4.48.1. Overview of Engineering Program

(1) Engineering services are available in several areas of expertise, including staff with advanced degrees, professional designations, and state certifications/licenses. The following is a list of engineering specialists working in the Engineering Program:

• General Engineer (GS-0801)

• Mining Engineer (GS-0880)

• Petroleum Engineer (GS-0881)

• Industrial Engineer (GS-0896)

• Internal Revenue Agent Valuation Specialist (GS-0512)

• Financial Analyst/Intangible Property Appraiser (GS-1160)

• Real Property Appraiser (GS-1171)

• Personal Property Appraiser (GS-1171)

(2) The Engineering Program typically provides expertise to local geographic compliance practice areas; however, engineers with specialized issue training may assist other geographic practice areas. Engineering issues include:

• Depletion

• Depreciation (cost segregation, bonus depreciation)

• Amortization

• Research expenditures

• Casualty loss

• Capital v. expense

• Capital v. repairs

• Capital gains/losses

• Energy efficient commercial building deduction

• Valuation issues (real property, intangibles and business)

• Tax credits (such as research, orphan drug, energy, qualifying advanced energy project, enhanced oil recovery, railroad, etc.)

• Functional analysis related to transfer pricing

• Other technical issues

(1) By law, the Service has the authority to conduct examinations under Title 26, Internal Revenue Code, Subtitle F – Procedure and Administration, Chapter 78, Discovery of Liability and Enforcement of Title, Subchapter A, Examination and Inspection, which includes, but is not limited to, the following IRC sections:

• IRC 7602, Examination of books and witnesses

• IRC 7605, Time and place of examination

(1) The Engineering Program consists of a director of field operations (DFO), Engineering, territory managers, program analysts, team managers and teams. The DFO, Engineering reports to the Eastern Compliance Practice Area director. The engineering teams are located across the United States. See the LB&I organization chart:https://irssource.web.irs.gov/LBI/Documents/LBI_Org_Chart.pdf.

(1) Program Goals: The goal of the Engineering Program is to deliver timely, effectively planned, and properly managed support of examinations of tax issues providing for quality results and minimization of burden to the IRS and to taxpayers.

(2) Program Reports: The Engineering Program collects issue examination and time utilization data documentation and monitors the progress and results of assigned issues through various information management systems.

(3) Program Effectiveness: The effectiveness of the Engineering Program is monitored by issue examination and time utilization information system documentation and reporting, time entry system reporting, and other sources of information. Effectiveness is determined by the Program whereby mission and program objectives are accomplished efficiently, and reliable information is obtained and used for decision making. Statutes and regulations are followed to ensure the Program’s resources are protected from mismanagement and misappropriation of funds.

(4) Annual Review: Annual quality assurance and internal control reviews are conducted through the Federal Managers’ Financial Integrity Act Managers' Assessment (FMFIA) certification process. The FMFIA Managers' Assessment is part of management and internal controls assessment certification required for the Annual Assurance Statement. All managers are required to review the adequacy of controls for their respective program area to identify risks. Management involvement is necessary at every level in certifying the control environment for their program area of responsibility is working as designed. (See IRM 1.4.2, Monitoring and Improving Internal Control)

(1) The following is a list of frequently used acronyms in this program:

(1) The Engineering website is https://irssource.web.irs.gov/LBI/SitePages/ENG.aspx.

(2) Other IRMs in this chapter include:

(1) After receiving the case assignment, the engineer will perform a risk analysis with the referring agent/attorney or issue team (IRM 4.46.3). The engineer will conduct and document the risk analysis regardless of the type of examination or source of referral. The engineer team manager will review and approve the risk analysis. For more information concerning risk analysis, see IRM 4.10.2.7.1.1, Risk Analysis, and IRM 4.46.3.3, Risk Analysis Process.

(2) Any large, unusual, and questionable (LUQ) items identified will depend on the engineer's judgment of the return and the separate items that comprise the return. Some factors to be considered when identifying these items are:

• Taxpayer’s history on the issue

• Trend analysis of current and prior tax years

• Comparative size of the item

• Absolute size of the item

• Inherent character of the item

• Potential impact to current tax (e.g. carryforward research credit)

• Timing or permanent tax issue

• Application of new tax law or regulations

• Relationship to other items

• Whipsaw issues

• Automatic adjustments

• Missing items

(3) Regardless of the type or class of return, the engineer should first review the return in its entirety. This review should include the line items and credits claimed. Balance sheets, elections, schedules, or any other documents attached to the return are included in the review. The review also should include any relevant items from other sources.

(4) As part of the risk analysis, the engineer should compare the potential benefits from examining a return to the resources required to perform the examination. After the potential benefits and resources are considered, the engineer will rank the issues in priority order. Generally, the engineer will examine the issues with higher audit potential before those with lower potential. The engineer team manager may request the engineer to reprioritize based on other factors.

