Final Regs Describe Criteria for Scheduling Audits

  [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations that describe the criteria to be utilized by Internal Revenue Service employees in setting a time and place of examination. The general approach is to schedule a time and place that is reasonable under the circumstances. The Service is issuing these regulations pursuant to section 6228(b) of the Technical and Miscellaneous Revenue Act of 1988.

 EFFECTIVE DATE: These regulations are effective April 2, 1993.

 FOR FURTHER INFORMATION CONTACT: Kevin B. Connelly, 202-622-3620 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

 This document contains final regulations amending the Procedure and Administration Regulations (26 CFR part 301) under section 7605 of the Internal Revenue Code (Code). Section 7605(a) of the Code states that the time and place of examination pursuant to the provisions of section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602 shall be such time and place as may be fixed by the Secretary and as are reasonable under the circumstances. Section 6228(b) of Technical and Miscellaneous Revenue Act of 1988 (TAMRA) directs that regulations under section 7605 governing the time and place for examinations be revised.

 The Service published temporary regulations and a notice of proposed rulemaking by cross-reference to the temporary regulations in the Federal Register on April 3, 1990 (55 FR 12344, 12386). A nonsubstantive correction was published on May 30, 1990 (55 FR 21862, 21886). Prior to the issuance of the temporary regulations, the regulations under section 7605 of the Code provided, in general terms, that the time and place for examination are to be fixed by an employee of the Service and are to be reasonable under the circumstances.

 The temporary regulations, and now the final regulations, provide more specific guidance. In keeping with both the spirit of TAMRA and the policy of the Service, it is the goal of these regulations that the Service employee setting the time and place for examination will maximize the convenience of the taxpayer within the constraints of sound and efficient tax administration.

Explanation of Provisions

 The regulations provide general guidance regarding the time and place of examination in paragraph (a). Subsequent paragraphs provide more specific guidance as to the time of examination, the type of examination, the place of examination, taxpayer requests to change the place of examination, and transfers of examinations initiated by the Service. The Service received public comments concerning the temporary regulations from nine parties. Although all of the issues raised by these parties had been considered prior to the publication of the notice of proposed rulemaking, these issues were given further consideration and are discussed below. Several changes have been made to the final regulations in response to these comments. A number of stylistic and clarifying changes also have been made.

GENERAL GUIDANCE. The temporary regulations provide that the time and place of examination is to be determined by an Internal Revenue Service employee, and that in scheduling examinations, employees are to endeavor to be reasonable.

 The temporary regulations provide that standards set forth in the temporary regulations dealing with the reasonableness of time and place of examination do not apply to criminal investigations. In addition, the temporary regulations provide that the regulatory standards would be used as guidelines for international examinations, but that in the case of a conflict between the regulations and the policies and procedures of the Office of the Assistant Commissioner (International), the policies and procedures would apply. However, the basic concept underlying the regulations, a district, has no significance, for example, to an audit in a foreign country. Accordingly, the final regulations generally except international examinations from the regulations. The Service solicits comments as to whether regulations should be promulgated regarding the time and place of examinations that fall under the jurisdiction of the Office of the Assistant Commissioner (International).

 Two commentators objected to the unilateral authority granted to the Service's employee assigned to the case and suggested that an appeals procedure be established for taxpayers who do not agree that the time and place is reasonable. The final regulations do not adopt this suggestion. A taxpayer who believes a Service employee is not properly applying these regulations has the right to appeal to that person's supervisor. Thus, a formal appeals procedure would add a layer of bureaucracy to the examination process while providing little or no benefit to taxpayers.

TIME OF EXAMINATION. The temporary regulations provide that it is reasonable for the Service to schedule an examination during the Service's normal business hours, and that it is reasonable to schedule an examination without regard to seasonal fluctuations in the business of the taxpayer or the taxpayer's representative. The temporary regulations further provide that the Service will try to minimize scheduling problems for taxpayers and their representatives.

