been paid to the following extent:

Date Paid	Year	Tax	Penalty	Interest
4/15/2003	2001	$2,000	$1,000	$150
4/15/2003	2002	$3,000	$ 500	$50
Total paid		$5,000	$1,500	$200

Note: The term "unassessed advance payments" refers to advance payments which have been posted to the taxpayer’s account, but not applied to pay an assessment of tax, penalty or interest since the liabilities are unassessed.

Note: If Form 3610, Audit Statement is not prepared, then it is recommended that the information be shown elsewhere in the settlement computation - on Form 5278, Statement - Income Tax Changes,Form 4549, Report of Income Tax Examination Changes, Form 3623, Statement of Account or an attachment. The payment explanation is not needed if an interest computation including the payments is prepared to send to the taxpayer.

2. Unassessed advance payments in docketed cases: A notation in the settlement computation stating the date and amount of an unassessed advance payment is recommended in docketed cases. Sample language is shown below:
   
   The deficiency shown above for __(enter tax year) does not take into account a payment of $__ made on __ (enter date of payment).
   
   

3. Recomputation not necessary for one or more years: If a tax computation is not necessary for one or more years and a Form 3610, Audit Statement is prepared, the following optional statements may be added at the discretion of the TCS or an ATE: "No change to prior determination"; "No change to determination in statutory notice of deficiency"; "Prior determination reversed in full"; or "Determination in statutory notice reversed in full".

4. Number of pages or schedules: In lengthy settlement computations where it would be useful to the taxpayer or helpful in assembling copies, the total number of pages or schedules in the settlement computation may be noted. (This is optional and at the discretion of the TCS or an ATE.)

(1) Form 5278, Statement - Income Tax Changes, Form 4549, Report of Income Tax Examination Changes or Form 4549-A, Report of Income Tax Examination Changes (Without Taxpayer Signature), is used as the adjustment and tax computation schedule in settlement computations for income tax cases.

(2) The starting point for settlement computations may be the return, assessed amended return, assessed partial agreement, other prior assessment report, or the latest prior determination report issued to the taxpayer. Any practical and logical presentation of the results of Appeals’ determination is generally acceptable.

(3) Label each adjustment with a letter of the alphabet. List the title of each adjustment in the Adjustments to Income column. Extend the amount of adjustment to the applicable column. Depending on the computer software used, enter the adjustments per requirements of the software.

(4) Additional requirements for the tax computation schedule:

1. The tax computation forms have lines designated for the entry of additions to tax and/or penalties. Enter any additions to tax or penalties that still apply based on the settlement. When annotating the information on the tax computation form, a format similar to the following should be used to show the code sections and amounts:

Additions to tax/penalties:
Section 6651(a)(1)	$ 500.00
Section 6662	2,000.00

Note: The additions to tax or penalties on the RGS tax computation schedules include the name of the addition to tax or penalty. This is also an acceptable format.

2. If an addition to tax or penalty previously asserted in the Revenue Agent Report (RAR) or statutory notice is not being asserted in the settlement computation (it is being conceded or is no longer applicable), then it is not necessary to enter any addition to tax or penalty information on the tax computation form prepared for the settlement computation.

(5) Tax liability per the return was adjusted:

1. If the tax liability per the return was adjusted, a computation of "Tax as previously adjusted" similar to the following may be included in the settlement computation. This can be shown at the bottom of the tax computation form or on an attachment.

Return as filed	$40,000.00
Additional assessment (Date)	2,000.00
Overassessment (Date)	(1,000.00)
Tentative allowance carryback from (Year) (Date)	(5,000.00)
Tax as previously adjusted	$36,000.00 =========

Note: This computation is recommended if the "Total tax shown on return or as previously adjusted" amount is different in the Appeals or Counsel computation than the amount shown in the RAR or statutory notice of deficiency.

(1) The purpose of an explanation of adjustment is to clarify and explain. Most adjustments will require no explanation; others, a short explanation or reference to a schedule or exhibit will suffice. The explanation may be listed on a separate explanation of adjustments page or noted on the tax computation form.

(2) Determine what is needed in the way of explanations or supporting schedules and exhibits on a case-by-case basis. To decide whether an explanation is needed, ask these questions, or consult with the requestor if you are unsure:

1. Does the taxpayer need an explanation to understand the adjustment or to adjust their books?

2. Would an explanation help the ATE or Counsel?

3. Is an explanation needed to adjust other years?

(1) Generally, when a decision in a Tax Court case is neither entirely for the petitioner (taxpayer) nor entirely for the respondent (IRS), Rule 155 of the Tax Court Rules requires computations to be submitted by the parties, showing the amount of deficiency or overpayment to be entered as the decision pursuant to the court’s determination of the issue. These computations are often submitted jointly; however, if the parties cannot agree then each party must submit separate computations.

