4.70.14. Resolving the Examination

(1) Disqualification of a plan in any given year causes the plan to be disqualified in that year and in all subsequent years.

1. In general, once a plan is disqualified, it remains non-qualified until the qualification issues is corrected and the plan is re-qualified through a closing agreement.

2. A plan may be disqualified in a year for which the Form 5500/1041 statute has already expired. Although the IRS can’t assess tax in a barred year, the consequences of disqualification continue for all subsequent years and IRS can assess tax in subsequent years for which the statute is still open.

3. The IRS's ability to pursue a qualification issue in any year is not impacted by the Form 1041 statute of limitations. The expiration of the statute of limitations for Form 1041 for any given year doesn’t prevent the IRS from pursuing a qualification issue in that year (see Christy and Swan Profit Sharing Plan v. Commissioner, T.C. Memo 2011-62).

Note: Protect statute of the 1041 tax return when proposing to disqualify a qualified plan until either:
A Form 1041 is secured and TE/GE forwards the case for closure, or,
A referral to the appropriate EFU using F5666 is forwarded. See: IRM 4.70.12.3.7, Statute of Limitations and Statute Control Procedures, for instructions on protecting the statute of limitations.

(2) The tax effect of revocation/non-qualification includes the following:

1. Trust assets’ realized earnings are taxable each year the plan is not qualified (if the assessment of tax is not barred by statute). Trust earnings must be reported on Form 1041, which the trustee must file annually, on a calendar year basis.

2. HCE income tax - if the plan is disqualified for failure to meet IRC 401(a)(26) (participation failure) or IRC 410(b) (coverage failure), each highly compensated employee (HCE) must include in income his/her entire vested accrued benefit (or account balance) not yet included in income per IRC 402(b)(4).

3. Nonforfeitable contributions are taxable - If the plan is disqualified for any reason, plan contributions allocated in a given year to any plan participant (HCE or NHCE) in a defined contribution plan, (in a defined benefit plan the increase in the present value of the accrued benefit) are taxable on the plan participant’s Form 1040 to the extent to the extent they become nonforfeitable in that year per IRC 402(b)(1).

   Reminder: Normally, discrepancy adjustments are limited to only the HCEs. However, you and your group manager may determine that an NHCE discrepancy adjustment is appropriate.

   Note: If a participant is not fully vested, amounts that become vested in a subsequent year will be taxable in the subsequent year to the extent they become vested.

4. Forfeitable contributions are non-deductible - In a defined contribution plan, contributions allocated to participant accounts aren’t deductible on the plan sponsor’s tax return (for example, Form 1120) to the extent they are forfeitable by the participant.

5. Contributions are non-deductible - In a defined benefit plan, in most cases, none of the contributions made are deductible on the plan sponsor’s tax return (for example, Form 1120), because separate accounts are not maintained in a defined benefit plan. If there’s only one participant, the employer can deduct the contribution to the extent the participant includes the contribution into income.

   Note: The employer can deduct the amount of the employer’s contribution in the non-qualified year to the extent that the amount is includible in the employees participating in the plan gross income, only if separate accounts are maintained for each employee where there is more than one employee (IRC 404(a)(5) and 26 CFR 1.404(a)-12).

6. Ineligible rollover distributions - distributions made from the plan are ineligible for rollover to another qualified plan or to an IRA, and therefore, are taxable to the individual on his/her Form 1040 in the year of the distribution per IRC 402(b)(2).

7. Excise tax on ineligible rollovers - Any funds rolled into an IRA from a plan determined to be not qualified under IRC 401(a) are subject to excise tax on excess contributions under IRC 4973.

   Note: IRC 4973 excise tax is due each year until the excess contributions are distributed from the IRA.

8. Rollovers from non-qualified to qualified plan taints the qualified plan - Any funds rolled from a non-qualified plan to a qualified plan can potentially cause the recipient plan to be non-qualified.

9. FICA taxes due - Employer contributions allocated to each participant’s account in a defined contribution plan become subject to FICA taxes.

(3) Compute the tax effect of the revocation/non-qualification for all open years, beginning with the year under examination and going forward and include a copy of the tax calculations in the case file with the RAR when you close the case.

(1) The EPCRS SCP allows a plan sponsor to correct plan errors without contacting the IRS or paying a fee.

(2) Find important resources on SCP on the Retirement Knowledge Management Base site:

1. Rev. Proc. 2021-30

2. EPCRS Self-Correction Program

3. Self-Correction Program Desk Guide

4. Self-Correction Program Checksheet

(3) To be eligible for SCP, the plan sponsor or administrator must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the law.

(4) Plan sponsors may fix certain operational failures and plan document failures through SCP as described in Part IV of Rev. Proc. 2021-30. Plan sponsors satisfy the SCP requirements for an:

1. Operational Failure if the plan sponsor of a qualified plan (an IRC 401(a) plan), a 403(b) Plan, a SEP, or a SIMPLE IRA Plan satisfies the requirements of Rev. Proc. 2021-30 Section 7.02, and either section 8 (for insignificant Operational Failures) or section 9 (for significant Operational Failures).

2. Eligible Plan Document Failure if the plan sponsor of a qualified plan or a 403(b) Plan satisfies the requirements of section 7.03 and section 9.

(5) As soon as you discover operational failures that affects the plan qualification, you must fully develop the facts surrounding the failures before discussing the case with your group manager.

(6) After you develop the facts, review and become familiar with the requirements of SCP. The Self-Correction Program Desk Guide is a great resource for understanding SCP procedures. If you determine that:

1. SCP is appropriate to resolve the failures, before the plan sponsor corrects the operational failures, prepare the Self-Correction Program Checksheet for review and approval by your group manager.

2. The failure is ineligible to be corrected under SCP, contact your group manager to determine whether the failures can be resolved under the Audit CAP procedures.

(7) A key factor in SCP is the method of correction of the failure. Determine whether or not correction of the failure is in accordance with Appendix A or B of Rev. Proc. 2021-30.

(8) Follow these procedures if the plan sponsor uses a correction method in accordance with Rev. Proc. 2021-30 Appendix A or B:

(9) Follow these procedures if the correction method is not in Rev. Proc. 2021-30 Appendix A or Appendix B:

(1) Audit CAP closing agreements are available to:

1. Plans under IRC 401(a), IRC 403(b), SEPs, SARSEPs and SIMPLE IRAs, for correction of all qualification failures examiners find on examination that haven’t been corrected under SCP or VCP.

   Caution: IRC 457 plans are not eligible for correction using an EPCRS Audit CAP closing agreement. A DO 8-3 closing agreement must be used to correct IRC 457 plan failures.

2. Correct egregious failures.

   Note: See Rev. Proc. 2021-30 Part II, Section 4.10.

   Caution: Audit CAP may not be available to correct diversion or misuse of plan assets or abusive transactions. See Rev. Proc. 2021-30 Part II, Sections 4.11 and 4.12 respectively.

(2) Find important resources on Audit CAP on the Retirement Knowledge Management Base site:

1. Rev. Proc. 2021-30

2. Audit CAP Desk Guide

   Note: EP R&A examiners may find the R&A CAP Desk Guide on the Determinations Shared Drive.

3. Audit CAP Checksheet

4. Audit CAP MPA

(3) Examiners: Follow these initial Audit CAP processing procedures:

1. Fully develop the issues before you discuss the facts with your group manager.

2. Prepare the Audit CAP Checksheet listing case information.

3. Spell out correction methods in writing, including any proposing retroactive amendments.

   Note: This may involve directing the plan sponsor to amend the plan retroactively.

4. Determine the Maximum Payment Amount (MPA). See the Audit CAP MPA Worksheet.

(4) Send the completed Audit CAP Checksheet, Audit CAP MPA Worksheet, and any relevant work papers to your group manager.

(5) Group manager: follow these procedures:

1. Rev. Proc. 2021-30 Appendix A & B Failures: Within five business days from receiving the Audit CAP Checksheet, contact the examiner to discuss the issues for the failures, proposed correction methods, and the sanction. Prepare the CAP Sanction Memo (See Exhibit 4 of the Audit CAP Desk Guide) and return it to the examiner (with a copy to the area manager) with the approved Audit CAP Checksheet within five business days of receipt.

2. Rev. Proc. 2021-30 Non-Appendix A & B Failures: Within five business days from receiving the Audit CAP Checksheet, forward the checksheet to the Manager, EP Mandatory Review (EP Exam) or EP R&A Quality Assurance (EP R&A Examiners)

   Note: Mandatory Review will return the checksheet to the group manager within seven business days outlining the proposed correction methods. Return the CAP Sanction Memo and correction methods to the examiner within three business days of when you received it from Mandatory Review (with a copy to the area manager).

   Reminder: The area manager with jurisdiction will resolve any disagreements between Mandatory Review and the group on the recommended sanction and/or the correction method(s).

3. Plan Document Failures: You may approve prototype late or non-amenders and do not have to send them to Mandatory Review. Also, you do not have to send nonamender cases coordinated with or approved by EP Determinations to Mandatory Review.

4. For Operational Failures for not following the terms of the plan document and related corrections made by retroactively following the terms of the plan document, putting the participants in the exact position they would be had no violation occurred, you do not have to send to Mandatory Review.

(6) EP examiner:

1. Follow the procedures in the Audit CAP Desk Guide or R&A CAP Desk Guide (for R&A Examiners).

2. Discuss the qualification failures discovered and the option of resolving the failures with the taxpayer/POA.

   Note: If the taxpayer doesn’t agree on both the corrections and sanction, document the case chronology record and the workpapers with the reason an agreement was not reached and close the case unagreed per IRM 4.70.14.2.4.2.1, EP - Unagreed Form 5500 Examination Procedures.

3. Prepare a draft closing agreement.

   Reminder: Example agreement templates are located on the Retirement Knowledge Management base.

4. EP Exam: Send the draft agreement to your manager.

   Note: The group manager will help prepare the closing agreement.

5. EP R&A: Send the draft agreement to the Area Manager.

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(8) Examiner: When you receive approval from your manager and/or Mandatory Review, send to the taxpayer/POA, the following:

1. Letter 1595

2. One copy of the draft closing agreement

3. Audit CAP Instructions for Execution of Closing Agreement

4. F3244-A ACH Transfer Instructions

(9) If the taxpayer/POA requests changes to the template closing agreement language, get the group manager’s approval.

(10) Secure documentation that the plan sponsor has corrected the qualification issues before you send the final closing agreement to the taxpayer/POA.

(11) Send one copy of the final closing agreement to the taxpayer/POA using Letter 1595 or Letter 1595-B along with execution and payment instructions (if appropriate).

(12) You may receive the signed closing agreement from the taxpayer in hard copy (via mail) or electronic via EEFax, TDC, or secured email.

(13) Tax Examiner: Follow these steps only for electronic payments made through pay.gov.

1. When payments are submitted through pay.gov, use pay.gov/agency to access data/documents needed to process the sanction payment.

2. You’ll receive an email when payments are received with the pay.gov tracking ID number.

3. Make sure that the payment has been validated and give the EP examiner/group manager the deposit ticket number that they must insert on the Form 3210 to the Kansas City Submissions Processing Center in place of a check number.

4. Send the following items to the EP Examiner working the case:
   i. Form 3244-A pay.gov that was completed by the taxpayer
   ii. Detailed record entitled "ACH Transaction Detail"

(14) EP Examiner/group manager: When you receive the executed closing agreement and sanction (in the form of a cashier’s check, certified check made payable to the U.S. Treasury or ACH payment) from the plan sponsor, inspect both for errors.

1. If you discover any errors, return the documents and the monetary sanction to the plan sponsor for correction using Letter 1595-B.

2. If there are no errors with the documents or the sanction payment, scan and EEFax or email the executed closing agreement, the check and completed Letter 1595-D to the area manager for signature.

   Note: The plan years listed on Letter 1595-D are the plan years covered by the closing agreement.

(15) Area manager/designee: Within five business days:

1. Sign the closing agreement and Letter 1595-D.

2. Secure email the signed closing agreement and Letter 1595-D to the EP examiner and group manager.

(16) Group manager/examiner: Process the check within one business day of receiving the signed agreement from the area manager.

1. Follow your group’s procedures for payments and remittances via overnight delivery, including using the log book.

2. Prepare the following package:
   i. Form 3210 with package contents listed
   ii. Cover memorandum
   iii. A fully executed copy of the closing agreement
   iv. Form 5734
   v. Form 3244-A (if a physical check was received) or Form 3244-A pay.gov (if electronic pay)
   vi. Remittance (check or ACH Transaction Detail)

   Note: Examples of the items listed above can be found at Audit CAP Resources.

3. Send the package listed above to the Manual Deposit Unit located at the Kansas City Submissions Processing Center:

(17) Examiner: Within three business days of receiving the fully executed closing agreement from the area manager, send a fully executed copy of the closing agreement to the plan sponsor/POA with Letter 1595-D.

(18) Examiner: Save all documents forms and letters in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention. See IRM 4.70.12.5.2, TE/GE RCCMS Naming Convention.

(19) Examiner: Prepare the examination for closing. Include the following entries on the RCCMS Closing Record:

• General Tab - Disposal Code - Enter 106 – Closing Agreement.

• Details Tab – Closing Agreement Result - Enter the amount of the closing agreement monetary sanction.

  Note: If more than one year is on RCCMS, enter the amount of the sanction on the earliest year and for each of the subsequent years enter $1.

• General Tab - ARDI Code - Enter 1- Fully Paid.

(20) Prepare and mail the applicable closing letter per IRM 4.70.14.4.3.2, Functionally Unique Letters and Procedures.

(21) Close the case as an agreed case per IRM 4.70.14.4, Closing A Case, and its subsections.

(1) TE/GE Directors are delegated the authority "to enter into and approve a written agreement with any person relating to the Internal Revenue tax liability of such person (or of the person or estate for whom he or she acts) for a taxable period or periods ended before the date of agreement and related specific items affecting other taxable periods". (Delegation Order (DO 8-3)).

(2) DO 8-3 closing agreements are used to resolve issues that aren’t permitted through EPCRS.

(3) In most DO 8-3 closing agreements, the taxpayers and the Commissioner formally agree that the plan under examination is not qualified, officially making the proposed revocation or proposed non-qualification an "agreed revocation" or "agreed non-qualification."

1. The taxpayer is legally forgoing their right to an Appeals hearing and their right to petition the Tax Court.

2. When a DO 8-3 closing agreement is fully executed by the taxpayer and the IRS, the case becomes an agreed case in every respect, just like a case resolved under EPCRS.

   Note: In very limited situations, excise tax and/or unrelated business income (UBI) issues may be resolved through a DO 8-3 closing agreement; however, you must obtain pre-approval from the Director, EP Examinations.

(4) Examiners and managers are required to coordinate DO 8-3 closing agreements with Tax Exempt and Government Entities Division Counsel (TE/GEDC), as noted in the steps below.

(5) EP Examiner: Before making a submission for a DO 8-3 agreement, make sure that you took proper actions to protect the applicable statute of limitations for all relevant tax returns, such as Forms 1040, 1120, 1065 and 5330.

(6) When doing a DO 8-3 closing agreement, follow EPCRS closing agreement procedures in IRM 4.70.14.2.1.2.2, EP - EPCRS and Closing Agreements, with these exceptions:

1. The Director, EP Examinations (for EP R&A: Director, Employee Plans Rulings and Agreements) signs the closing agreement for the IRS.

2. You must get approval from your group manager, area manager, and the Director, EP Examinations (for EP R&A: Director, Employee Plans Rulings and Agreements) before you propose a DO 8-3 agreement.

   Note: You may discuss the D.O. 8-3 program as a potential option, but the specific terms and proposed resolution need to be cleared through management before offering it to the taxpayer.

3. Return a fully executed closing agreement with Letter 1595-D.

4. When closing agreements are fully executed, use closing Letter 1745 or Letter 1745-A, as applicable.

(7) Contact the group manager to discuss resolving the case under DO 8-3.

