4.46.6. Workpapers and Reports Resources

(1) Purpose: This IRM provides guidelines for the development of workpaper content and organization, as well as preparation of audit findings for a completed report. These guidelines promote quality and consistency in examiner workpapers and reports. This section also describes the electronic case files required in the Issue Management System (IMS).

(2) Audience: All LB&I personnel

(3) Policy Owner: Assistant Deputy Commissioner Compliance Integration

(4) Program Owner: The LB&I Policy Office within ADCCI

(5) Primary Stakeholders: Many internal functions review LB&I case files after they leave the group, including:

• Subject matter experts and technical specialists

• SB/SE Technical Services reviewers

• Joint Committee reviewers

• Appeals officers

• LB&I Quality Review and Analysis reviewers

• Tax examining technicians

• TIGTA and GAO auditors

• LB&I and Chief Counsel attorneys

• Taxpayer Advocate case advocates

(1) Workpapers must be legible, indexed and organized. The workpapers are required to be identified by the appropriate Standard Audit Index Number (SAIN) and indexed in a logical order within each section so that others such as a reviewer or an Appeals Officer, can easily follow the work product.

(2) A workpaper index must be used to organize electronic workpapers within IMS. The standard index will allow others to quickly find documents within the workpapers loaded in IMS and will serve as a reminder that all documents needed for a quality exam should be included. The workpaper index should be labeled as "000-00.00-Workpaper Index" so that the document filters to the top during a workpaper sort within IMS. This will enable files to be easily located within IMS or the team website by using the index.

(3) Electronic workpapers must be named with a 3-digit SAIN (or 4 to 6-digit IMF issue code for 1040 returns) - SAIN extension, numeric number - description. This naming convention ensures that the workpapers within each SAIN will show up in the desired order. If the SAIN extension or workpaper number is left out of the middle of the file name, the workpaper will show up in the alphabetical order of the 1st letter in the description. The mandatory standard naming convention is shown in the following examples:

(4) Lead sheets with standardized audit procedures, which can be tailored to each examination, are available in IMS for many SAIN numbers. IMS provides an electronic index, named WP Index, for all case documents under the case attributes on the case tree.

(5) Workpapers (electronic or paper) should appropriately document techniques used and conclusions reached. For additional information regarding workpapers, refer to IRM 4.10.9, Workpaper System and Case File Assembly.

(6) Workpapers (electronic or paper) required to be uploaded to IMS should identify the issue and show the development and conclusions reached. If electronic files are provided that are considered pertinent to the development of the issue, they should be added to IMS. All workpapers included in IMS should be associated with the appropriate issue SAIN number and issue name. Extraneous documents (electronic or paper) should be properly disposed or returned to the taxpayer and should not be included in IMS. Relevant workpapers should be separated from extraneous documents. Extraneous documents include duplicate copies and documents not needed to support adjustments made on audit or critical to the case. Consult with your manager before disposing of extraneous documents to prevent unlawful/inadvertent destruction of records.

(7) IMS offers examiners the option of using lead sheets for many issues based on SAIN input. Examiners should tailor these standardized audit procedures to each issue. Lead sheets created in IMS should be renamed to reflect the content of the workpaper, for example, "004-00.00– Preparing the Examination Plan" .

(8) For examinations closing virtually, all forms and documents that are required in a paper case file must be uploaded in IMS. It is recommended that examiners upload these documents to IMS for all case closings as LB&I moves towards a paperless system. See Exhibit 4.46.6-4 for instructions on uploading documents to IMS. See Exhibit 4.46.6-5 for recommended best practices for IMS upload and storage of workpapers.

(1) The International Examiner’s Report (IER) serves several purposes:

1. It documents the results of the international portion of the examination.

2. It transmits the international audit conclusions and relevant information to the team coordinator or the controlling examiner. In addition to providing information on the results of the international portion of the examination, the IER provides information that the controlling examiner may use for CTA or RGS input.

3. Although IMS now captures CTA report input for LB&I cases, the IER isolates the international adjustments and can be useful to validate and perfect the CTA coding and input.

