4.24.5. Large Business and International (LB&I) Examination Program Procedures for Excise Employees

(1) Managers, senior management officials, excise examiners, and personnel at CEAC must understand and follow the technical guidance and information processes to ensure examinations of excise returns, excise refunds, and excise claims with LB&I taxpayers are accurately prepared and submitted.

(2) Excise examinations are conducted by excise examiners located in field offices.

(1) While not all inclusive, this table reflects many of the significant statutes affecting excise taxes with LB&I taxpayers.

(1) Overall responsibility for examining corporations, Sub chapter S corporations and partnerships with assets greater than $10 million is assigned to LB&I. These businesses typically employ large numbers of employees, deal with complicated tax law issues, as well as sophisticated accounting principles, and conduct business in an expanding global environment. Excise Tax Policy is responsible for developing additional guidance or reference materials for its specific functional administrative needs as they apply to excise examinations for LB&I taxpayers. Such material must remain consistent with LB&I policies and general procedural requirements.

(2) Director, Examination - Specialty Policy is responsible for Excise Tax Examination policy and procedures.

(3) Director, Examination - Specialty Examination is responsible for operational examination compliance activities.

(4) Chief, Estate & Gift/Excise Tax Exam is responsible for ensuring that approved policies and procedures specific to Excise Tax Examination are communicated to and carried out by excise examiners.

(5) Excise Tax Examination has jurisdiction over all non-wagering excise tax issues related to Indian Tribal Governments (ITGs). Tax Exempt & Government Entities (TE/GE) ITG has jurisdiction for all wagering excise tax issues relating to ITGs. Refer to IRM 4.24.6.2.14, Excise Examinations of Indian Tribal Government Cases, for procedures to follow on ITG cases.

(6) Excise examiners are expected to collaborate and perform their professional responsibilities supporting the LB&I team. To achieve this, excise examiners work with the team members and taxpayer personnel who have knowledge of the issues and can most effectively assist in developing and managing excise tax examinations for LB&I taxpayers. For more detailed guidance, refer to IRM 4.46.1.2, Overview of the LB&I Examination Process.

(1) Program Goals - The program goals provided in this IRM section are designed to increase compliance with excise tax laws by applying them with integrity and fairness, as well as by providing taxpayers top quality post-filing services for excise taxes administered by SB/SE.

(2) Program Reports - Information reporting of program objectives are included on Program Manager Monthly Briefings provided to Director, Examination - Specialty Policy.

(3) Program Effectiveness - FSEQ uses National Quality Review System to measure program effectiveness based on independent case reviews from a sample of examination work. National, area, and territory trend analysis on the quality attributes are used to establish baselines to assess program performance, identify opportunities to improve work processes, analyze causes for failure, assess the feasibility of possible solutions, and measure the success of quality improvement efforts.

(4) Annual Review - Program Manager - Excise Tax Policy is responsible for annually reviewing information in this IRM section to ensure accuracy and promote consistent tax administration.

(1) Terms and their definitions used throughout this IRM section are listed in Exhibit 4.24.5-1.

(2) Acronyms and their definitions used throughout this IRM section are listed in Exhibit 4.24.5-2.

(1) The IRM sections described below are the primary sources of information for excise examiners, excise managers, and personnel at CEAC who process excise examinations with LB&I taxpayers. Together this material forms the operating rules and explains the responsibilities for excise tax audit procedures used in the audit of an LB&I taxpayer.

1. IRM 4.24.6, Technical Guidance and Information Processing for Excise Tax Examination Issues - This IRM section provides the procedures and technical guidance specific to excise returns, excise refunds, and excise claims.

2. IRM 4.24.8, Examination Guidance for Excise Claims for Refund or Abatement - This IRM section provides general guidelines and report writing procedures for excise examiners and other IRS personnel who process claims for refund or credit.

3. IRM 4.24.20, Excise Tax Report Writing Guide - This IRM section provides the procedures for the preparation of excise reports.

4. IRM 4.24.25, Issue Management System (IMS), Notebook and Workpapers - This IRM section provides instructions for the mandatory use of IMS and Notebook, as well as the preparation of workpapers that support accurate excise examination reports.