(5) The engineer should review all LUQ items. However, the engineer cannot examine every possible issue. For instance, it is not proper for the engineer to make a detailed analysis, unless the potential adjustments will materially affect the tax liability or will be important from a compliance viewpoint. The engineer is expected to adequately explain both examined items and the large, unusual, or questionable items that are accepted without examination. The case file and workpapers must clearly indicate the scope of the examination for each issue, the depth of the examination, and the reasons for the tax determination reached.

(6) The audit plan should contain a description of the issue(s), anticipated audit steps needed, additional resources needed (such as outside experts, statistical sampling coordinator, overnight travel, etc.), estimated issue completion date, and estimated days needed to complete the examination. The engineer team manager must approve the audit plan prior to submission to the referring agent/attorney or issue team.

(7) The scope of the examination may be expanded or reduced during the examination as facts develop on the issue. If additional time is requested by the engineer, approval by the engineer manager is needed. If the estimated completion date or the statute needs an extension, issue manager and case manager approval is needed. Extending the statute may also require territory manager concurrence.

(8) If a new engineering issue is identified during the examination, a new risk analysis must be completed by the engineer and approved by the engineering team manager. The engineering team manager will coordinate with the case manager to get the issue added in IMS.

(1) The following should be considered during the initial contact/meeting with the taxpayer:

1. Coordinate with the team coordinator to set up an initial engineering meeting with the taxpayer or representative.

2. Discuss potential issues, potential adjustments, and audit steps with the taxpayer.

3. Explain the roles of the engineer team manager and engineering territory manager.

4. Exchange expectations.

5. Discuss timelines.

6. Arrange tours of business operations, interviews or presentations, if needed.

7. Issue initial Information Document Requests (IDRs) and discuss the process and expectations.

8. Communicate openly with the taxpayer throughout the examination with a focus on resolving the issues. Resolution should occur at the earliest point possible in the examination.

(1) Written requests should be in the form of an IDR. The engineer should follow the requirements of the team coordinator or referring agent for preparing and tracking IDRs. The engineer will offer to meet with the taxpayer or taxpayer's representative to discuss the draft IDR before it is formally presented to the taxpayer.

(2) When requesting information, the engineer will follow the LB&I IDR procedures contained in IRM 4.46.4.6, Information Document Request Process:

1. Consider the relevance and reasonableness of the information requested.

2. Establish mutually agreeable response dates for individual items if not established in an examination plan with the taxpayer.

3. Establish priorities.

4. Determine taxpayer’s terminology prior to the written request.

5. State the purpose of the request.

6. Limit the number of items on each IDR.

7. Timely follow-up on overdue or incomplete IDR responses and involve the issue manager if IDR enforcement is required.

8. Timely review and notification of taxpayer regarding adequacy of IDR responses.

9. Follow guidelines set forth in the audit plan

10. All IDRs should be entered in IMS and properly tracked as to draft date, issue date, response date, received date and closed date.

11. All late or incomplete IDR responses must follow the LB&I enforcement process.

(1) The extent of factual development depends on the complexity and compliance risk of the issue. Factual development may include analysis and performance of the following:

• IDR responses and follow-up IDRs

• Taxpayer records

• Tax returns and supporting tax workpapers

• Related returns and entities

• Public documents (such as Form 10K)

• Financial statements

• Books and records (i.e., fixed asset ledger, chart of account, etc.)

• Schedules (i.e., depreciation, depletion, etc.)

• Funding requests for capital projects and major repairs

• Source documents (i.e., leases, rent rolls, contracts, etc.)

• Studies prepared by the taxpayer or their representative

• Interviews of subject matter experts (SMEs)

• Third party contacts

• Site visits/tours

(2) The engineer may tour the taxpayer’s plant, property, laboratory, or other facilities. When conducting site visits, engineers may hold meetings with taxpayer personnel. Engineers are required to document site visits and interviews with taxpayer personnel in their workpapers.

(3) During the examination, engineers may consult with:

• Other team members

• SMEs

• Counsel

• Outside consultants

(4) The engineer should conduct research, using the following sources:

1. Internal Revenue Code and regulations

2. Revenue rulings and revenue procedures

3. Letter rulings, including field service advice, technical advice memoranda, Chief Counsel advice, private letter rulings, etc.

4. Court cases

5. Public records

6. Federal and state filings

7. Internet information

8. Professional papers and industry groups

9. Industry periodicals and articles

10. Bulletin boards

11. Commercial databases

    Note: For a list of subscribed databases see Engineering Reference Material Toolkit on the Engineering website.

(5) Additional actions may include:

1. Involvement of Counsel, if appropriate.

2. Consultation with practice network SMEs.

3. Discussions of concerns and potential adjustments with issue manager.

4. Confirmation of facts and discussions of findings with taxpayer, including issuing an AOF IDR for potentially unagreed issues.