4. The IER provides historical information that is used to evaluate subsequent international referrals.

5. Part 4 of the Form 3963 is used for the Mutual Agreement Procedures (MAP) Report if one is required (see IRM 4.60.2, Mutual Agreement Procedures and Report Guidelines).

(2) International examiners will prepare a report of findings for each case in which they participate as a team member. A report is not required for consultation assignments.

(3) The IER package consists of 4 parts:

1. Form 3963.

2. Narrative comments regarding the international examination.

3. Form 4549-B or Form 4605.

4. Form 886-A, Explanation of Items. Local practice may eliminate the inclusion of Form 886-A for LCC cases.

   Note: Form 3963 and the narrative comments described in a) and b) above should not be shared with the taxpayer

(4) The international examiner should include in the narrative part of the report:

1. A brief description of the taxpayer’s operations and history.

2. An explanation of issues considered and not changed that would be useful for evaluating future referrals and planning future audits.

3. An organization chart, if warranted.

4. Any other information that may be helpful to the next international examiner such as foreign tax credit carryover amounts, claim information, etc.

(5) Examination must maintain a copy of the IER in the examination case file (paper or electronic).

(1) Examination reports should contain all the information necessary to ensure a clear understanding of the adjustments and tax computation. Examination reports serve as the basis for assessment and collection action. Examiners should take all necessary steps to ensure the accuracy of examination reports. Unless stated otherwise, the provisions of IRM 4.10.8, Examination of Returns, Report Writing, apply to reports prepared by LB&I teams for consistency. The team coordinator should specify workpaper style and composition preferences before the report is prepared.

(2) Tax computation and report preparation software is used by TCS to generate examination reports.

1. Bloomberg BNA Corporate Tax Analyzer (CTA) Software is used to generate Form 1120, income tax examination reports.

2. Report Generation Software (RGS) is used to generate individual, partnership and S corporation income tax examination reports.

3. The 1041 Workcenter is used to generate trust income tax examination reports.

4. See IRM 4.10.16 , Examination Operational Automation Database (EOAD) for procedures related to EOAD.

(3) Form 4549, Report of Income Tax Examination Changes, is used to prepare reports for most individual and corporate agreed examinations.

1. Form 4549-A, Report of Income Tax Examination Changes, is used in partially agreed cases, unagreed and Joint Committee cases. However, LB&I cases may make it practical to prepare reports using Form 4549-A with Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, even for agreed cases.

2. Continuation sheet Form 4549-B, Report of Income Tax Examination Changes, is used on any case with adjustments exceeding the number allowed on Form 4549 or Form 4549-A.

Note: The Form 4549-B is also used to list adjustments by entity for consolidated return reports. The total adjustments listed on Forms 4549-B are carried to Form 4549 or Form 4549-A, line 1a.

(4) Form 4605, Examination Changes - Partnerships, Fiduciaries, S Corporations and Interest Charge Domestic International Sales Corporations, is used to prepare reports for partnerships and S corporations.

(5) Refer to the Report Writing section of LB&I-04-1019-010, Interim Guidance on the Centralized Partnership Audit Regime Field Procedures, for Bipartisan Budget Act (BBA) examinations.

(6) Use Form 4666, Summary of Employment Tax Examination, to summarize the employment tax examination results. Also use Form 4667, Examination Changes – Federal Unemployment Tax, and Form 4668, Employment Tax Examination Changes Report. Refer to IRM 4.23.10, Report Writing Guide for Employment Tax Examinations.

(7) Report adjustments and explanations must reconcile to the workpaper conclusions. Written explanations should be issued to the taxpayer on Form 5701, Notice of Proposed Adjustment, prior to issuing the final examination report. Form(s) 886-A, Explanation of Items, should be attached to all final agreed and unagreed reports issued to the taxpayer.

(1) Examination reports must meet the following standards:

1. Examiners will adequately address issues, facts, law, taxpayer’s position(s), arguments and conclusions for all agreed and unagreed issues. See IRM 4.46.6.9, Explanation of Items: Form 886-A.