5. IRM 4.46.1, General Information and Definitions - This IRM section defines the overall LB&I Examination Process (LEP), including roles and responsibilities, collaboration and communication, and the definitions of terms related to the LEP.

6. IRM 4.46.3, Planning the Examination - This IRM section describes the planning phase of the LEP. This section also provides guidance and technical information on international referral criteria and procedures.

7. IRM 4.46.4, Executing the Examination - This IRM section describes the execution phase of the LEP. Specifically, IRM 4.46.4 describes the process to implement audit steps, establishes policies and procedures to gather information, research federal law and issue Notices of Proposed Adjustment, establishes policies and procedures for the application of Economic Substance Doctrine and penalties, establishes procedures for Information Document Request (IDR) enforcement process, provides guidelines for monitoring and managing cases, provides guidelines for monitoring and developing issues, and provides guidelines for issuing an Acknowledgment of Facts (AOF) IDR for potentially unagreed issues.

8. IRM 4.46.5, Resolving the Examination - This IRM section defines the resolution phase within the LEP, including roles and responsibilities, collaboration, and communication.

9. IRM 4.46.6, Workpapers and Reports Resources - This IRM section 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 IRM section also describes the electronic case files required in IMS.

10. IRM 4.46.10, Outside Expert Program - This IRM section provides information for LB&I’s Outside Expert Program. The guidelines and procedures described are designed to ensure proper procurement of outside expert services at the examination and Appeals levels.

(2) Supplemental guidance that contains resources, job aids, and information for excise issues and cases, Form 637, Application for Registration (For Certain Excise Tax Activities), as well as the Fuel Compliance Program are housed at the Excise Tax Knowledge Base Homepage.

(3) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accordance with taxpayer rights. For more detailed guidance, refer to IRC 7803(a)(3) and the Taxpayer Bill of Rights Website.

(4) Third-Party Contacts - The need to contact third parties should be considered early in the examination or as soon as the need arises. IRC 7602(c) provides that IRS personnel may not contact third parties with respect to the determination or collection of tax liability without providing advance notice to the taxpayer. IRS personnel are required to maintain a record of such contacts and provide taxpayers with this record upon request. For more detailed guidance, refer to IRM 4.46.3.4.1, Third Party Contacts.

(1) A Pre-Contact Analysis involves gathering sufficiently detailed information, both external and internal, about the taxpayer and its entire operations. The excise examiner reviews and analyzes this information to plan the examination and more efficiently deploy resources.

(2) The excise examiner will document in the workpapers those actions taken to determine which excise taxes were considered in the examination planning process of the taxpayer or its subsidiaries.

(3) The excise examiner should consider all excise taxes in the pre-planning of each LCC case. Refer to IRM 4.24.5.1.2 for a listing of excise taxes and applicable statutes. Excise taxes that are frequently present in LCC cases include, but are not limited to the following:

1. Ozone Depleting Chemicals and Imported Products - IRC 4681(b)(1) and IRC 4681(b)(2)

2. Premiums paid to Foreign Insurers - IRC 4371

3. Transportation of Persons by Air - IRC 4261

4. Tax on Fuels (gasoline, diesel fuel, kerosene, other fuels) - IRC 4041 and IRC 4081

   Note: Fuel claims allowed under IRC 34 are processed on Form 4136, Credit for Federal Tax Paid on Fuel. Any proposed adjustment(s) will be made by LB&I Income Tax with guidance from the excise examiner.

(4) Sources of pre-contact analysis information may be gathered from, but are not limited to, the following activities:

1. Review information contained in the case historical file from prior excise tax examinations. Information concerning the findings and resolutions of the case may be helpful in expanding or contracting the examination plan based on the facts and circumstances.

2. Request transcripts for all entities related to the taxpayer. From the transcripts, determine the filing status, the amount, and the types of excise taxes filed by each entity, as well as whether statutes are imminent.

3. Internet research may be used to identify domestic and international manufacturing, as well as products and services offered by the parent and its subsidiaries.