1. This discussion of Rule 155 computations uses the word "deficiency". Employment tax determination cases under IRC 7436 do not involve a deficiency (as defined in IRC 6211). The discussion in this IRM section however, applies to IRC 7436 cases as if the IRC 7436 notice of determination were a notice of deficiency.

2. In addition, Rule 155 computations in certain post assessment proceedings such as interest abatement, spousal relief, and collection due process cases do not determine "deficiencies". Often, such cases determine "liabilities", or determine periods of interest abatement or other forms of relief.

3. The Rule 155 computations may be modified, as appropriate, to fit these types of cases.

(2) TCSs prepare Rule 155 computation statements.

1. Counsel will submit the Rule 155 computation request through the Appeals Support SharePoint site using Form 3608, Request for TCS Service. All documents needed to complete the computation should be attached to the request in SharePoint. The TCS manager assigns the Rule 155 computation to a TCS. Counsel delivery of the documents/administrative file needed to complete the computation will vary by the location of the Counsel office and the TCS office.

   Note: The "Counsel Resources" section of the TCS Website has useful information to assist Counsel when requesting computations from TCS. (Counsel should see the "Information for TCS Requests" file for how to determine the correct TCS manager, how to complete Form 3608, Request for TCS Service, and what information the TCS needs in order to prepare the computation.)

2. Be alert for automatic adjustments not included in the Counsel request. Handle any other issues in accordance with the notice of deficiency or pre-session settlement. Rely upon the Counsel request and administrative file (if available) and not the legal file or decision for information. When ambiguities exist seek clarification from Counsel.

3. Counsel should receive computations from TCS within 45 days of the opinion. When necessary, give priority to these computations. Unless otherwise directed by the court, Counsel must file Rule 155 computations promptly with the court within 90 days from the date of the court’s opinion. However, the CCDM provides that Rule 155 computations should be filed within 60 days.

   Note: For Counsel to receive computations from TCS within 45 days of the opinion, Counsel must forward the Rule 155 request to TCS immediately upon receipt of the opinion and include all necessary information so that the case can be expedited.

(3) Per Counsel's CCDM, the attorney must determine the specific adjustments to the statutory notice that are at issue before the court requiring adjustment for an accurate computation. (See CCDM 35.8.6.3.1.2, Computation by Appeals ). Accordingly, the Counsel request for a Rule 155 computation must advise TCS of the following:

• All issues before the court, including issues settled or conceded and issues raised by Counsel or the petitioner.

• The interpretation to be followed in the computation if the opinion requires interpretation because of ambiguity or is susceptible to more than one interpretation.

(4) A Rule 155 computation statement generally consists of three parts - a summary page (face sheet), the computation of tax schedules, and a statement of account.

(5) When the "short format" is appropriately used for Rule 155 computations, the tax computation and statement of account may be omitted. See IRM 8.17.2.12.2 and IRM 8.17.2.12.3 for more information.

(6) It is recommended that all pages of the Rule 155 computation statement be numbered, including the statement of account.

(1) ATEs, TCSs and Tax Specialists (TS) who prepare final tax computations will upload Form 5278, Statement - Income Tax Changes and all related schedules, forms, exhibits, letters, penalty and interest computations prepared by these employees into the ACDS for all cases.

(2) ATEs, TCSs and TSs who work cases in other systems, for example, RGS and IMS, will also upload their final tax computations in ACDS.

(3) If the completed Form 5278, Statement - Income Tax Changes, or required schedule, form, exhibit, or tax computational letter is a revision or correction of prior work, then all prior versions must be deleted from ACDS, and the final revision or correction uploaded to ACDS.

(1) Other forms are available and may be used to make computations or to support computations. The following is a partial list of such forms. These forms are available on the Electronic Publishing Catalog web site (all but Form 886-S, Partners' Share of Income, Deduction and Credits are fillable Adobe Acrobat forms). Some of these forms are available in the TCS spreadsheets section located on the Technical Support SharePoint site. (The Technical Support SharePoint site is reached by the "Spreadsheets SharePoint" link on the TCS Website.)

(2) The following is a partial list of forms that may be used in the computation of life insurance cases:

(3) Make sure that the schedule or exhibit used in a settlement computation is technically applicable and that the law in effect for the tax year in issue is correctly applied.

• The details supporting the above computations are set forth on attached pages _____ to _______, inclusive.