(6) The engineer should analyze the information gathered in an objective manner and accurately apply tax laws to provide tax determinations that are well-supported and documented.

(7) As new facts are developed during the examination, the engineer should re-evaluate the scope and depth of examining the issue and adjust as the facts and circumstances dictate.

(8) Share findings with the taxpayer with the objective of resolving the issue at the earliest point possible.

(1) The issue narrative will be developed according to the guidelines found in IRM 4.46.6. Each proposed issue will be developed and presented to the taxpayer on a Form 5701, Notice of Proposed Adjustment. Every engineering report must be reviewed by the engineer team manager. Every Form 5701 must be approved (or signed) by the issue manager before it is presented to the team coordinator, case manager, or revenue agent. A table of contents and executive summary should be included if appropriate or at the judgment of the engineer team manager. As a rule of thumb, if report is more than ten pages, a table of contents is recommended and if the report is unagreed, an executive summary is recommended. If the report has exhibits, a list of exhibits or attachments will follow the conclusion.

(2) The content will follow this format provided in IRM 4.46.6.9, Explanation of Items:

1. Issue

2. Facts

3. Applicable Law

4. Taxpayer’s Position

5. Argument or Analysis

6. Conclusion

(3) The first section, "Issue", will frame the issue with a brief conclusion of the results of the examination. The issue statement will identify the dollars, the year(s) at issue, the code section and the specific issue being addressed. The context of everything that follows in the narrative on this issue should focus on this commentary. The Issue should clearly and briefly state a question followed by an answer.

(4) The "Facts" section discusses the facts of the issue developed during the examination. State the relevant facts of the issue that establish the proper tax treatment of the issue. In addition, a brief description of the taxpayer’s business may help a reader understand the context of the issue. The purpose of an examination is to correctly apply the law to the facts. Do not include adjustments or analysis (including legal analysis) of the issue in the Facts section. The use of sub-headers and tables or charts is helpful for organizing the facts.

(5) The discussion of "Applicable Law" will contain the commissioner’s position as established by the Internal Revenue Code, treasury regulations, revenue rulings, revenue procedures and relevant court cases. Technical advice memorandums, field service advice, private letter rulings, and other similar publications may not be cited unless the document is specific to the taxpayer and the issue under examination. Specific case citations may be used if the examiner uses the citations to apply the Code or regulations. Lengthy quotations of the Code, regulations, or cited court cases are not helpful.

(6) The purpose of the "Taxpayer’s Position" section is to explain what legal interpretation the taxpayer relied upon to support their position on the issue. If the taxpayer does not provide a clear explanation of their position, this section will include a discussion of the steps taken to obtain the information from the taxpayer. If possible, consider including a direct quote from either a taxpayer’s response to an IDR or from a study prepared for the issue.

(7) The "Argument" or "Analysis" section supports the Commissioner’s position and refutes the taxpayer’s position. The narrative should be persuasive in nature and tie together the facts and law and summarize the applicable law. There should be enough information to tell a story. The narrative will be well organized. The purpose is to explain the disagreement with the taxpayer and provide the specific reasons for the proposed adjustment. One of the purposes of this section is to provide the engineer’s response to the taxpayer’s position. The narrative should be objective and professional. If technical information is necessary, use a plain English explanation of the item in the narrative. Use footnotes to describe or define technical terms. Do not introduce facts that were not previously discussed in the "Facts" section.

(8) The "Conclusion" section briefly summarizes the results of the examination and the reasons for the proposed adjustment.

(9) Write the issue narrative using prescribed standards for grammar, wording, references, quotations, and other style elements. The IRS Style Guide helps IRS writers maintain consistent and uniform standards in communications.

(1) Report the results of appraisals of properties or valuations of interests using professional appraisal or valuation report standards. If the appraiser signs a report using a designated certification (CVA, ASA, MAI, etc.), the report will comply with the requirements of the certifying organization. Otherwise, the report will comply with the appropriate valuation guidelines contained in IRM 4.48.3 through IRM 4.48.6.

(2) Expert reports may be prepared for non-valuation issues as necessary or as requested.

(3) Appeals or Counsel may request that an engineer prepare an expert report in preparation for litigation. As with any other written work product, the engineer team manager will review and approve the expert report prior to submission to the requestor. This step is necessary to ensure the expert report is technically accurate and is consistent with policy and procedures. This report may be presented to the court as an expert witness report. Generally, the expert report must present the facts. It must be free of subjectivity and unfounded opinion. The expert report must not advocate any interpretation of the facts as they may apply to the law or any application of the law. If the engineer is certified, the report should conform to the specifications or requirements of the certifying organization. It is the responsibility of the engineer to provide the best service to the requesting client by ensuring that the expert report complies with the Federal Rules of Evidence, Article VII.