(8) Group Manager: Within five business days of the discussion above, contact your area manager to discuss the facts of the case. If the area manager disagrees with the processing of the case under a DO 8-3 closing agreement, inform the examiner that it is not an option.

(9) EP Examiner: When the area manager decides that a DO 8-3 closing agreement is proper:

1. Calculate all applicable taxes, penalties and interest (including Form 4549-E).

2. Draft the DO 8-3 Transmittal Checksheet. See exhibit 20 of the Audit CAP Desk Guide.

3. Prepare an Executive Summary (Includes: background, facts, issues, resolution and must address penalties (especially if not assessing).

   Note: Includes the case background, facts, issues, specific legal citations, proposed resolution. It must address the assessment/non-assessment of penalties. Do not include exhibits or attachments. The executive summary itself should have all the information needed to support the DO 8-3 request.

4. Prepare the draft DO 8-3 closing agreement. Include all responsible parties in the draft. Summarize the errors and proposed resolution. Name the violated statutory and regulatory requirements, but do not recite them. Ensure all parties to the agreement are also signatories to the agreement.

   Note: Ask your group manager for sample DO 8-3 closing agreements or find an example on the EPCRS Knowledge Management base site.

5. Secure email theForm 4549-E, DO 8-3 transmittal check sheet, executive summary, and draft DO 8-3 closing agreement to your group manager for approval. Do not include any other documents.

(10) Group manager: For DO 8-3 closing agreements for IRC 457(b) plans, contact the FSL/ET Program Manager as early as possible in the process for comment if there is an open, concurrent examination of the sponsor or if any proposed changes will affect employment taxes.

(11) Group manager: If you agree with resolving the case through a DO 8-3 closing agreement, within five business days of receiving the documents listed in item 9 from the examiner:

1. Review the DO 8-3 agreement and executive summary.

2. Sign the transmittal.

3. Secure email the four documents to your area manager with your recommendation.

(12) Area manager: If you agree with the recommendation, review the draft DO 8-3 and executive summary. Forward the draft DO 8-3 closing agreement, Form 4549-E, and executive summary to the assigned contact points in TE/GE Division Counsel by sending the request to *CC TEGEDC Employee Plans Counsel Assistance.

(13) TEGEDC review: TEGEDC reviews the DO 8-3 closing agreement and executive summary for legal sufficiency and substantial legal error. TEGE DC does not review the entire case. The TEGEDC review is limited to the issues that the DO 8-3 agreement proposes to resolve. TE/GE DC may approve the closing agreement package or return it to the examiner and group manager for further development.

(14) Area manager: Upon receipt of TEGEDC’s approval of the agreement and executive summary, sign the transmittal and send it, along with the executive summary, Form 4549-E, and draft DO 8-3 closing agreement, to the functional assignment coordinator (FAC) and the Director, EP Examinations. Do not include more than the four just-listed documents unless otherwise directed by the FAC.

(15) Director, EP Examinations or the FAC (for EP R&A: Director, EP R&A): either sign and return the transmittal check sheet accepting the draft closing agreement or respond to the area manager with any questions or concerns.

(16) All EP Examinations employees: Use these letters in the DO 8-3 process:

1. Letter 1595 - to mail draft closing agreements to the taxpayer/representative for review and signature.

2. Letter 1595-B - to return a closing agreement to the taxpayer/representative because of improper payment or improper execution.

3. Letter 1595-D - to mail fully executed DO 8-3 closing agreements back to the taxpayer/representative.

4. Letter 1745 - as the closing letter for the 5500 examination when a DO 8-3 closing agreement is secured and the IRS determined the plan is disqualified from inception and remains disqualified.

   Note: Use Letter 1745-A when you’re coordinating the examination with SB/SE or LB&I.

(17) You may accept the signed closing agreements from the taxpayer by mail, fax, or secure mail. See Letter 1595 for details.

(18) Group manager: When the taxpayer/POA returns the signed closing agreement and verification of the sanction payment (Form 3244-A) to the examiner:

1. Notify the FAC and the Director, EP Examinations that you’re sending a closing agreement for countersignature.

2. Send via secure email the closing agreement, the cover memorandum, verification of the sanction payment and the transmittal check sheet to the Director, EP Examinations and the FAC.

(19) The Director, EP Examinations or FAC (for EP R&A: Director, EP R&A): return the fully executed closing agreement within five business days to the group manager and examiner via secure email.

(20) Group manager/examiner: Process the check within one business day of receiving the signed agreement from the Director, EP Examinations or the FAC.

1. Follow your group’s procedures for payments and remittances via overnight delivery, including using the log book.

2. Prepare and forward a closing agreement package per IRM 4.70.14.2.1.2.2.2(16), EP – EPCRS Closing Agreements.

   Note: See Employee Plans Examination Exhibits, Contact Information for the physical address and email address to use.

(21) Group manager/examiner: Once you receive the signed closing agreement, email a copy of the agreement, the remittance (ACH transaction detail) and Form 3244-A to: *cfo.cfm.pay.gov.closing.agreements.racs.anmf@irs.gov

(22) EP examiner: mail the following to the taxpayer/representative:

1. Letter 1595-D along with a copy of the fully executed closing agreement.

2. Closing Letter 1745 or Letter 1745-A, as applicable, if the DO 8-3 agreement is secured, we determined the plan is disqualified from inception and it remains disqualified.

(1) Taxpayers should pay the sanction electronically in lieu of a check on pay.gov.

1. Answer the question – “Was the closing agreement the result of an employee plans audit or determination letter application as "yes".

2. Input the social security number or business EIN as listed in the closing agreement.

3. Click the "Continue to the Form" button to get to the F3244-A.

4. Complete the highlighted portions of the on-line Form 3244-A.

   Note: Give the taxpayer the Form 3244-A pay.gov instructions.

5. Submit the payment.

(2) The taxpayer receives a tracking number when they complete the submission process. They must record the tracking number and provide this number to the EP examiner with the executed closing agreement.

(3) EP examiner: include the tracking number in lieu of the check when you send the closing agreement package to your group manager per IRM 4.70.14.2.1.2.2.2, EP – EPCRS Closing Agreements.

(1) Forms 5330 are filed to report excise tax under Chapter 43. The most common taxes are:

1. Failure to meet minimum funding standards (IRC 4971)

2. Nondeductible contributions to qualified employer plans (IRC 4972)

3. Excess contributions to IRC 403(b)(7)(A) custodial accounts (IRC 4973(a)(3))

4. Prohibited transactions (IRC 4975)

5. Certain dispositions by ESOPs (IRC 4978)

6. Certain excess contributions (IRC 4979)

7. Certain prohibited allocation of employer stock in an ESOP that failed to meet the requirements of IRC 409(p) (IRC 4979A)

8. Certain reversions of plan assets (IRC 4980)

(2) Forms 990-T are filed to report UBI generated by trust assets.

(1) The due date for filing a Form 5330 depends on the particular Chapter 43 excise tax involved. The table below indicates the due date by IRC section.

(2) The final regulations under 26 CFR 54.6011-3 require that any employer or individual required to file an excise tax return on Form 5330 must file the excise tax return electronically using the IRS Modernized e-File (MeF) System through an IRS Authorized e-filing Provider for taxable years ending on or after December 31, 2023, if the filer is required to file at least 10 returns of any type with the IRS during the calendar year that the Form 5330 is due. See T.D. 9972 for more information.

(3) Form 990-T is due on the 15th day of the fourth month following the close of the taxable year of the trust.

(1) See IRM 4.70.13, Executing the Examination, for exam techniques and guidelines that apply to all types of cases. A few basics include -

1. Securing and reviewing source documents substantiating the applicability of or additions to income, excise or UBI tax.

2. Use Form 5773-A, or its equivalent, and workpapers to document the exam findings regarding potential tax and penalty issues.

3. The procedures found in IRM 4.70.11.2.2.1, RCCMS, apply to Form 5330 and 990-T exams.

4. The procedures found in IRM 4.70.11.3.1, Case Suspense for Federally Declared Disaster, Significant Fire, or Terrorist or Military Action, and the subsections thereunder, apply to Form 5330 and 990-T exams.

(2) Provide complete and accurate tax and penalty calculations to the taxpayer and POA. See IRM 4.70.13.12, Penalties Consideration for guidance.

(3) For a return not yet due, the examiner must:

1. Notify the taxpayer of the requirements to file and pay the applicable tax when due.

   Note: If the taxpayer files the return not yet due with the examiner, see IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

2. If the taxpayer does not file the return, prepare Form 5666 for a future year referral and send it to Classification. Form 5666 can be sent by email or by regular mail. See Employee Plan Examination Exhibits for Classification’s contact information.

3. If the taxpayer voluntarily files the return, verify its accuracy and mail it to the campus (Ogden Service Campus or Kansas City Service Campus). See Employee Plan Examination Exhibits, for the mailing address and stop number.

   Note: If a discrepancy is found, notify your manager and discuss whether an examination of the return is warranted. The discussion and outcome must be documented in the CCR.

(4) For claims filed on a Form 5330, or 990-T; follow the procedures in IRM 4.70.17, Claims and Abatements.

(1) In most instances, Form 5330, and 990-T exams are initiated based on information discovered during a related Form 5500 exam.

(2) Once the examiner and group manager agree that the information discovered warrants a Form 5330, or 990-T to be filed, the applicable taxpayer must be notified in writing of that decision.

1. Use Letter 1477 to inform the taxpayer that a Form 5330, or 990-T is due to be filed. If you have sufficient information, attach Form 886-A (RAR) with the pertinent facts, law, government position, tax calculations and IRC 6651(a) penalty calculations (if applicable). If additional information is needed, attach an IDR.

   Note: When the issue involves a prohibited transaction that has not been corrected, the RAR should include an explanation of the assertion of IRC 4975(b) tax.

   Similarly, when the issue involves a funding deficiency that has not been corrected, the RAR should include an explanation of the assertion of IRC 4971(b) tax.

   Exception: In some situations, the assessment of 4971(b) may be waived.

   See IRM 4.70.14.2.1.2.4.7, EP - Waiver of the 100% 4971(b) Excise Tax, for eligibility and procedures to waive the additional tax under IRC 4971(b).

2. Request the taxpayer file Forms 5330, or 990-T for all years due and open by statute.

   Note: If the return is not yet due, refer to IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

3. If additional tax is proposed on a previously filed Form 5330, or 990-T, and the manager has agreed to put the return under exam, use Letter 6031 to inform the taxpayer an examination has commenced. Use Form 870-EP to secure agreement of the additional tax. See Employee Plan Examination Exhibits for an example of a completed Form 870-EP.

   Note: For purposes of UBI in a trust, Form 870-EP is signed by a trustee of the trust.

4. If the taxable period extends into a taxable year for which a Form 5330 is not yet due, notify the taxpayer of the requirements to file the return and pay the tax for such taxable year. See IRM 4.70.13.9.5.3.1, Securing Forms 5330 and 990-T Not Yet Due.

5. Include a penalty calculation sheet when penalties are being imposed. The failure to file and failure to pay penalties under IRC 6651(a) are applicable to delinquent Forms 5330 and 990-T.

   Reminder: IRC 6651(a) penalties are the only penalties applicable to a delinquently filed Form 5330.

   Note: See IRM 4.70.13.12.3, Common Penalties, for more information on IRC 6651(a) penalties.

6. Solicit tax payment with applicable IRC 6651(a) penalties to stop interest from accruing further.

7. Send Pub 1, Your Rights as a Taxpayer, with the letter.

8. Send a copy of the letter to any authorized POA.

(3) The examiner must call the taxpayer (and POA) to discuss the issue(s) raised and, if applicable, opening of the exam. The call should take place -

1. No earlier than fourteen calendar days or ten business days (whichever is longer) after the letter referenced in item a. is mailed, and

2. No later than fifteen business days after the letter is mailed.

   Note: The taxpayer must be given ample time to receive the letter before the examiner calls.

(1) You no longer need to establish delinquent Forms 5330, Forms 5329, or Forms 990-T that you accept as filed on RCCMS and AIMS. You will still need to process the accepted as filed delinquent returns to the service center, but you will not need to establish these returns for examination on RCCMS and AIMS. In instances where you don’t need to examine a secured return as you can accept it as filed, then after processing it to the Service Center, you only need to save a copy of the accepted return, the acknowledged Form 3210 received from the service center, or comparable record of confirmed receipt document (i.e., EEFax confirmation) in RCCMS.

(2) Record the receipt of the return by completing the electronic RCCMS 3198-A Special Handling checksheet in the RCCMS compliance activity of the primary examination return.

(3) Properly note in your workpapers that you accepted the returns as filed. Use the RCCMS 3198-A Special Handling checksheet to record the number and types of return secured in RCCMS to let CP&C capture the fact that you secured a return and accepted it without having to establish a related examination or create a Form 5329 discrepancy adjustment.

(4) Delinquent Forms 5330, or 990-T received from the taxpayer that you are proposing adjustments to (not accepted as filed) are processed in accordance with IRM 4.70.13.9.5.2, EP Processing Delinquent Forms 5330 and 990-T.

(5) Forms 5330, or 990-T received from the taxpayer for years not yet due are processed in accordance with IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

(6) In the instance a Form 5330 or 990-T was put under exam, Agreed Forms 5330 are processed in accordance with IRM 4.70.14.2.1.2.4, EP - Processing Agreed Forms 5330 and 990-T.

(7) Establish a Substitute for Return (SFR) as soon as the examiner and manager believe the taxpayer will not voluntarily file the return(s) due. Form 5330 and 990-T Substitute for Returns can now be established electronically using RCCMS. It is no longer necessary to mail the paper substitute for return package to the Ogden Service Center. The SFR return(s) will be established using RCCMS after entity module verification. Follow the procedures in IRM 4.70.13.9.8.7, EP Processing Form 5330 or 990-T Substitute for Return.

(8) When examining a Form 5330, or 990-T return previously filed by the taxpayer (such as a claim or when the tax reported is erroneous), conduct IDRS research.

(1) A delinquent Form 5330, or 990-T is considered "agreed" when:

1. Form 5330, or 990-T is filed,

2. The amount of tax reported is correct (or Taxpayer agrees to your adjustment), and

3. Correction is made (if the issue is minimum funding or a prohibited transaction).

   Note: For purposes of IRC 4971, a case will also be processed as an agreed case for a specific year if the taxpayer files Form 5330 and reports the correct amount of IRC 4971(a) and IRC 4971(b) tax, even if the funding deficiency has not been corrected.

(2) Follow the procedures in IRM 4.70.14.2.4.2.3, EP - Unagreed Forms 5330 and 990-T, if tax is due but the taxpayer refuses to:

1. File Form 5330, or 990-T for any tax required to be reported on these forms.

2. File Forms 5330 and correct the funding deficiency in the case of IRC 4971 tax.

   Exception: See IRM 4.70.14.2.1.2.4.7, EP - Waiver of the 100% 4971(b) Excise Tax, for eligibility and procedures to waive the additional tax under IRC 4971(b).

3. File Form 5330 and correct the prohibited transaction in the case of IRC 4975 tax.

(3) Entity Module Verification– The examiner is responsible for securing an INOLES print to determine if an entity module is present.

1. When obtaining an INOLES print for an SSN, use a file source of "V" after the SSN (for example, INOLESXXX-XX-XXXXV).

2. When obtaining an INOLES print for an EIN, do not use a file source (for example, INOLESXX-XXXXXXX).

3. If INOLES produces a screen with at least the taxpayer’s name and address, an entity module has been established on the BMF or IMF.

4. If INOLES produces a blank screen, the BMF or IMF entity has not been established.

   Note: This happens frequently with an SSN.

(4) If there is no entity module on the BMF, prepare Form 4442 as soon as possible to establish a module.

1. EEfax or email the completed Form 4442 to the EP AIMS Coordinator. See Employee Plans Examination Exhibits for contact information and IRM 4.70.13.9.5.2.2, EP Preparation of Form 4442, for Form 4442 instructions.