4. Inspect the income tax returns of the parent and any related entities to determine whether the taxpayer filed Form 4136. If so, obtain a copy of the form and any attachments. Review the information for any large unusual or questionable (LUQ) fuel credits or the potential for duplication of claims filed for the same type of fuel.

5. Review "Other Deductions and Cost of Goods Sold" reported on the income tax return(s) of the parent and any related entities for insurance expense. The balance sheet for long-term liabilities, which may include global debt obligations, should also be reviewed.

6. Review Form 851, Affiliations Schedule, to identify all affiliated taxpayers with potential excise tax issues and determine the business purpose for each. Request the appropriate IDRS research to determine each related entity’s filing requirements and compliance status. Consider each subsidiary for inclusion in the examination plan. In cases where the subsidiary list is voluminous, use risk analysis procedures to prioritize those entities to include in the examination plan and identify those entities or areas, which must be scheduled for another examination cycle. Refer to IRM 4.46.3.3, Risk Analysis Process, for more information.

Note: If a disregarded entity is listed on Form 851, the IRS disregards this type of entity as separate from its owner; however, a disregarded entity is not treated as a separate entity for purposes of certain excise taxes and employment taxes.

Note: If the taxpayer did not file Form 851, request a comprehensive subsidiary schedule with EINs for all subsidiaries from the LB&I Team Coordinator.

7. Review all filed Form 720 and Form 8849, Claim for Refund of Excise Taxes, for LUQs, as well as for current or emerging issues. If taxpayer is a non-filer, consider all business activities for excise potential. Taxpayer claims on Form 8849 may include a blind credit or an informal attachment. Include these items for inspection during the review. Should a paid claim be selected for examination, follow paid claim procedures found at IRM 4.24.8.13, Paid Claims Audit Information Management System (AIMS) Source Code 31 - Introduction.

8. Each business unit that has or is required to have a separate EIN must file a separate Form 720 and Form 8849.

9. Inspect Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations, to identify ownership of foreign subsidiaries, their locations and business purpose. Information on the Form 5471 is helpful in determining potential imported products subject to excise tax, as well as foreign insurance on the transportation of these items. Form 5471 will also identify foreign insurance entities potentially subject to foreign insurance excise tax on premium transactions.

10. Inspect Form 5472, Information Return of a Foreign-Owned Corporation, to monitor transactions of foreign-owned corporations. This information may aid in determining foreign manufacturers for potential imported products and foreign insurance on shipments. It is an information source for whether the foreign parent is providing insurance to domestic companies. It also helps identify foreign insurance entities for potential foreign insurance excise tax. Review the statement attachments pertaining to various expenses, looking for fuel expenses, heavy highway vehicle operations, air transportation, or any indication of possible excise tax exposure. If there is heavy highway vehicle use, this may lead to questions concerning the filing of Form 2290, Heavy Highway Vehicle Use Tax Return.

11. Review corporate annual reports, 10-Ks and publicly available financial statements for the tax periods under examination, as well as for prior and subsequent tax periods, if available. Pay special attention to the discussions about the company’s operations, litigation, risk factors, and note any changes in the corporate structure including new entities or divisions or sales or disbanded entities or divisions.

12. All Securities and Exchange Commission (SEC) filings are available either on the taxpayer’s website or independently through sources, such as SEC/Electronic Data Gathering, Analysis, and Retrieval (EDGAR). All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR.

13. Review state and local governmental reports because they may aid in determining examination potential. Examples of state and local governmental reports are import documents, state fuel tax reports for fuels sold during the period, and annual state reports filed by insurance companies with State Insurance Commissions. The annual state reports will note premium transactions with foreign reinsurers. In addition to the Office of Surface Mining Reclamation and Enforcement federal reports, many states prepare state coal reports. Reconcile the reported volumes on Form 720 to the federal and state reports.

14. Review the Audit Technique Guides for each of the excise taxes to determine if potential tax issues are applicable to the taxpayer. If so, review the procedures necessary to properly develop the issue. For more information, refer to the Excise Tax Knowledge Base Homepage, Excise Examination shelf, Technical Assistance book, Audit Techniques book.

15. Request and review all attachments (formal and informal) to returns that have been filed to identify any unusual credits or adjustments that are being claimed.