 One commentator suggested that the regulations call for examinations to take place during the taxpayer's normal business hours, rather than the Service's. Another commentator suggested that the Service should schedule evening or weekend examinations for taxpayers who find the Service's normal business hours to be disruptive. In addition, two commentators suggested that seasonal fluctuations in the taxpayer's or representative's business should be taken into account. Finally, one commentator suggested the Service consider rescheduling an examination if a taxpayer is unable to attend because of a religious or secular holiday.

 These alternatives were considered in drafting the temporary regulations. In many cases it will be possible for examinations to be scheduled to at least partially accommodate a taxpayer's schedule. However, in other cases it is administratively impracticable for the Service to accommodate a taxpayer's schedule. For example, many Service offices are very small and do not have staff available to conduct examinations at times other than normal business hours. Therefore, since the regulations provide that the Service will attempt to minimize scheduling problems for taxpayers and their representatives, the regulations were not revised. It is expected that the Service normally will accommodate taxpayers in the case of religious or secular holidays.

TYPE OF EXAMINATION. The temporary regulations provide that the Service will determine whether an examination will be an office examination or a field examination based upon the complexity of the return and which form of examination will be more conducive to effective and efficient tax administration. An exception is provided for cases of clear need, such as when the taxpayer's advanced age or infirm physical condition make it unreasonably difficult to travel to a Service office, or when the taxpayer's books, records, and source documents are too cumbersome for the taxpayer to bring to a Service office.

PLACE OF EXAMINATION. The temporary regulations provide that the Service's initial determination of where an examination will take place generally will be based upon the address shown on the tax return selected for examination. The temporary regulations provide that office examinations of individuals (including sole proprietorships) generally are to be conducted at the Service office within the taxpayer's district that is closest to the taxpayer's residence. Because the Service sometimes conducts office examinations of estates, trusts, and other entities, the final regulations also provide that office examinations of entities generally are to be conducted at the Service office closest to where the original books, records and source documents of the entity are maintained. As in the temporary regulations, the final regulations provide for a different office to be used for examinations if the closest Service office does not have an examination group or the personnel needed to conduct the examination.

 Another commentator suggested limits on the time and distance a taxpayer should be required to travel to an alternative office selected by the Service. To accommodate these concerns, the final regulations provide that in appropriate circumstances the Service will take into account the distance a taxpayer would have to travel to a Service office. (Due to different population densities in different geographic areas, it is not practical to limit travel to a specific distance.) Moreover, consistent with current Service practice, this applies not only to alternative offices (as requested by the commentator) but also in determining whether it is reasonable to require a taxpayer to travel to the office closest to the taxpayer's residence. Thus, for example, the Service may establish temporary satellite locations closer to taxpayers' residences rather than require taxpayers to travel a long distance to what would otherwise be the Service office closest to their residences.

 With regard to field examinations, the regulations provide for the examination to generally take place at the location where the original books, records, and source documents pertinent to the examination are maintained. The regulations also provide that if a business is so small that a field examination would essentially require the taxpayer to close the business or would unduly disrupt business operations, the Service generally will agree to conduct an office examination (instead of a field examination) at a Service office within the district where the original books, records, and source documents are maintained.

TAXPAYER REQUESTS TO CHANGE PLACE OF EXAMINATION. The temporary regulations provide that taxpayers may make written requests to the Service to change the place of examination. The Service is to consider requests on a case-by-case basis, taking into account the following factors: the location of the taxpayer's current residence or principal place of business; the location where the taxpayer's books, records, and source documents are maintained; the location where the Service can perform the examination most efficiently; the resources available at the location to which the taxpayer has requested a transfer; and other factors indicating that conducting the examination at a particular location could pose undue inconvenience to the taxpayer. The regulations also provide that the business location of the taxpayer's representative generally will not be considered in determining the place for an examination. In addition, the regulations provide that as a condition to transferring an examination of a taxpayer for which the applicable statute of limitations will expire within thirteen months, the Service may require the taxpayer to extend the limitations period.