2. Examiners should reconcile reports to supporting workpapers and tax return data to a current transcript.

3. The examiner’s report will address pertinent legal arguments on unagreed issues. Legal citations support application of law for unagreed and agreed issues. IRM references, law or accounting journal articles, IRS training material and other internal communications do not qualify as legal citations.

4. Examiners will acknowledge the taxpayer’s position on agreed issues and respond to the taxpayer’s position on unagreed issues.

5. The examiner’s report will include any specialists’ adjustment(s).

6. A Joint Committee spreadsheet that traces the appropriate carrybacks and carryforwards must be included if the case meets Joint Committee Review criteria. See IRM 4.36.2, Identification of Joint Committee Cases.

7. MAP (Mutual Agreement Procedure) report is required if the audit proposes adjustments that affect the taxpayer’s income in a treaty country. See IRM 4.46.6.3.4, International Examiner Report Writing, Mutual Agreement Procedures (MAP) Report.

(1) Team managers are required to approve audit reports before they are issued to taxpayers. The manager’s approval must be documented in the case file. This approval may be documented via email, the manager’s initials on the audit report, a notation in the activity report, or other documentation in the case file. Secure the team manager’s documented approval of the audit report prior to issuing it to the taxpayer.

(2) For LB&I examinations that result in a no-change report with no adjustments (disposal code 02), management approval will be evidenced by the manager’s signature on the no-change letter before closing the case to CCP. (See IRM 4.46.6.4.1).

(3) The assertion of penalties requires the written approval of the immediate supervisor of the issue team members determining the assertion of penalties before the Notice of Proposed Adjustment is issued to the taxpayer. This approval must be documented in the case file. (See IRM 4.46.4.12.6 Workpaper Documentation on Penalties).

(4) In any case where there is a substantial understatement of tax and no penalty is proposed, the non-assertion of the IRC 6662(d) penalty must be approved in writing by the immediate supervisor of the issue team members determining the non-assertion of this penalty. This approval must be documented in the case file.

(1) LB&I revenue agents will use a tax computation specialist (TCS) for all LB&I cases with the exception of international withholding tax computations, excise tax computations and most employment tax computations. Requests for TCS services are made by the team coordinator (TC). A single request for TCS services is done through the Specialist Referral System (SRS) at the beginning of every case.

(2) Separate SRS referrals for related entities (e.g., shareholders’ returns, officers’ returns, etc.) should be submitted as soon as it is determined that the returns will be examined. For S corporation examinations, separate SRS referrals for each S corporation shareholder should be submitted as soon as it is determined that the S corporation will have adjustments, if referrals have not already been submitted for the shareholders and the S corporation is not linked.

(3) The SRS request for a TCS should include a LIN link for the latest return of the exam cycle. Amended returns and Forms 1139 should be provided by the TCS once a TCS is assigned to the case.

(4) The TCS provides services that differ from those provided by other specialists. It is therefore important that the requesting revenue agent selects the correct practice area and DFO when submitting the SRS request. This will direct the request for TCS services to the correct practice area and TCS group.

(5) Once a referral has been made and a TCS has been assigned to the case, the revenue agent will communicate directly with the assigned TCS to provide documents needed for the return input, any what-if computations, and to have RARs prepared.

(6) Once the request has been assigned by the TCS manager, the revenue agent will assign the TCS "team coordinator" privileges in IMS so the TCS may complete the request for input, RAR computation, or tentative calculations.

(7) For carryback cases, examiners are to provide the TCS with Forms 1120X, 1139, 1040X or 1045 that are the source documents for NOL, capital loss and credit carrybacks.

(8) The revenue agent will verify the accuracy of the RAR prior to issuing it to the taxpayer.

(1) Refer to IRM 4.10.8.4., Regular Agreed Cases, for agreed report procedures.

(2) Secure the taxpayer’s agreement to the examination report on one of the following forms:

• Form 4549, Report of Income Tax Examination Changes

• Form 4605, Examination Changes - Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations

• Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Excise or Employment Tax)

• Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment

(3) Agreement waivers are considered executed after the taxpayer has signed them. Executed agreement waivers should be date stamped upon receipt.