2. The TE/GE Closing Group will notify the examiner by EEFax or email when the Form 4442 is processed.

(5) Once a delinquent return is received from the taxpayer, process it in accordance with IRM 4.70.13.9.5.2, EP Processing Delinquent Forms 5330 and 990-T.

1. You do not need to establish delinquent Forms 5330, Forms 5329, or Forms 990-T that you accept as filed on RCCMS and AIMS. You will still need to process the accepted as filed delinquent returns to the service center as outlined in IRM 4.70.13.9.5.2, EP Processing Delinquent Forms 5330 and 990-T for Forms 5330, but you will not need to establish these returns for examination on RCCMS and AIMS.

2. In instances where you don’t need to examine a secured return because it is accepted as filed, then after processing it to the Service Center, save a copy of the accepted return, the acknowledged Form 3210 received from the service center, or comparable record of confirmed receipt document (i.e., EEFax confirmation) in RCCMS.

3. Record the receipt of the return by completing the electronic RCCMS 3198-A Special Handling checksheet in the RCCMS compliance activity of the primary examination return.

4. Also, properly note in your workpapers that you accepted the returns as filed. Use the RCCMS 3198-A Special Handling checksheet to record the number and types of return secured in RCCMS to let CP&C capture the fact that you secured a return and accepted it without having to establish a related examination or create a Form 5329 discrepancy adjustment.

(6) Periodically request a BMFOLT or IMFOLT print to confirm that the return has been processed and posted.

(7) The manager will email the approved Form 5500, 5330 and 990-T Request Form, (the Form) to Classification at tege-cpc-classification@irs.gov. Classification will establish the Form 5330 or 990-T on RCCMS and AIMS upon receipt of the Form.

(8) Process Forms 5330, or 990-T received from the taxpayer for years not yet due in accordance with IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

(9) To close agreed delinquent secured from the taxpayer, follow IRM 4.70.14.2.1.2.4.8, EP - Closing Agreed Form 5330 and 990-T Exams.

(1) On a case-by-case basis and when circumstances warrant, all or part of the excise tax under 4971(b) (the "b" tax), may be waived by a delegated official.

(2) After all relevant information and documentation is considered, the group manager can request approval from the appropriate official to waive all or part of the "b" tax. The group manager will use the IRC 4971(b) Tax Waiver Approval Memo for this purpose. See Employee Plans Examination Exhibits for the IRC 4971(b) Tax Waiver Approval Memo.

(3) The delegated official is either the EP Examination Area Manager or the Director, EP Examinations and is determined by the amount of the unpaid minimum required contribution as follows:

• For amounts equal to or less than $5 million, the delegated official is the EP Examination Area Manager.

• For amounts greater than $5 million but less than $50 million, the delegated official is the Director, EP Examinations.

(4) When IRC 497(b) tax is waived in this manner, document the CCR and include the signed IRC 4971(b) Tax Waiver Approval Memo in your exam workpapers.

(1) Forms 5330 exams are considered agreed when:

1. Form 5330, or 990-T is filed,

2. The amount of tax reported is correct (or Taxpayer agrees to your adjustment), and

3. Correction is made (if the issue is minimum funding or a prohibited transaction).

   Note: For purposes of IRC 4971, a case will also be processed as an agreed case for a specific year if the taxpayer files Form 5330 and reports the correct amount of IRC 4971(a) and IRC 4971(b) tax, even if the funding deficiency has not been corrected.

   Note: Follow the procedures in IRM 4.70.17, Claims and Abatements, when working a claim.

(2) Prepare Form 5773-A and workpapers to document exam procedures and findings and save them in the RCCMS Office Documents folder.

(3) Prepare a closing letter that covers all Form 5330 years examined.

1. Use:

Form

Closing Letter

5330 or 990-T

Letter 6049 when the exam results in no change to the tax reported on a filed return. Note: Letter 6049 is the normal closing letter used to close a delinquent Form 5330 or 990-T picked up in conjunction with a Form 5500 exam and is to be mailed from the group . Letter 2086 when the exam results in no change to the tax reported on the filed Form 5330, but additional restorative correction is made. Letter 2087 when a signed Form 870-EP is secured reflecting an agreed upon change to the tax previously reflected on a filed return. The letter can also be used if a delinquent return is secured and you have additional comments that you want to convey to the taxpayer.

2. All closing letters will be mailed out by the exam group.

3. Scan and save a copy of the closing letter in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention.

(4) Use the following disposal codes:

(5) Close the agreed Form 5330, or 990-T exam case file(s) and any related Form 5500 series returns to the TE/GE Closing Group in Brooklyn when the RCCMS files are received from Classification and the return has fully posted on AIMS.

(6) You no longer need to establish delinquent Forms 5330, Forms 5329, or Forms 990-T that you accept as filed on RCCMS and AIMS. You will still need to process the accepted as filed delinquent returns to the service center, but you will not need to establish these returns for examination on RCCMS and AIMS.

(7) In instances where you don’t need to examine a secured return as you can accept it as filed, then after processing it to the Service Center, you only need to save a copy of the accepted return, the acknowledged Form 3210 received from the service center, or comparable record of confirmed receipt document (i.e., EEFax confirmation) in RCCMS.

(8) Record the receipt of the return by completing the electronic RCCMS 3198-A Special Handling checksheet in the RCCMS compliance activity of the primary examination return. Use the RCCMS 3198-A Special Handling checksheet to record the number and types of return secured in RCCMS to let CP&C capture the fact that you secured a return and accepted it without having to establish a related examination or create a Form 5329 discrepancy adjustment.

(9) For cases which are put under exam, prepare the RCCMS tabs in accordance with IRM 4.70.14.2.1.2.4.9, EP - Preparation of RCCMS Tabs for Agreed Form 5330 and 990-T Exams.

(10) As applicable, the following documents must be scanned and saved into the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention:

• Form 10329

• Form 872

• Form 870-EP

• Copy of the return mailed to the campus

• A copy of the check for payment of tax, penalties or interest

• Form 2848 or Form 8821

• All correspondence received from the taxpayer or POA

• Any other paper documents necessary to document the examination trail

(11) Save all copies of workpapers, forms and letters that you prepare, in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention.

(12) The closing letter will be mailed out by the group manager (or designee).

(13) Close the case on RCCMS with the "Update AIMS" box checked. The case will be updated to status 51 by the group manager (or designee) when it is closed from the group.

(14) Close all agreed Forms 5330, or 990-T on RCCMS and AIMS to the TE/GE Closing Group in Brooklyn.

(1) Validate cases for closure in the RCCMS closing record using the table below.

(2) Examples of reference numbers are:

(1) Except for prohibited transactions, the statute of limitations (SOL) for assessment of taxes expires three years from the later of the due date of the return, or the date the return is filed (See IRC 6501(a)).

1. Generally, for any tax other than IRC 4975 excise tax and UBIT, there will not be a SOL date when a return is not filed.

2. A return is deemed filed on its due date if filed on or before its due date.

(2) Forms 5330 filed for IRC 4975 excise tax:

1. The three-year statute of limitations for assessment of taxes begins on the later of:
   a. The date the related Form 5500 series return is filed, or
   b. The date due, if the prohibited transaction is sufficiently disclosed (See IRC 6501(l)(1)).

   Note: The statute of limitations for prohibited transactions is extended to six years if the prohibited transaction is not adequately disclosed on the related Form 5500.

   Note: See Employee Plans Examination Exhibits for a matrix to help compute the statutes under IRC 4975.

2. Involving a discrete act (one-time occurrence, such as a sale), even though the taxes are imposed annually, there is only one period of limitations applicable to all the tax attributable to the prohibited transaction. Therefore, the filed or due date to be used in determining the statute of limitations date is limited to that of the initial Form 5500 return filed for the period in which the discrete act occurred.

3. For a prohibited transaction that is considered a continuing transaction, such as a loan or lease, the situation is different.
   a. In addition to the original transaction, a new transaction is deemed to occur on the first day of each subsequent taxable year of the disqualified person.
   b. The filing of the Form 5500 return for the year in which the prohibited transaction first occurred starts the running of the statute of limitations for purposes of the tax on the actual transaction occurring in that plan year.
   c. The filing of the Form 5500 return for each subsequent plan year starts the running of the statutes for transactions deemed to reoccur in subsequent years.

(3) Forms 990-T reporting UBIT:

1. The three-year statute of limitations for assessment of taxes begins:
   1. If the trust files a Form 990-T, the statute of limitations begins to run on its filing date.
   2. If the Form 990-T is not filed, the statute of limitations starts to run based upon the Form 5500 return if:
   i. The plan administrator files the Form 5500 series return, and
   ii. The Form 5500 discloses sufficient information to reveal the existence of UBI.

2. If the trust reported UBI on the Form 5500 series return, and the amount of omitted gross income from unrelated business activity is greater than 25% of the reported gross income from unrelated business activity, the statute of limitations period is six years from the date the Form 5500 series return was filed. See IRC 6501(e).

   Note: Before you pursue a six-year statute, secure the approval of your manager and TEGEDC.

3. If the Form 990-T is not filed, and the criteria in item (a)(2) above are not met, the statute of limitations does not begin running.

4. If the trust files Form 990-T and the amount of omitted gross income from unrelated business activity is greater than 25% of the reported gross income from unrelated business activity, the statute of limitations period is six years from the date the Form 990-T return was filed.

   Note: Before you pursue a six-year statute, secure the approval of your manager and TEGEDC.

5. See IRM 4.70.12.3.8.9, Securing Consents for Form 990-T, for guidance on completing Form 872-H, Consent to Extend the Time to Assess Tax on a Trust, to extend the statute of limitations for Form 990-T.

   Note: Form 872-H can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent to extend the time to assess tax.

(4) In cases where the taxpayer omitted more than 25% of the excise tax due (other than prohibited transactions and UBIT), the statutory period to assess tax is six years from the later of:

1. The date the return is filed, or

2. Deemed filed.

   Note: See IRC 6501(e)(3).

(5) Consult TEGEDC before pursuing a six-year statute of limitations. Document discussions and responses with Counsel in the CCR.

(6) Make sure the statute of limitations reflected in the RCCMS Compliance Activity, General tab (1 of 2), is completed and is correct. BMF and IMF will automatically calculate a statute of limitations date for a Forms established on AIMS. However, the calculated date cannot be relied upon to reflect the normal statute date for prohibited transactions or SFRs established for all other taxes.
1. Presently, statute of limitation dates for all Forms are calculated on BMF and IMF as three years from the later of: The date the Form is filed, or the date due.
2. Forms 5330 reporting IRC 4975 excise tax:
1. BMF incorrectly calculates the statute of limitations date for prohibited transactions since there is no linkage to the Form 5500 series return statute date.

(7) If AIMS and/or RCCMS reflects an incorrect statute date, notify your manager and update the statute of limitations through RCCMS with the "Update AIMS" box checked.

(8) When the statute date is less than or equal to 270 days, complete the RCCMS Statute Validation Process:

1. Check the "Statute Valid" check box in the RCCMS Compliance Activity, General tab (1 of 2).

2. Select "Actions", "Request Statute Validation", complete the "Comment" box and submit the request for your manager’s approval.

(9) Follow the statute control procedures discussed in IRM 4.70.12.3.8, EP Statute Control Procedures.

(1) Sometimes Forms 5330, or 990-T are established on AIMS and RCCMS in error (for example, the taxpayer provides additional information which shows that tax is not due.)

(2) If a Form 5330, or 990-T is established in error on AIMS:

1. To delete the incorrect AIMS account, prepare Form 10904, Request for Record Deletion from AIMS, as follows:

Field:	Entry:
Name of Taxpayer:	Input the plan name.
Name Control:	Input the four-digit name control.
Taxpayer Identification Number:	Input the EIN for the record being deleted.
Plan Num.:	Input the plan number for the record being deleted.
Tax Period:	Input the plan year for the record being deleted.
Disposal Code:	Select disposal code "33". Note: If the return has not posted (there is no TC 150 posting), make sure the box next to AM424D is checked.
Other:	Select "Error Account"; Select "AIMS".
Reason for Request:	Input a brief explanation of the requested correction.

Note: See Employee Plans Examination Exhibits for an example of a completed Form 10904.

2. Secure group manager and Area Manager approval on an electronic Form 10904.

3. Post the approved Form 10904 in the RCCMS Office Documents folder.

4. Secure AMDISA, INOLES and BMFOLT/IMFOLT prints for the account being deleted and save them in the RCCMS Office Documents folder.

5. The group manager (or designee) will update the case to status 51 on AIMS and RCCMS when it is closed.

6. Close the examination on RCCMS (disposal code 901) and AIMS (disposal code 33) to the TE/GE Closing Group, requesting status "56" (Form 10904).

7. The EP AIMS Coordinator will delete the account when the RCCMS record is received.

(1) For cases involving uncorrected minimum funding deficiencies or uncorrected prohibited transactions, the examiner will prepare a DOL referral package and forward it at the earliest possible time in the audit cycle.

(2) The examiner will provide the group manager with the following items:

1. Completed Form 6212-B.

   Note: Include a concise summary of the issue(s) referred on Line 12 "Remarks" of Form 6212-B.

2. Any relevant information pertaining to the issue referred, including a copy of the RAR if there is an unagreed IRC 4971, IRC 4975 issue or a proposed revocation.

   Note: None of the Form 6212-B attachments are sent to DOL-EBSA, unless Classification receives a written request from DOL-EBSA for the information.

   Classification will release relevant information as required by IRC 6103(l)(2).

(3) The group manager or designee will send approved referrals to the FAC/EP DOL Coordinator. See Employe Plans Examination Exhibits, for addresses.

(4) See IRM 4.70.11.15.6, Referrals to Other Agencies.

(1) Solicit the trust EIN from the plan sponsor.

(2) If the plan sponsor provides a trust EIN, secure a BMFOLI print to make sure the EIN is not being utilized to file returns other than trust returns (e.g., Form 990-T or Form 1041).

(3) If the trust does not have an EIN and the plan sponsor will not obtain one, obtain one by faxing Form 4442 to the EO Entity Unit at Ogden Campus. The e-fax number is 855-306-0953. See Employe Plans Examination Exhibits for an example of a completed Form 4442.

(4) Obtaining a new EIN for the trust in a manner described in item (3) above will automatically establish an entity module.

(1) During the exam of a Form 5330 or Form 5500 series return involving an accumulated funding deficiency or prohibited transaction, the employer or disqualified person may request or currently have pending:

1. A waiver of the funding deficiency before the IRS.

2. An administrative exemption from the prohibited transaction requirements before DOL.

(2) These types of cases may be subject to mandatory technical advice procedures and require coordination with the Employee Benefits, Exempt Organizations, and Employment Taxes Office of Associate Chief Counsel (EEE Counsel) in Washington, D.C.

(3) Waiver of the liquidity shortfall (as defined inIRC 430(j)(4)) excise tax under IRC 4971(f)(4) may need to be coordinated with EP Rulings and Agreements in Washington, DC.

(4) EEE Counsel considers requests for waivers of the minimum funding standards under the following circumstances:

1. For a defined contribution plan accompanied by a request for a determination letter on the effect of an amendment necessary to satisfy section 3 of Rev. Rul. 78–223, IRB 1978–1 C.B. 125 (the case is subject to mandatory technical advice).

2. For a defined benefit plan, or a request for a waiver ruling for a defined contribution plan which is not accompanied by a request for a determination letter on the effect of an amendment necessary to satisfy section 3 of Rev. Rul. 78–223. Forward the waiver request to EP Technical in Washington, D.C. for consideration by an actuary.

(5) As described in IRM 4.70.14.2.1.2.4.7, EP – Waiver of the 100% 4971(b) Excise Tax, the IRS may waive part or all of the tax under IRC 4971(b).

(6) Under ERISA section 3003, the IRS may grant waivers of taxes under IRC 4975.