 Several commentators asserted that the location of the taxpayer's representative's office should be one of the factors considered by the Service, if not the controlling factor. Several reasons were given for conducting examinations at a taxpayer representative's office, including protecting the taxpayer's right to representation, cost savings to the taxpayer, and comfort, efficiency and convenience for the Service employee.

 Nothing in the regulations precludes an office or field examination from being conducted on the business premises of the taxpayer's representative on the basis of the other factors described in the regulations. Under those factors, the Service is likely to conduct examinations at the office of a taxpayer's representative, for example, if the representative maintains the taxpayer's books, records, and source documents at his or her office, or if there are other reasons why that office is the location where the Service can perform the examination most efficiently. However, if the business location of the taxpayer's representative were a separate factor, the Service might well be required to conduct examinations at distant locations of nonlocal representatives. This could adversely affect the Service's ability to freely examine the taxpayer's books and records, and would be likely to increase the cost of those examinations. It would be unfair for the Service -- and ultimately the general taxpaying public -- to bear those increased costs. Given that qualified local representatives are generally available to taxpayers, it seems unlikely that causing a taxpayer to bear the cost of its choice of nonlocal representation will significantly affect the taxpayer's ability to be properly represented in an examination. Therefore, no change was made to the regulations regarding the consideration of the location of the taxpayer's representative as a separate factor.

 One commentator objected that for purposes of requiring a taxpayer to extend the applicable statute of limitations as a precondition to a transfer, the thirteen month period is too long. The Service's administrative practices require this thirteen month period to be retained. However, to provide additional protection to taxpayers, the regulations have been revised to limit to one year the period for which the Service may require the taxpayer to extend the statute of limitations.

TRANSFERS INITIATED BY THE SERVICE. The temporary regulations make it clear that the Service may initiate a transfer of an examination to further the effectiveness and efficiency of the examination.

Special Analyses

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business

Drafting Information

 The principal author of these regulations is Nancy O. Ryan of Office of the Assistant Chief Counsel (General Litigation), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and the Treasury Department participated in their development.

List of Subjects in 26 CFR part 301

 Administrative practice and procedure, Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Oil pollution, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, Taxes.

Treasury Decision 8469

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

Paragraph 1. The authority citation for part 301 is amended in part by removing the citation for Section 301.7605-1T and adding in its place a new citation for Section 301.7605-1 to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.7605-1 also issued under section 6228(b) of the Technical and Miscellaneous Revenue Act of 1988; * * *

Par. 2. Section 301.7605-1 is amended by:

1. Revising paragraph (a);

2. Redesignating paragraphs (b) and (c) as paragraphs (h) and (i), respectively;

3. Adding paragraphs (b) through (g);

4. Adding paragraph (j);

5. The additions and revisions read as follows:

SECTION 301.7605-1 TIME AND PLACE OF EXAMINATION.

(a) TIME AND PLACE OF EXAMINATION TO BE REASONABLE -- (1) IN GENERAL. The time and place of examination pursuant to the provisions of sections 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602 of the Internal Revenue Code are to be fixed by an officer or employee of the Internal Revenue Service, and officers and employees are to endeavor to schedule a time and place that are reasonable under the circumstances. This section sets forth general criteria for the Service to apply in determining whether a particular time and place for an examination are reasonable under the circumstances. Officers and employees should exercise sound judgment in applying these criteria to the circumstances at hand and should balance convenience of the taxpayer with the requirements of sound and efficient tax administration.

(2) INTERNATIONAL EXAMINATIONS. Except for the provisions of paragraph (b)(2) of this section, this section does not apply to examinations that fall under the jurisdiction of the Office of the Assistant Commissioner (International).

(3) CRIMINAL INVESTIGATIONS. Except for the provisions of paragraph (b)(2) of this section, this section does not apply to criminal investigations.