(4) In the event the taxpayer does not sign the waiver form, the examiner will follow the unagreed procedures. (See IRM 4.10.8.6,, Partially Agreed Cases and IRM 4.10.8.12, Unagreed Case Procedures.

(5) For securing agreements for TEFRA entities refer to IRM 4.31.2.3.11, Securing Agreements from the TMP and the Partners. For securing agreements for BBA entities refer to Resolving the Examination section of LB&I-04-1019-010, Interim Guidance on the Centralized Partnership Audit Regime Field Procedures.

(6) All TEFRA agreements must be executed by a Technical Services TEFRA coordinator or other employee delegated by Delegation Order 4-19, Partnership Matters.

(7) The TC and case manager will ensure that cases are processed promptly following receipt of signed agreement forms.

(8) Solicitation of Deficiency - Examiners must solicit payment of tax deficiency, penalty and interest. Examiners will document this action on Form 9984, Examining Officer’s Activity Record.

(9) Cash Bonds or Payments - Taxpayers may pay a deficiency or proposed deficiency by making a deposit or making an advanced payment by check or electronic funds transfer. For payments received by check, prepare and process Form 3244-A, Payment Posting Voucher -- Examination, with the funds received, according to LB&I guidelines. If the taxpayer wishes to make a deposit under IRC 6603 for the purpose of suspending the running of interest on a potential underpayment, the taxpayer must follow the procedures in section 4 of Rev. Proc. 2005-18. If the taxpayer wishes to identify a deposit in the nature of a cash bond (that was previously made under Rev. Proc. 84-58) as a deposit eligible for interest under IRC 6603(d), the taxpayer must follow the procedures in section 5 of Rev. Proc. 2005-18. The taxpayer may also make advance payments or cash bond payments using Same Day Wire Transfer via the EFTPS (Electronic Federal Tax Payment System) systems.

(10) Processing Checks Received – Procedures for processing remittance checks received from taxpayers are found at the Remittance Processing for LB&I Cases web site. See  IRM 4.20.1.3.2, Processing Payments Received and  IRM 4.4.24.8, Payments of $100,000 or More.

(11) Inform taxpayers that the agreed case is subject to review and once it is accepted they will receive Letter 987, Agreed Income Tax Change, stating the case is closed. Examiners will prepare Letter 987, which is signed by the team manager, and leave it undated in the case file (with a copy for the case file). CCP will date and issue Letter 987 to the taxpayer.

(1) Report forms for an unagreed case are similar to those used for agreed cases. The instructions to complete agreed case reports generally apply; however, unagreed report forms do not include a signature line for the taxpayer. All unagreed reports and related documents/workpapers (tax computations / RAR / protest / rebuttal / T-letter, etc.) are mandatory items that are required to be included in the IMS case file.

(2) Form 4549-A or Form 4605-A are used to summarize all adjustments. Explain each issue on a Form 886-A, Explanation of Items, detailing the facts, law and argument, taxpayer’s position, and a conclusion. See IRM 4.10.8.12, Unagreed Case Procedures.

(3) Inform taxpayers of their rights to discuss proposed adjustments with the examiner’s team manager and of their formal appeal rights.

(4) Examiners will solicit payment for tax deficiency, penalties and interest for all agreed issues, unless the agreed adjustments would generate a net refund.

(5) If the taxpayer submits a protest, the examiner must review it and prepare a timely rebuttal. The rebuttal will address and/or resolve any factual differences between the protest and the audit report. The rebuttal will also address any new arguments or legal positions presented by the taxpayer.

(6) If agreement is reached on some, but not all, issues or years, encourage the taxpayer to enter into a partial agreement by executing a waiver on Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. No agreement should be solicited if the agreed adjustments would generate a net refund. See IRM 4.10.8.6, Partially Agreed Cases, for instructions on the preparation of partially agreed RARs. See IRM 4.46.6.11, Cases with Unagreed Issues - Minimum Refund, paragraph (2).