(7) All cases involving a taxpayer’s request for the abatement or waiver of taxes under IRC 4975 are subject to mandatory technical advice. See IRM 4.70.13.6.7.2, Technical Advice Memorandum (TAM) Procedures, for instructions on processing Technical Advice cases.

(8) Cases involving prohibited transaction exemption requests with DOL are coordinated with DOL by the FAC/EP DOL Coordinator. This includes, for example, cases in which either the conditions of the exemption were not met or the facts were materially misrepresented in obtaining the exemption.

(9) If DOL grants an exemption on a prohibited transaction, the IRS may not impose taxes under IRC 4975 on that transaction. If the IRS assessed tax before DOL granted the exemption, the tax must be abated.

(10) Complete the exam to the extent possible and place the case in informal suspense in the group until such waiver or exemption request is approved or denied. See IRM 4.70.11.3, Case Suspense, regarding suspense cases.

(11) See the following revenue procedures for additional guidance: Rev. Proc. 2023-1, Rev. Proc. 2023-2, Rev. Proc. 2023-3, Rev. Proc. 2023-4, Rev. Proc. 2000-17, Rev. Proc. 2004-15, and Rev. Proc. 81-44. The first four listed are revised annually, usually in January.

(1) Close each examined return under EO jurisdiction using one of the examination results listed below:

• No change.

• Change due to correction of operations.

• Revocation of tax-exempt status (IRC 501(c) or (d) organizations only) (IRC 7428 case.)

• Reclassification of foundation status (IRC 501(c)(3) and IRC 4947(a)(1) organizations only) (IRC 7428 case).

• Disqualification of tax-exempt status - Status 40 organizations (IRC 7428 case).

• Disqualification of tax-exempt status - Status 36 organizations (IRC 7428 case).

• Disqualification of tax-exempt status - IRC 501(c)(12) or IRC 501(c)(15) (IRC 7428 case).

• Closing agreement.

• Termination of tax-exempt status.

• Change in tax.

• Allowance of a claim in full.

• Allowance of a claim in full (surveyed claim).

• Disallowance of a claim in full or in part.

• Disallowance of a claim in full or in part, plus additional tax or penalty.

• Withdrawal of claim

• Allowance of an abatement request in full

• Disallowance of an abatement request in full or in part • Disallowance of an abatement request in full or in part, plus additional tax or penalty

• Withdrawal of abatement request

  Note: Each change in tax or status must be either agreed or unagreed (except auto-revocations and terminations).

  Unagreed changes are further classified as either "with" or "without" the taxpayer's protest for appeal.

(2) No Change – An examination resulting in no change to exempt status, foundation status, or tax liability.

(3) Change due to Correction of Operations – Examinations of primary returns, where the taxpayer took corrective actions during the examination to correct operational or other compliance issues that did not result in a change to exempt status.

(4) Change Cases – Cases in which the examination results in a change (or adjustment) in the organization's status or tax liability. Change cases are agreed, excepted agreed, unagreed with protest, or unagreed without protest. Tax changes can be partially agreed.

(5) Agreed Change or Agreed Disallowance – The taxpayer signs a waiver and acceptance form agreeing to the changes in tax or status (or to any disallowance of a claim or abatement). An allowance of a claim or abatement in full as requested by the taxpayer without additional adjustments and without a signed waiver form is deemed to be an agreed change. In the case of two-tier Chapter 42 excise taxes (IRC 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, or 4958), a case remains unagreed until the act, or failure to act, giving rise to the tax is fully corrected.

(6) Excepted Agreed Change – The taxpayer agrees to proposed changes in tax or status by signing a waiver, but the examination results are subject to review, such as changes to exempt status and foundation status. A signed waiver:

• Waives the statutory restriction upon assessment and collection of the deficiency of tax.

• Waives the ability to contest the assessment in the United States Tax Court (unless an additional deficiency is proposed).

• Stops the running of interest 30 days from the date of receipt if the tax isn't assessed within the 30-day period.

• Doesn’t preclude assertion of a further deficiency.

• Doesn’t preclude a request for further consideration of the issues by the taxpayer.

  Note: The return is "excepted" from application of the case reopening criteria.

  See IRM 4.10.8.5, Excepted Agreed Cases.

  Example: You propose a revocation on a Form 990 examination of an IRC 501(c)(7) organization, and the revocation is agreed. All revocations are subject to Mandatory Review because Mandatory Review must concur with the revocation before finalizing it. The Form 990 examination is excepted-agreed.

  Example: You propose a revocation on a Form 990 examination that is unagreed, but the organization agreed to additional UBIT by signing Form 4549 in the event Mandatory Review or Appeals sustains the exemption. Because you cannot finalize the agreed UBIT issue due to a pending revocation issue, treat the Form 990-T examination as excepted-agreed. Therefore, the Form 990-T case file will ride with the Form 990 file to Mandatory Review.

  You must address an open Form 990-T examination as an alternative issue in a revocation RAR, whether the alternative Form 990-T issue was agreed or unagreed. See also IRM 4.70.14.2.1.3.3.22, EO - Revocations and Disqualifications - Alternative Positions.

(7) Partially Agreed Change – At least one change issue is agreed and at least one change issue is unagreed, with respect to a specific type of tax (income, employment, or excise). Secure a signed waiver for the agreed issue for immediate processing by Mandatory Review, while the organization possibly contests the remaining issues in Appeals or in court. Partially agreed cases also include agreed changes in exempt status or foundation status, but the resulting tax isn't agreed. In the case of two-tier Chapter 42 excise taxes (IRC 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, or 4958), a case remains unagreed until the act or failure to act giving rise to the tax is fully corrected.

1. Partially agreed cases are considered excepted agreed cases. You must first process the agreed issue in an agreed report. Upon confirmation from the EO closing unit that the agreed issue is posted, proceed with the unagreed portion of the report using normal unagreed closing procedures.

2. The Agreed Report: An agreed report will be processed as a partial closure of AIMS. A partial closure will allow an adjustment to be made to the tax module without closing the AIMS database. In the case of an income tax, prepare the agreed report as follows:
   i. Prepare Form 4549-A using only the agreed adjustments.
   ii. The additional tax computed will be reflected on Form 870.
   iii. Indicate "Agreed Issues" on the top of the Form 4549-A.
   iv. Make a copy of the Form 4549-A and the signed Form 870 for the case file as a workpaper documenting the calculation of the tax.

3. Prepare and Process the Agreed Report:
   i. On the 3198-A Checksheet in RCCMS, note "Partial Assessment Requested" and in the Other Instructions section, "Return via fax when completed."
   ii. On the closing record in RCCMS, check partial assessment.
   iii. The report created in the previous paragraph.
   iv. Copy of the front page of the tax return with a BMFOLT transcript.

4. Upon receiving proof of processing by fax from the EO closing unit, prepare the unagreed report.

5. The Unagreed Report: The unagreed report will process toward a full closure of AIMS. In the case of an income tax, prepare the unagreed report and closing documents as follows:
   i. Prepare a second Form 4549-A showing both agreed and unagreed adjustments.
   ii. However, show the agreed adjustments by placing an asterisk (*) in front of the letter in Line 1 of Form 4549-A for each agreed adjustment.
   iii. The "Total Tax Per Return or as Previously Adjusted" on Line 3 of Form 4549-A will include the tax on the agreed adjustments.
   iv. The "Total Adjustments", Line 2 of Form 4549-A, will not include the agreed adjustment amounts.
   v. The "Other Information" section of Form 4549-A will contain the following statement, "The adjustments with an asterisk have been agreed. The taxpayer is in agreement with the adjustment(s) indicated as agreed, and the applicable agreed deficiency is being assessed and is included in Total Tax as Previously Adjusted".
   vi. Issue the second report to the taxpayer with the appropriate 30-day letter (Letter 3614 for UBIT and other EO income taxes).

6. In the case of excise and ETs, use the appropriate report forms corresponding to Form 4549-A and 870 used for income taxes. See report forms in Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases.

7. Final disposition of the case will require:
   i. A second RCCMS closing record will follow normal closing procedures.
   ii. A second 3198-A Special Handling checksheet in RCCMS for the case file indicating "Partial Agreement Case - Agreed Tax Previously Assessed".

(8) Unagreed Change or Unagreed Disallowance – A change in tax or status (or a disallowance of a claim or abatement request) without a taxpayer’s signed waiver and acceptance form. In the case of two-tier Chapter 42 excise taxes (IRC 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, or 4958), a case remains unagreed until the act, or failure to act, giving rise to the tax is fully corrected. Unagreed cases are either with or without protest. A taxpayer’s failure to respond to a 30-day letter defaults to unagreed without protest treatment. Unagreed without protest cases are subject to Mandatory Review, except:

• Non-worker classification ET adjustments.

• Gaming excise tax adjustments.

• Disallowance of abatement requests.

(1) Follow the instruction in IRM 4.70.14.4, Closing a Case, to close a no change case.

(1) Proposed adjustments apply to adjustments to status or tax. For purposes of this manual, proposed adjustments include disallowance of claims and abatements.

(2) You’re required to prepare a RAR for proposed adjustments. You can prepare an initial examination report, see IRM 4.70.14.2.1.3.1.32, EO – Initial Examination Reports, or a formal examination report. Initial examination reports don’t apply to declaratory judgment cases.

(3) The transmittal letter for the RAR solicits agreement to the proposal. For formal examination reports, this letter is a 30-day letter, which also informs an organization of their right to appeal.

(4) There are many variations of reports depending on the type of tax or status change. See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements and Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for the many variations.

(5) You must distinguish an examination report from a final closing letter that officially closes the examination. Final closing letters are issued by GMs.

1. A final closing letter will follow after the taxpayer replies or fails to reply to the 30-day letter.

2. In some cases the 30-day letter becomes a final closing letter if the organization fails to reply to the 30-day letter. This is the case for miscellaneous excise taxes, and non-worker classification ETs.

3. You will generally issue a final closing letter if the organization agrees with your adjustment (not applicable for declaratory judgment cases).

4. Mandatory Review or Appeals will issue a final closing letter for unagreed adjustment and declaratory judgment cases. These final closing letters generally take the form of a 90-day letter or statutory notice of claim disallowance if they agree with your position.

(6) Fully develop the issues of your examination prior to preparing any RAR. Address your issues in the RAR in the order of significance.

(7) The RAR should contain all the information necessary to ensure a clear understanding of the issues, the applicable law, and conclusions. The RAR, unlike workpapers, is a legally binding document and when executed, serves as the basis for tax law enforcement action. Prepare the RAR accurately and completely.

(8) Reports are accompanied with a waiver and acceptance form, also known as agreement forms. These forms require a taxpayer's signature if they agree with the proposed adjustment:

(1) Issue Form 870 Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, in a formal examination report to secure agreement on income taxes. Use Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed) with it.

(2) Use Form 870-E, Waiver of Restriction on Assessment and Collection of Deficiency and Acceptance of Overassessment, to secure agreement for excise taxes under IRC Chapter 42.

(3) When needing more than one line to reflect proposed recommendations for a year (such as multiple penalties) or the examination covers more than four years, you may have more than one Form 870 or 870-E in the case file.

(1) Issue Form 6018, Consent to Proposed Action, for any change in the exemption or other status of the organization. See Exhibit 4.70.14-6, EO Status 36 Case: Form 6018 Instructions.

1. Status changes include those subject to declaratory judgment (Lines 1 - 9), and those not subject to declaratory judgment on Line 10 of the form.

2. For declaratory judgment cases, execution of the form serves only to memorialize the intent of the taxpayer at the time of signing the form.

3. Memorialization of the intent to agree isn't legally binding and doesn't waive the organization’s declaratory judgment rights.

(2) Write up all proposed status changes on cases subject to declaratory judgment similar to an unagreed case, even if the organization executed a Form 6018.

(3) Declaratory judgment cases include:

• Revocation of IRC 501(c) organizations that received a ruling or determination letter granting tax-exempt status.

• Disqualification of a Status 36 organization for specified tax years.

• Disqualification of an IRC 501(c)(12) organization that failed its 85 percent member income test for specified tax years.

• Disqualification of an IRC 501(c)(15) organization that failed its gross receipts test for specified tax years.

• Reclassification of PF status under IRC 509(a).

• Modification of operating foundation status.

• Reclassification as a non-operating foundation under IRC 4942(j)(3).

• Reclassification of public charity status.

• Reclassification as a type of IRC 509(a)(3) status.

  Reminder: You can’t reclassify a PF to public charity status. See IRC 507.

(4) In cases where there are two or more declaratory judgment issues, such as revocation of IRC 501(c)(3) status and reclassification to a PF, use one Form 6018.

(5) Under no circumstances will the IRS personnel alter a waiver after securing a signature from the organization, nor will the IRS request the organization to execute a blank waiver.

(6) Don’t solicit Form 6018 unless fully advising an organization of its appeal rights. You must include a positive statement to this effect in the workpapers.

(1) Form 4549, Income Tax Examination Changes, is used for cases that result in:

1. Agreed income tax changes. Use the form for initial examination reports only, when you reasonably expect agreement.

2. Adjustments to income or deduction items don't affect or warrant a change in tax liability or refundable credits on the return examined. In such cases, notify the taxpayer of, or secure his agreement to any adjustments, which affect subsequent year returns of the taxpayer.

   Example: An examination results in an adjustment to a net operating loss (NOL) that doesn't cause an additional tax liability, but may affect subsequent year returns. The disposal code for closing the examination would be 01 (RCCMS - 210).

(2) If there are multiple issues or multiple years and some of them are agreed, encourage the taxpayer to enter into an agreement for the agreed issues or years by signing Form 4549.

(3) Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed), is used:

1. To explain unagreed and excepted agreed income tax change cases.

2. In a formal report and when unsure of the taxpayer's agreement.

3. With Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment.

(4) Form 4549 and 4549-A are designed to cover three years. Regardless of the number of years examined, prepare one set of explanations. When reasons for an adjustment vary from year to year, detail them in one explanation. If examining more than three years, show additional years on Form 4549-B, Income Tax Examination Changes.

(5) When multiple year examinations result in tax changes for some years and no tax change for other years, use Form 4549 or 4549-A (as applicable) for all years examined. Use a separate column for each no-change year and enter "None" on lines 2, 14, and 16.

(1) Use Form 4621, Exempt Organizations - Report of Examination (Proposed Tax Changes), as a summary report for these cases:

1. Excise tax changes under IRC Chapter 41 and 42.

2. IRC 507(c) termination tax.

3. IRC 170(f)(10)(F).

4. IRC 664(c)(2).

(2) Prepare this summary report in agreed and unagreed cases.

(3) Use Form 4621-A, Exempt Organizations - Report of Examination (Proposed Status Changes), as the summary report for:

• Revocations.

• Reclassification of foundation status.

• Reclassification of operating foundation status.

• Disqualifications of Status 36 organizations for specified tax years.

• Disqualifications of IRC 501(c)(12) or IRC 501(c)(15) organizations for specified tax years.

  Caution: Modifications are unavailable for PFs seeking to convert to publicly supported organizations. PFs must terminate their status under IRC 507.

  Note: In cases where there are two or more status issues, such as revocation of a IRC 501(c)(3) and reclassification to a PF, use one Form 4621-A. The RAR can address both issues.

(4) Prepare this summary report in agreed and unagreed cases.

(1) Use Form 4883, Exempt Organizations Excise Tax Audit Changes (Chapter 41, Chapter 42 and Section IRC 170(f)(10)(F) Excise Taxes), to set forth adjustments and calculate the tax for EO excise tax changes:

(2) Use Form 4883 for excise taxes imposed on:

• PF or other exempt organization.

• Disqualified persons.

• Self-dealers.

• Organization managers.

• Foundation managers.

(3) Don’t use Form 4883 for gaming excise taxes. See IRM 4.24.6.2.3, Excise Examinations with Wagering Issues, for report writing procedures in gaming excise tax cases.