(b) TIME OF EXAMINATION -- (1) DATE AND TIME OF EXAMINATION. It is reasonable for the Service to schedule the day (or days) for an examination during a normally scheduled workday (or workdays) of the Service, during the Service's normal business hours. It is reasonable for the Service to schedule examinations throughout the year, without regard to seasonal fluctuations in the businesses of particular taxpayers or their representatives. However, the Service will work with taxpayers or their representatives to try to minimize any adverse effects in scheduling the date and time of an examination.

(2) DATE OF APPEARANCE WHEN SUMMONS IS USED. If a summons is issued under authority of section 7602(a)(2) of the Internal Revenue Code, or under the corresponding authority of sections 6420(e)(2), 6421(g)(2), or 6427(j)(2), the date fixed for appearance before an officer or employee of the Service must be no less than 10 days from the date of the summons.

(c) TYPE OF EXAMINATION -- (1) IN GENERAL. The Service will determine whether an examination will be an office examination (i.e., an examination conducted at a Service office) or a field examination (i.e., an examination conducted at the taxpayer's residence or place of business, or some other location that is not a Service office), based upon the complexity of the return and which form of examination will be more conducive to effective and efficient tax administration.

(2) OFFICE EXAMINATION HELD IN LOCATION OTHER THAN SERVICE OFFICE IN CASE OF CLEAR NEED. The Service will grant a request to hold an office examination at a location other than a Service office in a case of clear need, such as when it would be unreasonably difficult for the taxpayer to travel to a Service office because of the taxpayer's advanced age or infirm physical condition, or when the taxpayer's books, records, and source documents are too cumbersome for the taxpayer to bring to a Service office.

(d) PLACE OF EXAMINATION -- (1) IN GENERAL. The Service generally will make an initial determination of the place for an examination, including the Internal Revenue Service district to which an examination will be assigned, based upon the address shown on the return for the period selected for examination. Requests by taxpayers to transfer the place of examination will be resolved on a case-by- case basis, using the criteria set forth in paragraph (e) of this section.

(2) OFFICE EXAMINATIONS -- (i) IN GENERAL. An office examination of an individual or sole proprietorship generally is based on the residence of the individual taxpayer. An office examination of a taxpayer that is an entity generally is based on the location where the taxpayer entity's original books, records, and source documents are maintained. An office examination generally will take place at the closest Service office within the district encompassing the taxpayer's residence or at the closest Service office within the district where the taxpayer entity's books, records, and source documents are maintained. It generally is not reasonable for the Service to require a taxpayer to attend an examination at an office within an assigned district other than the closest Service office.

(ii) EXCEPTION. If the office within the assigned district closest to an individual taxpayer's residence or the location where a taxpayer entity's books, records and source documents are maintained does not have an examination group or the appropriate personnel to conduct the examination, it generally is reasonable for the Service to require the taxpayer to attend an examination at the closest Service office within the assigned district that has an examination group or the appropriate personnel.

(iii) TRAVEL CONSIDERATIONS. In scheduling office examinations, the Service in appropriate circumstances will take into account the distance a taxpayer would have to travel.

(3) FIELD EXAMINATIONS -- (i) IN GENERAL. A field examination will generally take place at the location where the taxpayer's original books, records, and source documents pertinent to the examination are maintained. In the case of a sole proprietorship or taxpayer entity, this will usually be the taxpayer's principal place of business.

(ii) EXCEPTION FOR CERTAIN SMALL BUSINESSES. If an examination is scheduled by the Service at the taxpayer's place of business and the taxpayer represents to the Service in writing that conducting the examination at the place of business would essentially require the business to close or would unduly disrupt business operations, the Service, upon verification, will change the place of examination to a Service office within the district where the taxpayer's books, records, and source documents are maintained.

(iii) SITE VISITATIONS. Regardless of where an examination takes place, the Service may visit the taxpayer's place of business or residence to establish facts that can only be established by direct visit, such as inventory or asset verification. The Service generally will visit for these purposes on a normal workday of the Service during the Service's normal duty hours.