(7) Refer to the 30-Day Letter Package section of LB&I-04-1019-010, Interim Guidance on the Centralized Partnership Audit Regime Field Procedures, for BBA examinations.

(1) Prepare Form 886-A and attach it to the report form to explain the adjusted items. Use a separate Form 886-A for each adjusted issue. If the adjustment applies to more than one year, show the years and adjustments on one combined Form 886-A. The Form 886-A attachment is mandatory and must be attached to all Form(s) 5701 for all unagreed issues. For Joint Committee cases, Form 886-A is required for all agreed and unagreed issues.

(2) The following format should be used for LB&I cases:

1. Issue -- Number and label each issue explanation to correspond with the adjustment on the audit report. Include a reference to SAIN to facilitate tracing back to workpaper detail of the adjustment. For clarity, include the amount per return, the amount per audit, and the resulting adjustment

2. Facts -- Include a narrative statement of the facts upon which the adjustment is based. State the facts accurately and objectively. Include all relevant facts whether favorable to the IRS’ or taxpayer's position.

3. Applicable Law -- Cite and explain the applicable authority correctly. Clearly state the rulings and opinions relied upon in the explanation. Reports should fully inform the taxpayer of the legal basis for the proposed adjustments.

4. Taxpayer's Position -- State the taxpayer’s position in narrative form. Include any legal authority the taxpayer cites as the basis for the taxpayer’s position. If the taxpayer provides a written position statement, include the entire statement in this section or summarize the statement and include the entire document in the report as an exhibit.

5. Argument – Prepare a narrative with related facts, as previously discussed in b), and cite the authority to support the IRS’ position and the IRS’ rebuttal of the taxpayer's position.

6. Conclusion -- Briefly state a conclusion of the IRS’ position.

7. Executive Summary– An Executive Summary can be used for lengthy 886-A’s (in excess of 10 pages) and is recommended for unagreed issues. The Executive Summary should summarize the contents of the 886-A in a few paragraphs.

(3) For taxpayer’s statements marked as “FRE 408” or “For Settlement Purposes Only,” or variations thereof, see IRM 4.46.5.3.

(1) A taxpayer could be due a net refund upon completion of an examination even if none of the unagreed issues are resolved in the taxpayer’s favor. This is referred to as a "minimum refund" case. This is more likely in situations where the taxpayer has filed a claim for refund for one or more of the years in the cycle.

(2) The examination team should solicit a partial agreement relating to the agreed issues. See IRM 4.10.8.6, Partially Agreed Cases, for instructions on the preparation of partially agreed RARs.

1. The taxpayer agrees to the partial refund by signing Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.

2. Other instructions in IRM 4.10.8, Examination of Returns, Report Writing, for the preparation of reports and the processing of partial agreements remain in effect.

3. If the taxpayer declines to execute the Form 870, the case is considered unagreed with respect to all issues.

4. In all minimum refund cases Form 9984, Examining Officer’s Activity Record, and Form 4665, Report Transmittal, will document the efforts to solicit a partial agreement from the taxpayer and the taxpayer’s response. After processing of the partial agreement, unagreed issues are forwarded to Appeals in the regular manner.

(3) In the event the minimum refund amount exceeds $2,000,000 ($5,000,000 for corporations), and the taxpayer has demonstrated agreement with the examiner’s findings by executing the Form 870, the refund must be reported to the Joint Committee on Taxation and processed before the unagreed issues are forwarded to Appeals. For instructions on the preparation of case files for review and preparation of the report to the Joint Committee on Taxation see IRM 4.36.3, Examination Team Responsibilities.

(1) The loss of computerized records related to examinations can have catastrophic consequences to the tax administration process and can potentially result in the loss of large sums of current and future revenue. Proper backup procedures facilitate data recovery if a data loss occurs. Workpapers that are maintained, uploaded and synchronized in IMS are automatically saved every 2 hours or when you close the case attribute screen.

(2) Best practice from Case Management Systems Solutions encourages the use of IMS and Virtual Servers to back up your data and workpaper files. Refer to Document 12990, Records Control Schedule (RCS) 26, Item 47 - Issue Management System (IMS) for the National Archives and Records Administration (NARA) approved records retention and disposition authority to ensure records, in hard copy and electronic format, are appropriately managed, retained and archived.