16. Review all filed Forms 8275, Disclosure Statements, and Forms 8275-R, Regulation Disclosure Statements, for disclosure statements that have been attached to the returns.

17. Request Currency and Banking Retrieval System import information to determine if the taxpayer imported petroleum products, trucks, sport fishing items, bows & arrows, tires, ozone depleting chemicals, etc. into the United States. Customs Form 7501, Entry Summary, is filed for entry of all goods into the United States. It includes the importer name, consignee name, entry port,  harmonized tariff number, quantity, and value of goods.

18. Consider a request to the Excise Case Selection - Joint Operations Center (ECS-JOC) to run Excise Summary Terminal Activity Reporting System volume comparison to Form 720 filing for entities that are taxable fuel registrants. To request this type of information, refer to Joint Operations Center Request for Information that is found at Excise Tax Knowledge Base Homepage.

(1) The excise examiner should meet with the other examination team members including:

• Computer Audit Specialist (CAS) - The CAS should be consulted to determine if a high volume of records is needed, a specific type of file is required, or to determine if the excise tax records are machine-sensible and contained in the Retention Agreement. As machine-sensible records are identified, the excise examiner should consult with the CAS to include these records in the new Retention Agreement at the end of the current income tax examination cycle (useful for future excise tax examinations).

• Financial Products Specialist (FPS) - The FPS helps in determining the amount and type of imported products, as well as the existence of any global notes and securities. The FPS should be consulted for information on debt, which was issued in foreign markets. For excise tax, the issue applies to Obligations Not in Registered Form.

• Excise Examiner on the Prior Cycle Examination - The excise examiner assigned to the prior cycle examination of the taxpayer is a valuable source of information about the taxpayer. In addition to discussing the taxpayer and the taxpayer’s operations, information concerning the taxes examined and findings during the prior cycle, the prior cycle excise examiner can help determine aspects of the current cycle examination plan. For example, if an area of tax planned for the current cycle was reviewed in the prior cycle with no adjustment or no unusual items were noted, and there has been no change in the operations of the taxpayer in this area of tax, the scope of the excise tax examination may be limited in respect to this tax. Facts and circumstances of the case need to be considered, as well as managerial approval for any limitations of examination scope.

• Engineer - The Engineer should be consulted on related excise tax issues, such as the water content of coal, various chemical manufacturing flow charts, chemical substance items, and ozone depleting chemical items. Depending on the expertise of the engineer assigned to the LCC examination, a separate excise tax referral to the engineer group for a mineral, chemical or other Specialty Engineer may be required.

• Form 637 Territory Lead Technician (LT) - IMS team website should be checked to determine if the taxpayer or any subsidiary holds a Form 637 registration. If they do, a review of the closed case files should be performed. The excise examiner will coordinate with the Excise Manager and Form 637 Territory LT, if a Form 637 compliance review is needed on the registrant. Copies of any findings of the regular excise examination are forwarded to the Form 637 LT for inclusion in the Form 637 IMS case file.

• Excise Subject Matter Expert (SME) - The SME can provide information concerning current issues pertaining to specific excise taxes, as well as ideas, and help in obtaining and reviewing information during the examination. Should an excise examiner discover an issue during the examination, a SME request is made by completing a Guidance Request Memorandum. Refer to IRM 4.24.6.13, Requesting Excise Subject Matter Expert Assistance, for procedures. The SME can supply support and help in working the issue. For more detailed guidance, refer to the Excise Tax Knowledge Base Homepage, Excise Examination shelf, Technical Assistance book, and the SME web page that is located at: Requesting Subject Matter Experts page.

(2) For more detailed guidance, refer to IRM 4.10.2.7.5.1, Specialist Referral System (SRS) - Online Referrals.

(1) If, after reviewing the available information concerning the taxpayer, it is determined that an excise examination is not warranted, the excise examiner will:

1. Discuss the facts of the case, as well as the recommendation to close the consultation with the excise manager.

2. Upon excise manager concurrence, prepare a memorandum, which discusses the reasons for closing the consultation, and obtain the excise manager’s signature.

3. Forward the original memorandum to the team coordinator and maintain a copy in the group’s historical file and in the IMS MFT B5 case file.