(e) REQUESTS BY TAXPAYERS TO CHANGE PLACE OF EXAMINATION -- (1) IN GENERAL. The Service will consider, on a case-by-case basis, written requests by taxpayers or their representatives to change the place that the Service has set for an examination. In considering these requests, the Service will take into account the following factors --

(i) The location of the taxpayer's current residence;

(ii) The location of the taxpayer's current principal place of business;

(iii) The location at which the taxpayer's books, records, and source documents are maintained;

(iv) The location at which the Service can perform the examination most efficiently;

(v) The Service resources available at the location to which the taxpayer has requested a transfer; and

(vi) Other factors that indicate that conducting the examination at a particular location could pose undue inconvenience to the taxpayer.

(2) CIRCUMSTANCES IN WHICH THE SERVICE NORMALLY WILL PERMIT TRANSFERS. A request by a taxpayer to transfer the place of examination will generally be granted under the following circumstances:

(i) OFFICE EXAMINATION -- (A) If the current residence of the taxpayer, in the case of an individual or sole proprietorship, or the location where the taxpayer's books, records, and source documents are maintained, in the case of a taxpayer entity, is closer to a different Service office in the same district as the office where the examination has been scheduled, the Service normally will agree to transfer the examination to the closer Service office.

(B) If the current residence of a taxpayer, in the case of an individual or sole proprietorship, or the location where a taxpayer entity's books, records, and source documents are maintained, is in a district other than the district where the examination has been scheduled, the Service normally will agree to transfer the examination to the closest Service office in the other district.

(ii) FIELD EXAMINATIONS -- (A) If a taxpayer does not reside at the residence where an examination has been scheduled, the Service will agree to transfer the examination to the taxpayer's current residence.

(B) If, in the case of an individual, a sole proprietorship, or a taxpayer entity, the taxpayer's books, records, and source documents are maintained at a location other than the location where the examination has been scheduled, the Service will agree to transfer the examination to the location where the taxpayer's books, records, and source documents are maintained.

(3) TRANSFER FOR CONVENIENCE OF TAXPAYER'S REPRESENTATIVE. The location of the place of business of a taxpayer's representative will generally not be considered in determining the place for an examination. However, the Service in its sole discretion may determine, based on the factors described in paragraph (e)(1) of this section, to transfer the place of examination to the representative's office.

(4) TRANSFER WITHIN THIRTEEN MONTHS OF EXPIRATION OF LIMITATIONS PERIOD. If any applicable period of limitations on assessment or collection provided in the Internal Revenue Code will expire within thirteen months from the date of a taxpayer's request to transfer the place of an examination, the Service may require, as a condition for an otherwise permissible transfer, that the taxpayer first agree in writing to extend the limitations period for up to one year.

(5) TRANSFER TO OFFICE WITH INSUFFICIENT RESOURCES. The Service is not required to transfer an examination to an office or district that does not have adequate resources to conduct the examination.

(f) SAFETY OF SERVICE OFFICERS AND EMPLOYEES. Notwithstanding any other provision of this regulation, officers and employees of the Service may decline to conduct an examination at a particular location if it appears that the possibility of physical danger may exist at that location. In these circumstances, the Service may transfer an examination to a Service office and take any other steps reasonably necessary to protect its officers and employees.

(g) TRANSFERS INITIATED BY SERVICE. Nothing in this section shall be interpreted as precluding the Service from initiating the transfer of an examination if the transfer would promote the effective and efficient conduct of the examination. Should a taxpayer request that such a transfer not be made, the Service will consider the request according to the principles and criteria set forth in paragraph (e) of this section.

* * * * *

(j) EFFECTIVE DATE. Paragraphs (a) through (g) of this section, inclusive, are effective for examinations scheduled after April 2, 1993.

Par. 3 Section 301.7605-1T is removed.