(1)

(1) Use the SAIN codes on this list for Forms 1120-L only. All the primary corporate SAIN codes from IRM 4.46.6-1 will remain available for these returns.

(1) Use the SAIN codes on this list for Forms 1120-PC only. All the primary corporate SAIN codes from IRM 4.46.6-1 will remain available for these returns.

(1) All required forms and documents that would otherwise be required in a paper case file per this IRM and IRM 4.10.9 Examination of Returns, Workpaper System and Case File Assembly, should be uploaded to IMS. Examiners should ensure that all information critical to the case or that support an adjustment are included in IMS, including lead sheets, supporting workpapers and any other pertinent documents, and uploaded to the correct SAIN.

(2) All uploaded documents should follow a naming convention described in IRM 4.46.6.2, Workpaper Considerations.

(3) Documents required to be uploaded include all administrative documents such as statute extensions, closing agreements, signed RARs, signed NOPAs, etc. Generally, if it’s a signed document, it should be uploaded and retained in IMS. IRM 4.10.9.4, Workpaper System, specifies lead sheets and supporting workpapers should:

• Reflect the evidence gathered, explanations, analyses and conclusions reached.

• Effectively explain the issues addressed during the audit.

• Provide the evidence to reflect the scope and depth of the audit.

• Support the determination of the tax liability.

• Reflect the audit trail, allowing a subsequent reviewer to trace a transaction or event and related information from beginning to end.

(4) Managers must also review the Examiner’s workpapers for accuracy and ensure the uploaded files are not corrupt. Documentation of this review must be included by completing a signed Form 15292, Case Closing Cover Sheet, which is to be completed by the examiner and signed by the examiner, the case manager and CCP and uploaded to IMS.

(5) Cases involving potential Fraud:

(6) After uploading to IMS, the exam team should keep the following paper records for any matter involving potential criminal fraud until the examiner determines that the case has no criminal fraud potential:

1. Records which contain color (such as blue ink, color letterhead).

2. Records in which the taxpayer used white-out or any other alterations or markings that would render the scanned document not identical to the original document.

(7) Keep these paper records with the case file until either:

1. Criminal Investigation accepts the referral and exam transfers the record for inclusion in their investigative file; or

2. Exam Team/Manager/Fraud Enforcement Advisor/Criminal Investigation Division determine that the case has no criminal fraud potential.

(8) When you determine there is no criminal fraud potential, you don’t need to keep these records in the case file. However, you must keep these records per normal record retention requirements in IMS before proper disposal.

(9) Refer to IRM 1.15.3, Records and Information Management, Disposing of Records, for guidance on proper disposal of records/documents that contain SBU data (including PII or tax information).

(1) General Rule: If there is a specific SAIN already identified for a document type or issue, upload in IMS Workpapers under that SAIN.

• *Best Practice- Exam Plans from the Team Coordinator, CAS, International Agent, Engineer and FP should be scanned in one file and uploaded. This makes it very easy to review all of the case exam plans. IMS automatically generates Exam Plan and Risk Analysis under one place on case tree. This does not include the taxpayer’s signature on the exam plan and the manager’s signature on the risk analysis if prepared outside of IMS.

(1) The purpose of this exhibit is to provide guidance to managers, team coordinators, and team members on input requirements for all in-process cases.

(2) All IMS data input is mandatory unless it is identified as optional in the following grid. The amount of data to be input is based upon the requirements for LB&I at all levels.

(3) Mandatory Workpapers: Any electronic data received in response to IDRs and 5701s is required to be maintained (uploaded) into IMS for the unagreed issue(s). If examiners chose to create Word or Excel files outside of IMS they should upload these documents to IMS workpapers for the unagreed issue(s). Please note, under no circumstances are examiners required to create an electronic version of a paper document solely for the benefit of Appeals in an unagreed case. But, if electronic documents are available they should maintain them in the unagreed IMS case.