(1) You may offer an installment agreement to a taxpayer who is unable to pay the full amount owed if he/she is eligible. See eligibility criteria at IRM 4.20.4.2(6).

(2) Send Form 9465, Installment Agreement Request, to the taxpayer with the 30-day letter package or after you have received the taxpayer's reply to the 30-day letter.

(3) If the statute is imminent, secure Form 872 to ensure sufficient time to process the case.

(4) If a taxpayer submits a request for an installment agreement:

1. Stamp the receipt date on the request.

2. Complete Form 3177, Notice of Action for Entry on Master File, with TC 971 AC 043, Pending Installment Agreements.

3. Fax or secure email Form 3177 to the FAST within 24 hours of the taxpayer's request.

4. Forward the request to the appropriate Campus Center address identified in the Form 9465 instructions.

(5) Keep a copy of all forms in the work papers for information purposes.

(6) Close the discrepancy adjustment case. The Campus collection function will contact the taxpayer about "setting up" an installment agreement.

(7) Input the appropriate ARDI code for the installment agreement on the RCCMS closing record. Check the installment agreement box on the 3198-A Checksheet in RCCMS in the Mandatory Review section.

(8) See IRM 4.20.4, Examination Collectibility, Installment Agreements, for more information on installment agreements.

(9) If the taxpayer has filed bankruptcy, take the appropriate steps to protect the government’s interest. See IRM 4.27, Bankruptcy, for further guidance.

(1) A partially agreed case contains more than one issue of which at least one issue is agreed and at least one issue is unagreed. Partially agreed cases are considered excepted agreed cases.

1. You must first process the agreed issue in an agreed report.

2. Upon confirmation from the EO closing unit that the agreed issue is posted, proceed with the unagreed portion of the report using normal unagreed closing procedures.

(2) The Agreed Report: An agreed report will be processed as a partial closure of AIMS. A partial closure will allow an adjustment to be made to the tax module without closing the AIMS database. In the case of an income tax, prepare the agreed report as follows:

1. Prepare Form 4549-A using only the agreed adjustments.

2. The additional tax computed will be reflected on Form 870.

3. Indicate "Agreed Issues" on the top of the Form 4549-A.

4. Make a copy of the Form 4549-A and the signed Form 870 for the case file as a workpaper documenting the calculation of the tax.

(3) Prepare and Process the Agreed Report Package: Send the agreed report to the EO closing unit as a package that consists of the following:

• On the 3198-A Speical Handling checksheet in RCCMS, annotated "Partial Assessment Requested" and in the Other Instructions section, "Return via fax when completed."

• RCCMS, create a closing record for the partial agreed assessment. On the General Tab, ensure to check the box indicating this is a “Partial” agreement closing record.

• The report created in the previous paragraph.

• Copy of the front page of the tax return with a BMFOLT transcript.

(4) Upon receiving proof of processing by fax from the EO closing unit, prepare the unagreed report.

(5) The Unagreed Report: The unagreed report will process toward a full closure of AIMS. In the case of an income tax, prepare the unagreed report and closing documents as follows:

1. Prepare a second Form 4549-A showing both agreed and unagreed adjustments.

2. However, show the agreed adjustments by placing an asterisk (*) in front of the letter in Line 1 of Form 4549-A for each agreed adjustment.

3. The "Total Tax Per Return or as Previously Adjusted" on Line 3 of Form 4549-A will include the tax on the agreed adjustments.

4. The "Total Adjustments," Line 2 of Form 4549-A, will not include the agreed adjustment amounts.

5. The "Other Information" section of Form 4549-A will contain the following statement, "The adjustments with an asterisk have been agreed. The taxpayer is in agreement with the adjustment(s) indicated as agreed, and the applicable agreed deficiency is being assessed and is included in Total Tax as Previously Adjusted."

6. Issue the second report to the taxpayer with the appropriate 30-day letter (Letter 3614 for UBIT and other EO income taxes).

(6) In the case of excise and ETs, use the appropriate report forms corresponding to Form 4549-A and 870 used for income taxes. See report forms in Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases.

(1) Examinations can result in several types of adjustments, including but not limited to:

• Revocations (declaratory judgment case).

• Disqualifications (declaratory judgment case)

• Reclassifications of Foundation Status (declaratory judgment case).

• Modifications of operating foundation status (declaratory judgment case).

• Terminations.

• Change in income taxes - UBIT or political organization income tax under IRC 527(b).

• Change in income taxes - discrepancy adjustments.

• Change in income taxes - converted returns.

• Change in proxy taxes.

• Change in Chapter 41 or 42 excise taxes.

• Change in gaming taxes.

• Change in ETs.

(2) See IRM 4.70.14.2.4.1, EP & EO Declaratory Judgment Cases and the Administrative Record.

(3) See IRM 4.70.15, Discrepancy Adjustments, for discrepancy adjustments.

(4) See IRM 4.70.14.2.1.3.3, EO - Conversion of Returns.

(1) Proposed revocations are a change in status. Propose a revocation when the organization doesn't meet the requirements for the tax-exempt status granted to it by ruling or determination letter.

(2) Use the following letters and forms for proposed revocations:

(3) If an organization fails to qualify for tax-exempt status, send the 30-day proposed revocation letter and RAR to the organization. Hold the case for up to 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply or If the taxpayer fails to reply to a formal examination report and:

(4) For IRC 501(c)(3) revocations only, follow the instructions for IRC 6104(c) notification of certain states in IRM 4.70.14.4.11.8.2, IRC 6104(c) Disclosures: Proposed and Final Revocations.

(5) A revocation is agreed only if the organization signs Form 6018. A signed Form 6018 for a revocation isn’t legally binding and only serves to memorialize the agreement.

• A signed Form 6018 doesn’t waive the organization’s right to seek declaratory judgment.

• You’re still required to close the case to Mandatory Review even if Form 6018 is signed.

• Mandatory Review is still required to issue a 90-day FADL if Form 6018 is signed.

(6) If the organization doesn’t agree with the proposed revocation, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

(7) Because revocations are declaratory judgment cases:

• You must have an administrative record file and if the case is unagreed, a complete administrative record index.

• You will not issue a final closing letter on the primary return examination.

(8) Refer to the following references:

• See also Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for the various report forms and letters.

• Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process. See IRM 4.70.14.2.1.3.1.13(8), EO – Reclassification of Foundation Status, for effective date in IRC 7805(b) relief cases.

• See IRM 4.70.14.2.1.3.3, EO – Conversion of Returns. for revocation procedures in the context of converted returns and bringing an organization current on tax obligations for the affected tax years.

• See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record.

• See IRM 4.70.14.2.1.3.1.29, EO – Inadequate Records – Revocation, for revocation due to inadequate records.

(9) Close all revocations to Mandatory Review (not auto-revocations). Use the following disposal codes on the primary return closing record unless a higher priority DC applies:

• DC 09 (RCCMS - 211) for agreed revocations.

• DC 07 (RCCMS - 601) for unagreed revocations with protest.

• DC 55 (RCCMS - 605) for unagreed revocations without protest.

• DC 15 (RCCMS - 602) for unagreed revocations of church.

(1) Proposed foundation reclassifications are a change in status. If an IRC 501(c)(3) organization or IRC 4947(a)(1) NECT doesn't qualify for the foundation status under which it is classified, propose a reclassification of foundation status.

(2) A reclassification of foundation status is an adverse status change subject to mandatory review.

• You can’t reclassify a PF to a publicly supported organization. PFs must terminate their PF status under IRC 507.

• You can’t reclassify an organization to an exempt operating foundation described under IRC 4940(d)(2). Organizations must request that status using procedures in Rev. Proc. 2019-2, Rev. Proc. 2019-1, I.R.B. 230, (updated annually).

(3) A reclassification of foundation status is subject to declaratory judgment under IRC 7428. Rev. Proc. 2019-5, section 10, 2019-01 IRB 230, (updated annually). It includes:

• Reclassification from one type of publicly supported organization to another type.

• Reclassification from a publicly supported organization to a PF.

• Reclassification from a private operating foundation to a non-operating foundation.

• Reclassification from a type I or II supporting organization to a type III supporting organization, within IRC 509(a)(3).

• Reclassification from a functionally integrated type III supporting organization to a non-functionally integrated type III supporting organization, within IRC 509(a)(3).

(4) Except as indicated in paragraphs (5) and (6), a reclassification of a foundation status is generally effective when the organization fails to qualify for the existing foundation status. If the organization ceased to qualify for the foundation status during a year prior to the year of examination, obtain approval from the GM before expanding the examination. If the examination is not expanded to the prior tax years, the effective date of foundation reclassification is the first day of the first tax year under examination.

1. For public charity reclassifications under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi), and IRC 509(a)(2), verify the amounts on Form 990 Schedule A, Public Charity Status and Public Support.

2. If the calculation is incorrect, re-do the schedule.

3. Determine whether the organization meets the public support test.

4. If the organization fails a public support test for any two consecutive years beginning with its fifth year of existence, the effective date of reclassification is the first day of the second consecutive tax year the organization failed the public support test.

5. For special rules that apply to reclassifications of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi), and IRC 509(a)(2) charities, IRM 4.70.14.2.1.3.1.13, EO - Reclassification of Foundation Status.

(5) In the case of reclassifying a IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) organization to a PF, reclassification is effective only if the organization:

• Has been in existence for more than five years,

• Fails the public support test for any two consecutive tax years beginning with its fifth year of existence and

• Doesn’t otherwise qualify for another exclusion from PF status (such as IRC 509(a)(3)).

(6) In the case of reclassifying a IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) organization to a PF, the effects are as follows:

1. Reclassification of this type is effective the first day of the second consecutive tax year the organization fails the public support test.

2. The organization will be a PF for that first tax year for IRC 507, IRC 4940 and IRC 6033 purposes only.

3. For all succeeding tax years, the organization will be PF for all purposes.

(7) Reclassifying a public charity to a PF constitutes a conversion of Form 990 to a tax return, Form 990-PF. Conversions are covered by IRM 4.70.14.2.1.3.3, EO - Conversion of Returns. Basic instructions on reclassifying a publicly supported organization to a PF are as follows:

• Prepare a formal examination report for the foundation reclassification issue in the Form 990 examination. See paragraph (8).

• Either solicit Form 990-PF if the foundation reclassification is agreed, or prepare a Substitute For Return (SFR) reporting IRC 4940 tax initially established on NMF for a Form 990-PF adjustment. See instructions at IRM 4.70.14.2.1.3.3, EO – Conversion of Returns, for converted returns.

• After considering paragraph (6)b above, determine whether other Chapter 42 excise taxes apply.

• If other Chapter 42 excise taxes reportable on Form 4720 or 4720-A must be imposed, follow report procedures in IRM 4.70.14.2.1.3.1.6,EO – Form 4549, Form 4549-A, Form 4549-B, Form 4549-E.

  Note: Regarding Form 990-PF at the second bullet above, if you prepare an SFR, establish Form 990-PF (MFT 44) on AIMS Non-Master File and on RCCMS in order to propose a deficiency for the IRC 4940 tax. Follow the formal report procedures. This process is generally the same for converted Forms 1120 /1041, replacing Form 990-PF for Form 1120/1041 wherever it occurs, and replacing "foundation reclassification" for "revocation" wherever mentioned. Don’t refer any PF, exempt or taxable, to Small Business/Self-Employed (SB/SE).

(8) Effective Date in IRC 7805(b) Relief Cases:

1. IRC 7805(b) provides discretionary authority to determine the extent to which any ruling may apply without retroactive effect. IRC 7805(b) relief applies to:

Revocations. Determinations of liability for UBI. Determinations of liability for excise taxes. Private letter rulings. Technical advice issues.

2. When an entity receives a determination letter or ruling, and later loses exemption due to a change in facts or law, revocation is effective the first day of the first tax year in which the change occurs. Under these circumstances, there is no need to request application of IRC 7805(b) relief.

3. When an entity erroneously receives a determination letter or ruling due to an omission or misstatement of material facts, the effective date of revocation is the first day of the first tax year. In this case, don’t recommend relief under IRC 7805(b). It’s generally not available.

4. When an entity erroneously receives a determination letter or ruling due to the IRS misinterpretation of the law, recommend IRC 7805(b) relief.

5. The following table recaps the situations described above:

Entity’s Determination Letter revoked due to:	Revocation effective date:	IRC 7805(b) Applicability:
Change in tax law or organization alters its operation after initial recognition of exemption	First day of first tax year in which organization altered its operations or the law changed	Not necessary, but taxpayer may request a TAM if disputing whether it altered its operations
Omission or misstatement of material facts by the applicant organization	Retroactive to the first day of the first tax year	Not Available
Misinterpretation of law by IRS	Determined by  IRC 7805(b) relief	Applies. Recommend requesting relief

6. You or the organization may raise the question of IRC 7805(b) relief.

   Note: In revocation cases, advise the organization of the provisions of IRC 7805(b).

(9) Use the following letters and forms when preparing a formal report for reclassifying a foundation or public charity status:

(10) If the organization’s foundation status must be changed, send a 30-day letter (Letter 3620) and RAR to the organization. Hold the case for up to 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

(11) A foundation reclassification is agreed only if the organization signs Form 6018. A signed Form 6018 isn’t legally binding for foundation reclassifications and only serves to memorialize the agreement.

• A signed Form 6018 doesn’t waive the organization’s right to seek declaratory judgment.

• You are still required to close the case to Mandatory Review even if Form 6018 is signed.

• Mandatory Review is still required to issue a 90-day FADL if Form 6018 is signed.

(12) If the organization doesn’t agree with the proposed foundation reclassification, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

(13) Because reclassifications of foundation status are declaratory judgment cases:

• You must have an administrative record file, and if the case is unagreed, a complete administrative record index.

• You will not issue a final closing letter on foundation reclassification issue.

(14) If you are examining a non-operating foundation contending to be an operating foundation on Form 990-PF

(15) Refer to the following references:

• See also Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

• Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

• See IRM 4.70.14.2.1.3.3.1, EO - Proposed Adverse Status Change.

• See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record.

(16) Close all foundation reclassifications to Mandatory Review. Use the following disposal codes on the primary return closing record unless a higher priority disposal code applies:

1. DC 17 (203) for agreed reclassifications of foundation status.

2. DC 07 (601) for unagreed reclassifications of foundation status if protested.

3. DC 10 (604) for unagreed reclassifications of foundation status without protest.

4. DC 15 (602) for unagreed reclassifications of foundation status of a church.

(1) Disqualification (or denial) of tax-exempt status applies to certain organizations under EO examination jurisdiction who have not applied for tax-exempt status or have not received a ruling or determination letter granting such status. Proposed disqualifications are a change in status. There are three types:

• Disqualification of organizations treated as tax-exempt that self-declared their tax-exempt status on a filed Form 990, (Status 36 organizations) for specific tax years.

• Disqualification from tax-exemption of IRC 501(c)(12) or IRC 501(c)(15) organizations because they failed their respective 85 percent member income test or gross receipts test for specific tax years.

• Disqualification of organizations treated as tax-exempt under IRC 501(c)(3) without a ruling or determination letter, such as an organization claiming to be a church or a small organization with gross receipts normally not more than $5,000 per year.

(2) Treat disqualification of IRC 508(c) organizations that don’t apply for tax-exempt status and fail to qualify for exemption as revocations for all purposes (such as disposal code, etc.) for:

1. Churches, their integrated auxiliaries, and conventions or associations of churches.

2. Subordinate organizations in a group exemption ruling. See Treas. Reg. 1.508-1(a)(3).

3. Other organizations not required to apply for tax-exempt status under IRC 508(c).

(3) Status 36 organizations are treated as exempt under IRC 501(c) because the exempt status was declared on a filed Form 990. However, Status 36 doesn’t include IRC 501(c)(3), 501(c)(9), 501(c)(17) and 501(c)(29), organizations, because those organizations are required to apply for tax-exempt status.