4. Upload all work done in IMS and close the consultation in both ERCS and IMS. All work is performed in IMS, and there is to be no hard copy (paper file) of the consultation case.

5. Close the consultation case using Disposal Code (DC) 00 in IMS. ERCS Status Code should be updated to 90.

(1) In addition to the original issue identified on taxpayer’s claim, the scope of an excise claim examination should include other significant issues identified during the examination.

(2) An excise examiner should consider the taxpayer’s entire business activity and other potential excise tax liabilities to determine if the excise examination should be expanded beyond the claim for refund. For example:

1. If a taxpayer files a claim for a refund of Air Transportation taxes (CRN 326) on Form 8849, the excise examiner should consider expanding the scope of the excise examination to include potential excise tax liabilities under abstract 026.

2. If a taxpayer files a biodiesel mixture credit (CRN 390) on Form 8849, then the excise examiner should consider expanding the scope of the excise examination to include any potential excise liabilities filed on Form 720.

3. If a taxpayer files a kerosene for use in commercial aviation fuel credit (CRN 417 or 355) or kerosene used in aviation for nontaxable use credit (CRN 346 or 369) on Form 8849, then the excise examiner should consider expanding the scope of the excise examination to include any potential excise liabilities filed on Form 720.

(3) Whenever possible, the excise examiner should consult with the excise manager when raising new issues. The excise examiner should document reasons for expanding or not expanding the scope beyond the original claim for refund. Document the substance of the conversation on Form 9984.

(1) The risk analysis aids in developing an excise examination plan and should be performed for each entity and each type of excise tax. Risk analysis information is used to:

• Define the issues with each particular excise tax.

• Develop the audit potential for each excise tax.

• Determine the initial scope of the excise examination for each entity.

• Document reasons to examine or not examine a particular entity/excise tax.

(2) The risk analysis should consider those excise taxes for which the taxpayer may be liable. The analysis includes identifying:

• Potential computation errors.

• Potential incorrect exemptions.

• Tax avoidance schemes.

• Impact on future years.

(3) Excise Tax Examination is not subject to LB&I case materiality thresholds. For this reason, excise examiners should apply their best judgement when determining materiality.

(4) The time allocated for the excise examination should consider:

• Size and types of activities for the entity and its subsidiaries.

• Experience of the excise examiner.

• Potential research needed.

• Time required for general excise examination procedures, such as statute controls, meetings, case closings, etc.

(5) The time allocated to the excise examination may be reduced if the excise examiner is experienced in a specific type of excise tax; however, if this is not the situation, then the time allocated to the excise examination should be increased to allow for research and familiarization with the issues. Excise examination time may also be increased for actions by the SME or other specialists.

(6) The excise examiner and the excise manager will determine the initial time allocated for a case, as well as an expansion or contraction of that time. This is done in collaboration with the team coordinator and team manager.

(7) Once the excise examination plan is finalized, the excise examiner will obtain the excise manager’s approval and forward it to the team coordinator. A copy of the excise examination plan will remain with the case file. If an appointment date for an on-site visit has not been arranged, the excise examiner will collaborate with the team coordinator to schedule that appointment.

(8) Consult with the team coordinator for input on proforma workpapers to use for documenting the risk analysis/excise examination plan. Depending on the type of LB&I examination, excise examiners may use the following forms:

• Form 13744, Risk Analysis Worksheet

• Form 13744-I, Issue Based Risk Analysis and Examination Plan

• Form 13745, Examination Timeline

• Form 4764, LMSB Examination Plan

• Form 4764-A, LB&I Examination Plan, Part III - Summary of Assignments

• Form 4764-B,, LB&I Examination Plan, Part III - Examination Procedures Section

• Form 4764-IC,, LB&I Examination Plan for Industry Case (IC) Audits

  Note: The excise examiner has the flexibility to choose one or more of the preceding forms.

(9) Refer to IRM 4.46.3.9, Examination Plan, for information about preparation of the risk analysis/excise examination plan.