(4) A Status 36 organizations are IRC 501(c) organizations (other than IRC 501(c)(3), IRC 501(c)(9), and IRC 501(c)(17)) that declare tax-exempt status by filing Form 990 or 990-EZ, and that would otherwise be a taxable entity. They are characterized by:

• Not having submitted a Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code and

• Not having received a favorable ruling or determination letter granting tax-exempt status.

• IRC 501(c)(4) organizations may also declare tax-exempt status by filing Form 8976. If they fail to meet the qualification of tax-exempt status, disqualify them for the examined tax years for which they declared exemption.

• See IRM 4.70.14.2.1.3.1.31, EO - Status 36 Organizations.

(5) Because the IRS never recognized a Status 36 organization as tax-exempt, there is no ruling or determination letter to revoke if the organization fails to qualify for exemption. You must therefore determine whether the self-declaring organization qualifies for tax-exempt status for the specified tax years exemption is declared.

(6) Use the following letters and forms when preparing a formal report for disqualifications:

(7) If an organization doesn’t meet the requirements for exemption for the specified tax years under IRC 501(c), send a 30-day letter (Letter 3618 or Letter 4700) and a RAR to the organization. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO - Formal Examination Reports.

(8) A disqualification is agreed only if the organization signs Form 6018. A signed Form 6018 isn’t legally binding for a disqualifications and only serves to memorialize the agreement.

• A signed Form 6018 doesn’t waive the organization’s right to seek declaratory judgment.

• You are still required to close the case to Mandatory Review even if Form 6018 is signed.

• Mandatory Review is still required to issue a 90-day FADL if Form 6018 is signed.

(9) If the organization doesn’t agree with the proposed disqualification, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

(10) Because disqualifications are declaratory judgment cases:

• You must have an administrative record file and if the case is unagreed, a complete administrative record index.

• You will not issue a final closing letter on the primary return examination.

(11) Refer to the following references:

• See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

• Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

• See IRM 4.70.14.2.1.3.3, EO – Conversion of Returns, for disqualification procedures in the context of converted returns and bringing an organization current on tax obligations for the affected tax years.

• See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record.

• See IRM 4.70.19, Church Tax Inquiries and Examinations Under IRC 7611.

(12) Close all disqualifications to Mandatory Review. Use the following disposal codes on the primary return closing record unless a higher priority disposal code applies:

1. DC 13 (501) for agreed disqualifications if you are referring the organization to SB/SE or Large Business and International (LB&I) (no converted return process).

2. DC 04 (205) or 05 (207) for agreed disqualifications if you are enforcing income taxes through a converted tax return process.

3. DC 07 (601) for unagreed disqualifications if protested.

4. DC 10 (604) for unagreed disqualifications without protest.

5. DC 15 (602) for unagreed disqualification of a church not recognized as tax-exempt (church without a ruling or determination letter).

(1) Only an organization can terminate its own existence. An organization can terminate its existence in the following ways:

• A corporate EO files articles of dissolution with the state.

• A corporate EO files articles of merger with the state.

• An association adopts a board resolution terminating the association.

• Beneficiary interests (such as charitable interests) terminate in the case of a trust.

(2) While organizations voluntarily terminate their existence in accordance with state law, examinations terminate the tax-exempt status by issuing a termination letter after reviewing the following evidentiary documents:

1. Files a Final Return.
   o Organization managers are responsible for filing final returns, subject to penalty under IRC 6652(c)(2)(B) for failing to file a final return upon written demand. See 90-day Demand Letter 5325. You can’t recognize a termination of an exempt organization until you review the final return if the organization is required to file one.

   Exception: Under IRC 6033(b)(1), a church, integrated auxiliary of a church, or a convention or association of churches, are not required to file a final return. Also, organizations described in Treas. Reg. 1.6033-2(g)(1) as supplemented by Rev. Proc. 95-48, 1995-2 C.B. 418, Rev. Proc. 96-10, 1996-1 C.B. 577, and Rev. Proc. 2011-15, 2011-3 I.R.B. 322, are excepted from filing annual information returns.

   
   o The final return will cover the period from the beginning of the EO’s fiscal year through the date of termination. In order to have the return processed prior to the end of the EO’s fiscal year, prepare Form 2363-A to update the EO’s fiscal year-end to the month of termination.
   o Final returns are due the 15th day of the 5th month after the dissolution or termination is completed.

   Exception: An EO can’t file a final Form 990-N before the close of the tax year during which it terminated. You can verbally remind the organization it must file a final return or Form 990-N if so eligible.

   
   o An IRC 509(a)(3) organization must file a final Form 990 or 990-EZ, even if it is described in Rev. Proc. 95-48 and Rev. Proc. 96-10.

   Exception: IRC 509(a)(3) supporting organizations, the gross receipts of which are normally not more than $5,000, that supports an IRC 501(c)(3) religious organization are not required to file an annual information return, but must file Form 990-N.

   
   o A secured final return must be complete and substantively correct before recognizing a termination.
   □ A final return is not correct if the organization files a return that it is not eligible to file, such as Form 990-EZ.
   □ A Schedule N is required for a final Form 990 or 990-EZ.
   □ A terminating organization that files a substantively incorrect or incomplete final return without reasonable cause can be subject to penalties or revocation.

2. Submits a Written Statement of Disposition of Assets.
   o A principal officer of an EO may submit a written statement of disposition of assets to the examiner or in a final return. You can’t recognize a termination of an exempt organization until you review the written statement of disposition of assets.
   o Refer to the Instructions to Schedule N, Form 990 or 990-EZ for guidance on the type of information needed.
   o For the following IRC sections, verify that the assets were distributed as required by the specific subsection:
   □ IRC 501(c)(3).
   □ IRC 501(c)(9).
   □ IRC 501(c)(12).
   □ IRC 501(c)(16).
   □ IRC 501(c)(19).
   □ IRC 501(c)(22).
   □ IRC 501(c)(27).
   □ IRC 501(e).
   □ IRC 501(f).
   o Valid distributions for IRC 501(c)(3) include distributions:
   □ For exempt purposes within the meaning of IRC 501(c)(3).
   □ To a state or local government for public purposes.
   □ To the federal government.
   □ To an organization or organizations exempt under IRC 501(c)(3).

   Note: Consider the special distribution considerations for PFs.

   
   o If any final distributions are improper, solicit correction. If no correction is made, consider revocation of tax-exempt status. For example, if the assets weren't distributed properly, tell the EO to recover the assets. Ask the EO to redistribute them properly.

If the EO	You are to
Recovers and redistributes the assets	Secure documentation of the redistributions
Refuses to attempt to recover the assets	Propose revocation for the year (or years) in which the distributions were made
Tries to but can’t recover the assets	Secure a written, signed statement by an officer of the actions taken by the EO. Discuss with your manager as to proposing revocation or accepting the termination.

o Improper distributions may be taxable income to recipients. If taxable, verify if they were reported on Forms 1099. If not reported, secure the delinquent information returns. Prepare a penalty file if you decide to impose penalties. o Verify if the income was reported on the recipient's tax return. If not, propose a discrepancy adjustment. See IRM 4.70.15, Discrepancy Adjustments. For those recipients who are not yet required to report the income, prepare a referral (Form 5666) to SB/SE for a current year examination. Note: If you use Form 5346 for this purpose, it won’t be declined. Note: If the organization was exempt under IRC 501(c)(3) or 501(c)(4), you can pursue intermediate sanctions.

3. Submits a Dissolution Document. The organization may submit a dissolution document either to the examiner or in a final return. You can also obtain dissolution documents from certain state websites. You can’t recognize termination of an exempt organization until you review the dissolution documents. o Appropriate dissolution documents for terminations vary based on the type of entity.

If the EO is...	Then secure...
a corporation, that has filed Articles of Dissolution with the state	a complete copy of the Articles of Dissolution, and proof of filing with the state, such as a "date-filed" stamp. If incorporated in multiple states, obtain the documents for each state. Note: Some states require all taxes be paid before dissolution. Check the state's requirements.
an association	a resolution signed by at least two officers of the entity. The resolution must state the date of dissolution.
a trust	a copy of the court order dissolving the trust. If there is no court order, a resolution signed by at least two trustees. The resolution must state the date of dissolution.
an organization chartered by a parent organization in a group exemption ruling	See IRM 4.70.14.2.1.3.4.2, Terminations

Note: Organizations excepted by law from filing a return or a notice under IRC 6033 need not file a final return.

(3) Only organizations recognized as tax-exempt under IRC 501(c) or IRC 501(d) can receive a letter terminating their exempt status.

(4) Verify whether a termination claimed by an EO actually occurred.

(5) If the EO was automatically revoked, survey the return under examination. See IRM 4.70.14.4.11.2, EO Automatically Revoked Organizations.

(6) If you are unable to locate the EO, follow Unable-to-Locate Scenario Guidance Table. See Exhibit 4.70.14-17, EO Unable-to-Locate Scenario Guidance Table.

(7) If an EO claims to terminate while the examination is in process, continue the examination to closure like any other case.

• If the examination results in a change in tax or status, issue a report of examination to the last known authorized officer like any other case

• If there are no changes to tax or status, you may verbally notify the organization that they must file a final return by the 15th day of the 5th month after termination. Close the case as a no change if there are no additional compliance issues during the year under examination.

• If there are no changes to tax or status, and the organization manages to provide the three evidentiary documents in paragraph (2) before you close the case, you may issue a termination letter.

(8) If the EO properly terminated:

1. Issue the termination Letter 5426, Final Termination Closing Letter or Letter 5426-A, Termination Closing Letter.

   Note: Corporations "administratively dissolved" by the state where reinstatement is possible are not terminated.

2. Prepare Form 2363-A, to update the EOBMF to Status 20, Termination.

3. Prepare the 3198-A Special Handling checksheet in RCCMS. Enter "Termination" in "Other Instructions" at the bottom of the form. On the blank line to the right of "Other Instructions" in the "Special Features" section, enter "IRC 6104(c) Notification Requirements" for IRC 501(c)(3) cases.

4. At closure, use RCCMS DC 212, Termination, unless a higher priority disposal code applies.

(9) Close the case to the EO closing unit.

(10) Some organizations are terminated by the Ogden Campus due to filing inactivity (EOBMF Status 20). That contrasts with an organization’s voluntary termination of its existence in paragraph (1). Terminations by Ogden Campus are reversible if the organization later becomes active.

(1) Organization managers are responsible for filing final returns, subject to penalty under IRC 6652(c)(2)(B) for failing to file a final return upon written demand. See 90-day Demand Letter 5325. You can’t recognize a termination of an exempt organization until you review the final return if the organization is required to file one.

(2) In those cases where a final return hasn’t been filed, you must secure the final return. A PF must file a final return on Form 990-PF.

(3) The final return will cover the period from the beginning of the EO’s fiscal year through the date of termination. In order to have the return processed prior to the end of the EO’s fiscal year, prepare Form 2363-A to update the EO’s fiscal year-end to the month of termination.

(4) Final returns are due the 15th day of the 5th month after the dissolution or termination is completed.

(5) An IRC 509(a)(3) organization must file a final Form 990 or 990-EZ, even if it is described in Rev. Proc. 95-48 and Rev. Proc. 96-10.

(6) A secured final return must be complete and substantively correct before recognizing a termination.

1. A final return is not correct if the organization files a return that it is not eligible to file, such as Form 990-EZ.

2. A Schedule N is required for a final Form 990 or 990-EZ.

3. A terminating organization that files a substantively incorrect or incomplete final return without reasonable cause can be subject to penalties or revocation.

(1) A principal officer of an EO may submit a written statement of disposition of assets to the examiner or in a final return. You can’t recognize a termination of an exempt organization until you review the written statement of disposition of assets.

(2) Refer to the Instructions to Schedule N, Form 990 or 990-EZ for guidance on the type of information needed.

(3) For the following IRC sections, verify that the assets were distributed as required by the specific subsection:

• IRC 501(c)(3).

• IRC 501(c)(9).

• IRC 501(c)(12).

• IRC 501(c)(16).

• IRC 501(c)(19).

• IRC 501(c)(22).

• IRC 501(c)(27).

• IRC 501(c)(e).

• IRC 501(c)(f).

(4) Valid distributions for IRC 501(c)(3) include distributions:

1. For exempt purposes within the meaning of IRC 501(c)(3).

2. To a state or local government for public purposes.

3. To the federal government.

4. To an organization or organizations exempt under IRC 501(c)(3).

   Note: Consider the special distribution considerations for PFs.

   See IRM 4.70.14.2.1.3.1.18, EO – Termination – Disposition of Assets Involving Private Foundations, and the Exempt Organizations Technical Resource Guide, made available on EO Knet Sharepoint site.

(5) If any final distributions are improper, solicit correction. If no correction is made, consider revocation of tax-exempt status. For example, if the assets weren't distributed properly, tell the EO to recover the assets. Ask the EO to redistribute them properly.

(6) Improper distributions may be taxable income to recipients. If taxable, verify if they were reported on Forms 1099. If not reported, secure the delinquent information returns. Prepare a penalty file if you decide to impose penalties.

(7) Verify if the income was reported on the recipient's tax return. If not, propose a discrepancy adjustment. See IRM 4.70.15. For those recipients who are not yet required to report the income, prepare a referral (Form 5666) to SB/SE for a current year examination.

(1) A PF may submit a written statement on the disposition of assets to the examiner or in a final return. You can’t recognize a termination of a PF until you review a written statement of disposition of assets. Remaining assets of a PF may be distributed in the following ways:

• Making what would be a qualifying distribution under IRC 4942(g)(1)(A).

• Transferring them to certain public charities in accordance with IRC 507(b)(1)(A).

• Paying a termination tax under IRC 507(c) to the government.

• Transferring all remaining assets to another PF within the meaning of IRC 507(b)(2).

  Note: Certain tax attributes and characteristics carryover to the transferee foundation. See Treas. Reg. 1.507-3(a)(1).

(2) Refer to the General Instruction T in the Instructions to Form 990-PF for guidance on the type of information needed.

(3) A transfer to another PF must satisfy the requirements of all pertinent provisions of Chapter 42 of the Code. For example, if the transfer constitutes a taxable expenditure as defined in IRC 4945, the transferor is liable for the Chapter 42 tax that is incurred. See Treas. Regs. 1.507–3(d). Consequently, no termination letter can be issued until the taxable expenditure is fully corrected, and the initial tax deficiency has been fully processed and assessed (or abated under IRC 4962).

(4) A termination of existence can’t be recognized until all Chapter 42 taxes against the foundation are assessed (or abated under IRC 4962) for acts or failures to act that occurred during the years of examination or as a result of the transfer, and such acts are corrected.

(5) If a transfer described in IRC 507(b)(2) constitutes a willful and flagrant act in violation of Chapter 42, as described in IRC 507(a)(2)(A), then the provisions of IRC 507(a)(2) dealing with involuntary terminations are applicable, rather than the provisions of IRC 507(b)(2). In that event, the transferor foundation would be subject to IRC 507(c) tax. See Treas. Regs. 1.507–3(d) and 1.507–4(b).

(6) For IRC 507(b)(2) transfers, the group may expand the examination or prepare Form 5666 for a future year examination of the transferee PF to ensure that the transferee properly assumed the Chapter 42 attributes of the transferred assets.

(1) The organization may submit a dissolution document either to the examiner or in a final return. You can also obtain dissolution documents from certain state websites. You can’t recognize termination of an exempt organization until you review the dissolution documents.

(2) Appropriate dissolution documents for terminations vary based on the type of entity.

(1) A termination can only be recognized if all three documents in IRM 4.70.14.2.1.3.1.15 are secured.

(2) For public charities, ensure there are no changes to exemption or reclassification to PF, and that the annual information return(s) under examination is accepted as filed before you recognize a termination.

(3) For public charities, verify the correct foundation status. If an organization is described under IRC 170(b)(1)(A)(vi) or 509(a)(2) and it:

• Has been in existence for more than five years.

• Fails the public support test for any two consecutive tax years beginning with its fifth year of existence, and

• Doesn’t otherwise qualify for another exclusion from PF status (such as IRC 509(a)(3). Propose a reclassification to a PF effective the first day of the second consecutive taxable year the organization failed the public support test.

(4) Don’t recognize a termination if there are Chapter 42 tax deficiencies or corrections that must be proposed against the organization or PF.

(5) Determine whether bonds were outstanding at the time of the termination. If so, prepare Form 5666, addressed to Tax Exempt Bonds (TEB), identifying the year of termination.

(6) To the extent terminations apply to IRC 501(c)(3) organizations they are subject to the rules on state notification under IRC 6104(c). See IRM 4.70.14.4.11.8, State Notification of EO Examination Results.

(1) If the organization conducts an unrelated business activity, determine if the activity:

1. Meets the definition of an regularly carried-on unrelated trade or business.

2. Has a tax effect.

3. Is large enough to jeopardize its exemption. If it jeopardizes exemption, consider revocation.

(2) If you secure a delinquent EO income tax return (such as Form 990-T or Form 1120-POL) and you don't make an adjustment to that return, the following procedures don't apply. See IRM 4.70.13.9, Delinquent, Amended and Substitute for Returns, for delinquent return procedures.

(3) If there are multiple unrelated businesses or multiple years involved and the EO agrees to some but not all of the proposed adjustments, attempt to secure a signed waiver form for the agreed items.

(4) Use the following letters and forms when preparing a report for changes in UBIT or any other income tax required of EOs and IRC 4947 trusts:

(5) Give the taxpayer a schedule showing how the tax was computed.

(6) If an organization has an income tax deficiency, send a 30-day letter (Letter 3614) and an RAR to the organization. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

(7) A proposed income tax deficiency is agreed only if the organization signs Form 4549 or Form 870. Payment of tax is not agreement.

(8) If after receiving a reply to the 30-day letter the organization agrees with the tax change, issue a final agreed closing letter using Letter 2511. Close the case to the EO closing unit for assessment.

(9) Issue separate closing letters if there is an agreement for some but not all of the years.

(10) If the organization doesn’t agree with the proposed tax change, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

(11) If after receiving a reply to the 30-day letter the organization disagrees with the proposed tax change with protest, without protest, or doesn’t reply, close the case to Mandatory Review for the unagreed tax change. Mandatory Review or Appeals will issue a final closing letter in the form of a SNOD (90-day letter) if they agree with your adjustment.

(12) If in connection with a tax change, you have a primary return (or e-Postcard) also under examination, issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, to the EO that makes reference to the RAR for the tax change.

(13) Refer also to the tables in the following exhibits:

• See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

• See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

• For more details on 30-day letters, report forms, and closing letters for converted returns and discrepancy adjustments, refer to the same exhibits.

• Refer to IRM 4.70.13.14., Discussion of Examination Findings/Conclusions, for more details on the initial report process.

• Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

• See also IRM 4.70.15, Discrepancy Adjustments.

• See also IRM 4.70.14.2.1.3.3, EO - Conversion of Returns.

(14) Close all agreed tax changes to the EO closing unit and all unagreed tax changes to Mandatory Review (except for employment tax cases that do not involve IRC section 7436 issues). Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

1. DC 03 (RCCMS - 102) for agreed tax changes.

2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

(1) PFs report their Chapter 42 excise taxes on Form 4720 (MFT 50). Disqualified persons use Form 4720 (MFT 66), also referred to as "Form 4720-A".

(2) IRC Chapter 42 imposes several excise taxes. These taxes are assessed against the foundation and some are assessed against its disqualified persons and foundation managers. See Exhibit 4.70.14-10, EO Chapter 42 Excise Tax Reference Chart - Private Foundations.

(3) Use the following letters and forms when preparing a report for changes in Chapter 42 excise tax:

(4) A Thorne Letter:

• Is only required to be issued to a Foundation Manager, where the 2nd tier tax is proposed under IRC 4941, 4944, 4945, 4951, 4952 and 4955.

• Should be sent out to the foundation manager, prior to issuance of the 30-day letter.

  Note: The 30-day letters sets up the proposed excise taxes, such as 1st and 2nd tier. It would note the foundation manager’s refusal to correct.

• Is not required to be issued to either
  1) a disqualified person who isn’t a foundation manager or
  2) the PF requesting correction.

  Reminder: Consult with TEGEDC when preparing a Thorne letter.

(5) In some cases, if the foundation or disqualified person (liable party) proposes a correction and:

• You accept the proposed correction, issue Letter 5305, Private Foundation Correction Approval.

• You deny the propose correction, issue Letter 5306.

(6) A proposed Chapter 42 excise tax deficiency is agreed only if the liable party signs Form 870-E and, in the case of two-tiered Chapter 42 excise taxes, has made full correction. Payment of tax alone is not agreement.

(7) If the liable parties fail to make correction, you must include the second-tier tax in the formal examination report. Describe each correctable activity and its remedy on Form 886-A of the report.

(8) Sometimes the tax liability extends beyond the taxable years covered by the examination report and into a future taxable year. In these cases:

1. Make a statement on Form 4621 (the report form) or Form 886-A informing the liable party of its requirement to file Form 4720 for the following taxable years.

2. Inform the liable party they are required to pay any tax owed with respect to the act or failure to act remaining uncorrected into that following taxable year.

3. Consider preparing a referral on Form 5666 if the liable party indicates an unwillingness to make future corrections.

(9) Give the taxpayer schedules detailing computations for the adjustments. Show the adjustments on Form 4886.

(10) Consider whether the penalty under IRC 6684 for repeated or willful and flagrant Chapter 42 tax violations applies. Explain this penalty on Form 886-A. Include a comment on Form 4621 as to whether the penalty applies.

(11) Prepare the agreement form, Form 870-E for excise tax adjustments. See IRM 4.70.14.2.1.3.1.4, EO – Form 870 and Form 870-E, for additional information on Form 870-E.

(12) Send a 30-day letter (Letter 3614) and an RAR to the liable party. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

(13) Follow the instructions for IRC 6104(c) notification of certain States in IRM 4.70.14.4.11.8, State Notification of EO Examination Results.

(14) If after receiving a reply to the 30-day letter the liable party agrees with the tax change and has fully corrected the acts or failures to act that gave rise to the initial tax, issue a final agreed closing letter using Letter 2511. Close the case to the EO closing unit for assessment.

(15) If the taxpayer only agrees to or corrects some of the transactions, treat the case as partially agreed. Attempt to secure agreement for the agreed corrected items.

(16) Issue separate closing letters if there is an agreement for some but not all of the years.

(17) If the taxpayer doesn’t agree with the proposed tax change, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

(18) If after receiving a reply to the 30-day letter the liable party disagrees with the proposed tax change with protest, without protest, or doesn’t reply, close the case to Mandatory Review for the unagreed tax change. Mandatory Review or Appeals will issue a final closing letter in the form of a SNOD if they agree with your adjustment.

(19) If in connection with a tax change, you have a primary return (or e-Postcard) also under examination, issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, to the PF that makes reference to the taxable event that gave rise to a potential tax liability.

(20) Refer also to the tables in the following exhibits:

• See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

• See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

• Refer to IRM 4.70.13.14.3, Discussion of Examination Findings/Conclusions, for more details on the initial report process.

• Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

• See IRM 4.70.14.4.11.8.3, IRC 6104(c) Disclosures: Chapters 41 and 42 Assessments, for the procedures relating to state notification.

(21) Close all agreed tax changes to the EO closing unit. Close all unagreed tax changes to Mandatory Review. Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

1. DC 03 (RCCMS - 102) for agreed tax changes.

2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

(1) IRC Chapters 41 and 42 imposes several excise taxes on entities other than PFs. The IRC imposes some of these taxes on specified EOs and some on their disqualified persons and organization managers. See Exhibit 4.70.14-11, EO Chapter 41 and 42 Excise Tax Reference Chart - Non-Private Foundations.

(2) Use the following letters and forms when preparing a report for changes in Chapter 41 or 42 excise tax:

(3) If you identify a Chapter 42 excise taxable event subject to correction, send a Thorne letter requesting the organization or disqualified person to fully correct the acts or failure to act before you prepare a formal report. Consult with TEGEDC when preparing a Thorne letter.

(4) In some cases, if the organization or disqualified person (liable party) proposes a correction and:

• You accept the proposed correction, issue a modified version of Letter 5305 applicable to the type of Non-PF Chapter 42 tax involved.

• You deny the propose correction, issue a modified version of Letter 5306 applicable to the type of Non-PF Chapter 42 tax involved.

(5) A proposed Chapter 42 excise tax deficiency is agreed only if the liable party signs Form 870-E and, in the case of two-tiered Chapter 42 excise taxes, has made full correction. Payment of tax alone is not agreement.

(6) In the case of two-tiered taxes, if the liable parties fail to make correction, you must include the second-tier tax in the formal report. Describe each correctable activity and its remedy on Form 886-A of the report.

(7) Sometimes the tax liability extends beyond the taxable years covered by the examination report. In these cases:

1. Make a statement on Form 4621 (the report form) or Form 886-A informing the liable party of its requirement to file Form 4720 for the following taxable years.

2. Inform the liable party they are required to pay any tax owed with respect to the act or failure to act remaining uncorrected into that following taxable year.

3. Consider preparing a referral on Form 5666 if the liable party indicates an unwillingness to make future corrections.

(8) Give the taxpayer schedules detailing computations of adjustments to the taxpayer. Show the computation of the tax on the adjustments on Form 4883.

(9) Consider whether the penalty under IRC 6684 for repeated or willful and flagrant Chapter 42 tax violations applies. Explain this penalty on Form 886-A. Include a comment on Form 4621 as to whether the penalty applies.

(10) Prepare the agreement form, Form 870-A for excise tax adjustments. See IRM 4.70.14.2.1.3.1.4, EO – Form 870 and Form 870-E, for additional information on Form 870-E.

(11) Send a 30-day letter (Letter 3614) and an RAR to the liable party. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense.

(12) If after receiving a reply to the 30-day letter the liable party agrees with the tax change and, in the case of two-tiered excise taxes, has fully corrected the acts or failures to act that gave rise to the initial tax, issue a final agreed closing letter using Letter 2511. Close the case to the EO closing unit for assessment.

(13) If the taxpayer only agrees to or corrects some of the transactions, treat the case as partially agreed. Attempt to secure agreement for the agreed corrected items.

(14) Issue separate closing letters if there is an agreement for some but not all of the years.

(15) If the taxpayer doesn’t agree with the proposed tax change, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

(16) If after receiving a reply to the 30-day letter the liable party disagrees with the proposed tax change with protest, without protest, or doesn’t reply, close the case to Mandatory Review for the unagreed tax change. Mandatory Review or Appeals will issue a final closing letter in the form of a SNOD if they agree with your adjustment.

(17) If in connection with a tax change, you have a primary return (or e-Postcard) also under examination, issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, to the organization that makes reference to the taxable event that gave rise to a potential tax liability.

(18) Refer also to the tables in the following exhibits:

• See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

• See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

• Refer to IRM 4.70.13.14, for more details on the initial report process.

• Refer to IRM 4.70.14.2.4.3.1, Discussion of Examination Findings/Conclusions, for more details on the formal report process.

• See IRM 4.70.14.4.11.8.3, IRC 6104(c) Disclosures: Chapters 41 and 42 Assessments, for the procedures relating to state notification.

(19) Close all agreed tax changes to the EO closing unit. Close all unagreed tax changes to Mandatory Review. Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

1. DC 03 (RCCMS - 102) for agreed tax changes.

2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

(1) Refer to Rev. Proc. 83-32, 1983-1 C.B. 723, for the various filing requirements of both nonexempt charitable trusts (NECTs) and split-interest trusts.

(2) NECTs described under IRC 4947(a)(1) file annual information returns on Form 990 or Form 990-PF depending on whether the trust has a determination letter granting IRC 509(a)(3) status. A determination letter granting IRC 509(a)(3) status doesn’t grant the trust a tax-exempt status, but rather allows the trust to file a Form 990 instead of a Form 990-PF.

(3) Nonexempt split-interest trusts described under IRC 4947(a)(2) file annual information returns on Form 5227. Split-interest trusts include:

• Charitable remainder trusts (uni-trusts or annuity trusts).

• Charitable lead trusts (uni-trusts or annuity trusts).

• IRC 642 pooled income funds.

(4) When seeking information about a non-exempt charitable trust, send Letter 3407, requesting copy of trust instruments under Treasury Regulation 1.6012.

(5) If you are examining any IRC 4947 trust (Form 990, Form 990-PF or Form 5227), and the examination results in a no change, issue Letter 6049 for the examination of that return. See Exhibit 4.70.14-1, Closing Letters for No Change Cases, for a list of no-change and letter for Change due to Correction of Operations.

(6) If you are examining Form 990, Form 990-PF or Form 5227, and the examination results in corrective actions to correct operational issues that did not result in a change to exempt status, issue Letter 1744 following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations.

(7) The IRS doesn't revoke a tax-exempt status for IRC 4947 trusts, because a tax-exempt status was never granted.

1. Chapter 42 excise taxes apply if charitable interests are diverted.

2. A diversion of charitable interests may also require reclassification of an IRC 509(a)(3) NECT to a PF as it may no longer be a supporting organization.

3. In some cases, you may also make a discrepancy adjustment to deny the grantor of the trust the overvalued portion of the charitable deduction (or make a referral to SB/SE or LB&I using Form 5666).

(8) IRC 4947 trusts are subject to income tax if there is positive taxable income, and may be required to file Form 1041. Refer to income tax deficiency procedures in IRM 4.70.14.2.1.3.1.21, EO – UBIT and Other Income Taxes. IRC 4947 trusts are not recognized as tax-exempt.

1. Fiduciaries and trustees must also file a Form 1041 on behalf of the trust if the trust has positive taxable income.

2. When the examination of a Form 1041 results in no change to income tax, prepare Letter 6049 for the examination of that return.

3. If there is a tax change to Form 1041, follow the deficiency procedures similar to those applicable to Forms 990-T, except that you are applying the income tax under IRC 1 with respect to these trusts. The $1,000 specific deduction under IRC 512(b)(12) doesn't apply to IRC 4947 trusts. Follow the instructions in IRM 4.70.14.2.1.3.1.21, EO – UBIT and Other Income Taxes. for Form 1041 adjustments.

(9) If an NECT doesn't meet the requirements for IRC 509(a)(3) as a supporting organization, reclassify the NECT to a PF. Follow the instructions in IRM 4.70.14.2.1.3.1.13, EO – Reclassification of Foundation Status.

• Generally the other exclusions from PF status under IRC 509(a), such as IRC 509(a)(2) don’t apply.

• Split-interest trusts are always treated as PFs for Chapter 42 purposes.

(10) If you identify a Chapter 42 taxable event, based on Rev. Proc. 83-32, 1983-1 C.B. 723, follow the instructions in IRM 4.70.14.2.1.3.1.22, EO – Private Foundation Excise Taxes.

(11) Split-interest trusts are:

• Not subject to IRC 4942 tax.

• Limited in the application of IRC 4943 and IRC 4944 tax by IRC 4947(b)(3).

• Limited in the application of IRC 507(a) by IRC 4947(b)(4).

(12) For the disposal codes used for foundation reclassifications, see IRM 4.70.14.2.1.3.1.13(15), EO - Reclassification of Foundation Status.

(13) Close all agreed tax changes to the EO closing unit. Close all unagreed tax changes to Mandatory Review. Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

1. DC 03 (RCCMS - 102) for agreed tax changes.

2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

(1) Inactivity for a period of years could result in proposed revocation of tax-exempt status on the grounds that the organization doesn't conduct qualifying activities, and therefore doesn't meet the operational test in 26 CFR 1.501(c)(3)-1(a)(1).