(1) The planning meeting is an IRS meeting for all examiners, specialists, and managers that may also include the taxpayer. The purpose of the meeting is to discuss the taxpayer’s business activities, as well as the planned areas of the examination. The excise examiner should be familiar with the types of excise taxes reported by the taxpayer. Refer to IRM 4.46.3.4, Internal Planning and Internal Planning Discussions, for information about the planning meeting.

(1) The opening conference, which is conducted with the taxpayer present, introduces the examiners and specialists assigned to the case. The excise examiner provides a synopsis of the excise taxes that will be addressed and answers any questions raised by the taxpayer. Refer to IRM 4.46.3.6, Opening Conference/Meeting, for information about the opening conference.

(1) IDRs should be tailored to a specific issue or type of excise tax.

(2) The team coordinator may determine the name of the person to whom the IDR should be issued and the numbering system used for all IDRs issued.

(3) Prior to issuing an IDR, the excise examiner should discuss with the taxpayer and the team coordinator the specific information needed. The taxpayer may be able to explain what type of information is available. Conferring with the team coordinator also ensures that the excise examiner does not ask for readily available information.

(4) The excise examiner should consider the amount of data potentially available with LCC & IC cases and tailor the IDR accordingly. For example, do not request all insurance contracts with the first IDR. Instead, request a summary of all activity and then choose specific contracts in a subsequent IDR.

(5) A mutually agreeable response date must also be established. Refer to IRM 4.46.4.7, Information Document Request Process, for information about IDR procedures.

(1) Periodic examination meetings are arranged by the team coordinator and the taxpayer to discuss open IDRs and provide updates on outstanding issues. Refer to IRM 4.46.3.8, Issue Discussion Meetings, for information about periodic examination meetings.

(1) In support of the LB&I Executive Compensation Strategy, excise examiners should verify up-to-date filing of officers’ and key executives’ returns using IDRS command code IMFOLI when conducting an LB&I stand-alone excise tax examination. Excise examiners should use their judgement to determine if key officer and executive returns should be further inspected. If issues are found, Form 5346, Examination Information Report, will be completed and forwarded per local procedures. Guidance on inspection of officers' returns is found in IRM Exhibit 4.46.3-6, Inspection of Key Officer and Executive Returns. For more detailed guidance, refer to Corporate Executive Compliance.

(1) The excise examiner must issue Form 5701, Notice of Proposed Adjustment (NOPA), along with an explanation on Form 886-A, Explanation of Items, for each proposed issue unless it is an LB&I stand-alone excise examination. The excise examiner must collaborate with the team coordinator for the issuance and numbering of the NOPA. Refer to IRM 4.46.4.13, Notice of Proposed Adjustment (NOPA), for information about Form 5701.

(1) For complex facts and circumstances, a written AOFs may be necessary. Refer to IRM 4.46.4.11, Written Acknowledgment of the Facts (AOF), for information about AOF procedures.

(1) Once the taxpayer responds to the Form 5701, the appropriate excise examination reports are prepared. For more detailed guidance about excise report writing, refer to IRM 4.24.20, Excise Tax Report Writing Guide. If there is a proposed adjustment on Form 4136, the adjustment will be reflected on the Team Coordinator’s examination report. Therefore, a memorandum of adjustments is prepared to notify the Team Coordinator about:

• The amount(s) adjusted.

• The tax period(s) for the adjustment(s).

• An explanation of the adjustment(s).

(1) The Service maintains an ongoing effort to develop, monitor and revise programs designed to assist taxpayers in complying with legal requirements and avoiding penalties. As indicated in Policy Statement P-20-1, Penalties are Used to Enhance Voluntary Compliance, the Service uses penalties to encourage voluntary compliance. For more detailed guidance, refer to IRM 4.24.9, Excise Tax Penalties Guidance, or IRM 4.46.4.12, Penalty Consideration.

(1) A closing memorandum may be requested at the conclusion of the excise examination, which identifies types of excise taxes examined, the entity name, EIN, and tax period(s) examined. A detailed discussion of each type of excise tax examined along with the findings is issued even if the excise examination resulted in a no-change. Refer to IRM 4.46.5.18, Post-Examination Management Critique, for information about a closing memorandum or closing examination critique meeting.