(2) A secondary ground for revocation may be that the inactive organization failed to establish that it was observing the conditions necessary for continuation of exempt status and thus didn't comply with IRC 6033. However, automatic revocation may preempt the closing of such examinations. In that event, see survey procedures for IRC 6033(j) automatically revoked organizations at IRM 4.70.14.4.11.2, EO Automatically Revoked Organizations.

(3) If an inactive organization (not subject to auto-revocation) properly terminated before the completion of the examination or can’t be located, it may be recognized as terminated if it meets the criteria in IRM 4.70.14.2.1.3.1.15, Termination of Exempt Status, or is described in Examples 1 and 3 of Exhibit 4.70.14-17, EO Unable-to-Locate Scenario Guidance Table.

(4) If an inactive organization has not properly terminated (or is unable-to-locate in Examples 2, 4, 5, and 6 of Exhibit 4.70.14-17), you may do one of the following:

• Issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, with a paragraph informing them that a lack of operations could result in revocation of tax-exempt status and/or reclassification to a PF, if applicable.

• Propose revocation.

• Survey the case if it falls under the survey guidelines.

(5) If an inactive publicly supported organization is subject to a proposed revocation, determine whether to reclassify the organization as a PF.

(1) IRC 6001 provides that every person liable for any tax imposed by Title 26, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and Regulations as the Secretary or his delegate may from time to time prescribe.

(2) Whenever in the judgment of the Secretary or his delegate, it is necessary, he may require any person, by notice served upon such person or by Regulations, to make such returns, render such statements, or keep such records, as the Secretary or his delegate deems sufficient to show whether or not such person is liable for tax under Title 26.

(3) IRC 6033 provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and Regulations as the Secretary may from time to time prescribe.

(4) Treas. Reg. 1.6001-1(c) provides, in part, that organizations exempt from tax under IRC 501(a) shall "keep such books and records as are required to substantiate the information required by IRC 6033".

(1) An "Inadequate Records Notice" places taxpayers on notice that their record keeping practices are deficient and must be improved to meet the requirements of law. The issuance of an Inadequate Records Notice may result in a follow-up examination or compliance check. This notice is a tool to enforce compliance with the requirement to keep adequate books and records for purposes.

(2) The following items together constitute an "Inadequate Records Notice" (the Notice):

1. Letter 4095, signed by the GM.

2. If agreed, a signed Form 2807, Agreement to Maintain Adequate Books of Accounts and Records.

3. If unagreed, attachment titled, "Explanation of Inadequate Records". This notice must be sent by certified mail.

   Note: Explain the reason the records were inadequate on the top of the page. Copy the list of inadequate records from Form 2807, and paste them onto bottom half of the page.

4. Attachment titled, "Applicable Provisions of the Internal Revenue Code and Regulations".

5. Attachment titled, "Other Deficiencies Identified in the Examination".

   Note: List other defects noted in the examination similar to a paragraph on Letter 1744. These include examples such as engaging in excessive lobbying activities, or failure to file other returns.

   Title the attachment: "Other Deficiencies Identified in the Examination."

(3) Use your judgment to determine whether a taxpayer has:

• Maintained adequate records.

• Complied with a record retention agreement.

(4) Consider the facts and circumstances, including but not limited to the following factors:

1. Prior history and present degree of noncompliance.

2. Indications of willful intent.

3. Evidence of refusal to keep records.

4. Other evidence of harm to the government.

5. Probability that poor record keeping results in significant changes to the return.

6. Likelihood that compliance can be enforced if the taxpayer fails or refuses to correct the inadequacies.

7. Anticipated revenue in relation to the time and effort required to obtain compliance.

(5) If the taxpayer has failed to maintain adequate books and records, discuss the matter with your GM to determine whether to issue an Inadequate Records Notice.

(6) When discussing the inadequate records issue with the taxpayer:

1. Avoid criticizing the work of the taxpayer's employees, accountants, or attorneys in a way that would suggest wrongdoing or negligence.

2. Focus on explaining how the taxpayer's books and records are inadequate.

3. Explain the steps that need to be taken to bring them into compliance with applicable statutes.

(7) Document the following:

1. The nature of the inadequacies of the taxpayer's records.

2. Managerial discussions.

3. The basis for the conclusion reached.

4. On_______, the date the organization was verbally informed that records were not adequate, and in the record of service section on the bottom of the attachment to Letter 4095 titled, Applicable Provisions of the Internal Revenue Code and Regulations.

5. On_______, the date of delivery or service of Form 2807, and in the record of service section on the bottom of the attachment to Letter 4095 titled, Applicable Provisions of the Internal Revenue Code and Regulations. If certified-mailed, the return receipt constitutes record of service. Attach it to the copy of the Form 2807 retained in the case file. If hand-delivered, include the name of the individual served.

6. On________, the date you solicited an agreement, and in the record of service section on the bottom of the attachment to Letter 4095 titled, Applicable Provisions of the Internal Revenue Code and Regulations.

(8) If the case involves a potential or existing record retention agreement, contact LB&I. Use the Specialist Referral System (SRS) to obtain the assistance of a Computer Examination Specialist. See IRM 4.70.13.6.2, Specialist Referral System.

(9) If you and your GM agree that an Inadequate Records Notice is appropriate, take the following steps:

1. Prepare Form 2807. See example at Exhibit 4.70.14-9, EO Form 2807 Sample..

2. Include the date the taxpayer was verbally notified that the records were inadequate or not in compliance with a record retention agreement.

3. Include the tax years examined.

4. Include a description of the specific books and records.

5. Include a clear and concise statement how the taxpayer's records were inadequate or not in compliance with a record retention agreement.

6. Personally serve Form 2807 or send by certified mail. If you hold a closing conference with the organization, serve Form 2807 to an officer or trustee authorized to sign tax returns. Allow no more than 15 days.

7. Solicit an agreement with the taxpayer on Form 2807.

8. If the taxpayer doesn’t sign Form 2807, discuss the facts and circumstances with your GM.

   Reminder: Document all managerial discussions.

9. Prepare referral Form 5666. State in the "Information Obtained" section of Form 5666 that the attached Letter 4095 package is documentation for an Inadequate Records Notice.

   Note: Recommend a follow-up examination on Form 5666 for no less than two years subsequent to the year of the current examination.

10. Name the electronic files of the referral package following the established naming convention format and post to the RCCMS Office Documents Folder.

11. Check the "Yes" box on the SH-56.0 Referral item on tab 3 of 6 of the RCCMS 3198-A Special Handling checksheet to flag the Form 5666.

    Note: Manager reviews and sends the signed electronic Form 5666 (and attachments) in a secure email to the TE/GE Referral Group email box at *Manager EO Classification.

    See IRM 4.70.6.4, Referrals Procedures.

12. Issue Letter 4095 and its attachments to the taxpayer. m. At closure, use RCCMS DC 214, Change due to Correction of Operations. Close the case to the closing unit following.

13. At closure, use RCCMS DC 214, Change due to Correction of Operations. Close the case to the closing unit following.

(1) You may be assigned a follow up examination or compliance check of the taxpayer. Document in your workpapers your consideration of the inadequate record-keeping issue. State whether or not the taxpayer has corrected the inadequacies.

(2) If the taxpayer is substantially complying with the requirements to keep adequate records, follow normal examination procedures with regard to the scope of the examination.

(3) When closing the case, include the inadequate records notice information in the case file.

(4) If, upon follow-up, the taxpayer is still not keeping adequate records, consider additional enforcement measures, including:

• Assertion of accuracy penalties

• Revocation

(1) Every organization exempt from tax, whether or not required to file an annual information return, must submit such additional information as may be required by the IRS for the purpose of inquiring into its exempt status and administering the provisions of subchapter F, Chapter 1 of subtitle A of the Code, IRC 6033, and Chapter 42 of subtitle D of the Code. Treas. Reg. 1.6033-2(1)(2).

(2) Any organization exempt from tax under IRC 501(a) is required to supply the IRS with such information as is required by the revenue procedures, the instructions to Form 990, and the schedules thereto, and to keep such books and records as are necessary to substantiate such information. IRC 6033, Treas. Reg. 1.6001-1(c) and Treas. Reg. 1.6033-2(a)(1) and 1.6033-2(i)(2).

(3) Failure to maintain proper books and records, and make them available to the examiner, may result in revocation of tax-exempt status because the organization isn’t observing the conditions required for such status.

(4) Although drafted prior to enactment of IRC 6652, Rev. Rul. 59-95 has never been withdrawn and can be used to support a revocation, where the organization will not supply the information necessary to enable the Service to make a determination as to whether there have been any substantial changes in the organization's character, purpose, or method of operation, and there is a substantial doubt that the organization should continue to be exempt.

(5) If the organization continues to fail to comply substantially with the law and regulations for maintaining adequate books and records, or fails to provide requested information, discuss the inadequacies with your GM to determine whether to propose revocation of tax-exempt status.

(6) If you and your GM decide revocation is appropriate, your workpapers and report of examination must demonstrate:

1. How the information requested from the taxpayer is material in establishing the organization's right to continued exemption.

2. That the organization was given an adequate opportunity to provide the requested information.

3. That the organization was advised of the consequences of failing to provide such information.

   Note: The GM may consider requesting advice from TEGEDC during the development of a revocation issue based on a failure to maintain or provide records.

(1) An Appeals conference is not given to taxpayers who agree to proposed adjustments but don’t execute Form 2807.

(2) If the taxpayer doesn’t execute Form 2807 and the case is unagreed, inform the taxpayer of the opportunity to discuss the matter at an Appeals conference.

(1) Status 36 in the EOBMF describes the following types of organizations that haven’t received a ruling or determination letter granting tax-exempt status, and aren’t covered under a group exemption ruling:

• Organizations other than IRC 501(c)(3), (9) or (17) that filed a Form 990-N, Form 990, or Form 990-EZ, self-declaring their exempt status, not covered under a group exemption ruling.

• IRC 501(c)(4) entities that have registered under IRC 506 (even if no Form 990 series return was filed).

• Organizations claiming exemption under IRC 501(c)(29) even though these organizations are required to apply for exemption because the application process is anticipated to take longer than the 180 days prescribed under the Status 40 program.

(2) A Status 36 organization:

• Can be disqualified from tax-exempt status for the specified self-declared tax years if it fails to qualify.

• Is subject to filing Form 990-T and other EO returns if it qualifies for tax-exempt status for the self-declared tax year.

(3) A disqualification from a self-declared tax-exempt status is subject to declaratory judgment rights.

(4) If a Status 36 organization meets the requirements for the tax-exempt status as declared on Form 990 or Form 990-EZ:

1. Use Letter 6049 for no-change.

2. Inform the organization of the application for exemption process, including user fee.

(5) If a Status 36 organization fails to qualify for tax-exemption for any tax year, prepare Letter 3618, Form 4621-A, Form 886-A, and Form 6018.

1. Prepare Form 2363-A (don’t submit for processing). See Exhibit 4.70.14-15, EO Status 36 Case: Form 2363-A Instructions.

2. Prepare Form 5666 or (Form 5346) for SB/SE or LB&I. Alternatively, you can enforce the income tax for the examined tax years.

(6) Refer to the six Status 36 scenarios at Exhibit 4.70.14-4, Status 36 Case Scenarios.

(7) If the examination resulted in a change due to correction of operations or had changes to related returns, use DC 52 (RCCMS 214) and issue Letter 1744 as a closing letter with explanations of the changes on a Form 886-A. Use DC 02 (RCCMS 107) and issue Letter 6049 if there were no changes.

(8) For agreed disqualifications:

1. Close the primary return with DC 13 (RCCMS 501) unless a higher priority disposal code applies.

2. Form 5666 (or Form 5346) is required if you use DC 13 (RCCMS 501).

3. If you enforce the income tax for the disqualified tax years, close the primary return with DC 04 (RCCMS 205) or DC 05 (RCCMS 207).

   Note: Refer to Exhibit 4.70.14-6, for instructions in preparing Form 6018.

(9) For unagreed disqualifications, use DC 07 (RCCMS 601) or DC 10 (RCCMS 604).

(1) An initial examination report is a preliminary summary report proposing a change in tax or status and soliciting an agreement. Initial examination reports:

• Are an efficient way to present a report and secure an agreement when the taxpayer reasonably understands the changes and you expect to receive an agreement to the changes.

• Are followed by a formal report if the taxpayer disagrees or fails to reply. In contrast formal reports are followed by a SNOD or immediate assessment if a taxpayer fails to reply.

• Aren’t used for declaratory judgment cases, and church examinations. You can use a draft report tool instead if appropriate.

• Are optional and not appropriate for all cases.

  Note: In the case of discrepancy adjustments, Letter 3605, Form 4549-E and Form 886-A is a first formal examination report issued to the taxpayer that can be thought of as an initial examination report, but it is actually a formal examination report because it is followed by a SNOD if there is no reply to the 30-day letter.

(2) For non-declaratory judgment cases, you can bypass an initial report process and resort directly to a formal report process if:

• You aren’t certain the taxpayer understands the proposed changes.

• You reasonably expect the taxpayer will disagree with the changes.

• Other reasons are at the discretion of the examiner or the GM.

  Note: In some larger cases, you can present an issue to the taxpayer using Form 5701, and then prepare an initial or formal examination report after you have gathered all comments on all issues (all Forms 5701). Form 5701 isn't a "report" or a waiver form, rather it is used to present one issue at a time and to document the taxpayer's agreement or comments on each specific issue.

  See also Form 5700, Issue Control Log, also optional.

  Note: Consider that a FTS may be more appropriate in order to settle one or more unagreed issues. See IRM 4.70.14.2.4.3.2, EO - Fast Track Settlement (FTS).

(3) The taxpayer's reply or non-reply to an initial examination report determines whether you have an agreed or unagreed case moving forward.

1. If the initial examination report is agreed, issue a final agreed change closing letter with the GM’s signature, and close the case to the EO closing unit.

2. If the initial examination report is unagreed, issue a 30-day letter and formal examination report, update AIMS to status 13 while in 30-day suspense. Hold in suspense pending the taxpayer’s reply.

(4) The initial examination report:

1. Is a proposal.

2. Solicits an agreement.

3. Solicits correction of a taxable event for Chapter 42 excise tax purposes.

4. Allows more time to resolve any disputed facts of the case.

5. Allows for usage of shorter reply due dates (less than 30 days), if desired.

6. May inform the taxpayer to consider FTS for an unagreed issue.

7. Is optional and may be bypassed for a formal report.

(5) For the initial examination report, you must:

1. Fully develop the case before issuing the report.

2. Have a reasonable belief the taxpayer understands the changes and will agree without much difficulty.

3. Inform the taxpayer that the initial examination report doesn't constitute an official 30-day letter.

(6) Generally, you prepare the facts, law and argument portion of the RAR component in summary form. If prepared in summary form, the explanation must be sufficient to justify the proposed change.

(7) Give the initial examination report to the taxpayer using one of the following transmittals:

• A drafted nonstandard letter.

• A Form 4564, Information Document Request.

• A Form 5701, Notice of Proposed Adjustment.

  Note: Indicate on the transmittal, "This Not a 30-day Letter."

(8) If a taxpayer has verbally indicated they will agree to a proposed tax adjustment, an initial examination report doesn't need to include a Form 886-A, Explanation of Items.

(9) If preparing Form 886-A, type:

1. "This is an initial examination report" on the first page of the Form 886–A.

2. "Initial examination report" in the header of the Form 886–A.

(10) Use the spelling and grammar checker. Refer to the tables listing various reports and letters that can be included in an initial examination report:

• See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

• See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

(11) After the deadline for responding passes, determine if the taxpayer:

• Agreed to the proposed adjustment.

• Submitted a reply other than a signed agreement.

• Failed to reply to the initial examination report.

(12) If the taxpayer signs the agreement, process as follows:

(13) If the taxpayer disagrees with the initial examination report (and doesn't request a FTS), review the reply and proceed as follows:

(14) If no one replies to the initial report, issue a "Formal examination report" via certified mail to the taxpayer and any representatives. See IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.