IRS Procedures: Examinations and Appeals (Portfolio 623)

Tax Management Portfolio, IRS Procedures: Examinations and Appeals, No. 623-3rd, describes and discusses the law applicable to, and the policies and procedures followed by, the IRS in the examination of tax returns and administrative appeals of examination determinations. It reviews the general structure and procedures involved in the examination and appeals process, including the procedures for selecting tax returns for examination, the nature, scope and conduct of campus and area office examinations, and the issuance of examination reports.

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Tax Management Portfolio, IRS Procedures: Examinations and Appeals, No. 623-3rd, describes and discusses the law applicable to, and the policies and procedures followed by, the IRS in the examination of tax returns and administrative appeals of examination determinations.

It reviews the general structure and procedures involved in the examination and appeals process, including the procedures for selecting tax returns for examination, the nature, scope and conduct of campus and area office examinations, and the issuance of examination reports.

The Portfolio also describes and discusses collateral examination procedures, including the investigative and summons powers of the IRS, requests for technical advice from the IRS National Headquarters, consents to extend the period of limitations and special areas relating to penalties, jeopardy assessments and bankruptcies. Finally, the procedures and distinctive features involved in the examination and appeal of claims for refunds are discussed.

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Caroline Rule, B.F.A., University of Cape Town, South Africa (with honors, 1980); M.F.A., San Francisco Art Institute (cum laude, 1982); J.D., Yale Law School (1989). Senior Editor, Yale Law Journal (1989). Member, New York Council of Defense Lawyers; member of the Committee on Civil and Criminal Tax Penalties of the Tax Section of the American Bar Association; master of the Federal Bar Council Inn of Court; member of the Federal Bar Council Committee on Sentencing Reform and Alternatives to Incarceration; member of the New York City Bar Association Committee on Criminal Advocacy. Recognized by “New York Super Lawyers” for 2011 and 2012.


Detailed Analysis

I. Introduction

A. The IRS's Basic Authority and Sources

1. Overview of Portfolio Coverage

2. Recent Changes in Tax Administration

3. Internal Revenue Manual

4. IRS Organization Before the Reorganization - Examination Process

a. National Office

b. Regional Offices

c. Service Centers

d. District Offices

5. General Examination Procedures

a. Examination of Tax Returns

b. Appeal of Examination Determinations

c. Examinations and Appeals of Refund Claims

B. Determination of Tax Liability - General Overview

1. Returns Accepted as Filed

2. Examination of Tax Returns

a. Agreement on Examination

b. Disagreement on Examination - Group Manager Conference, Fast Track Mediation Appeal

c. Disagreement on Examination - No Appeal

3. Refund Claims

C. Taxes

1. Income Taxes

2. Estate and Gift Taxes

3. Employment Taxes

4. Excise Taxes

D. Statutory Framework

1. Commissioner of Internal Revenue

2. Chief Counsel

3. Tax Returns and Records

a. Taxpayer Identifying Numbers

b. Tax Shelter Registration Numbers

4. Assessment of Tax

5. Deficiency Procedures

a. General Overview

b. Definition of Deficiency

c. Assessment

d. Determination by Tax Court

6. Receivership and Bankruptcy

7. Period of Limitations

a. Assessments

b. Credits and Refunds

8. Additions to Tax; Additional Amounts; Penalties

9. Collection

10. Credits, Refunds, Abatements

11. Interest

12. Closing Agreements and Compromises

a. Closing Agreements

b. Offers in Compromise

E. Taxpayer Bill of Rights

1. Introduction

2. Taxpayer Rights

3. Taxpayer Interviews

4. Reliance on Written Advice by the IRS

5. Problem Resolution

a. In General

b. National Taxpayer Advocate

c. Taxpayer Assistance Orders

(1) In General

(2) Limitations on Use of TAOs

(3) Significant Hardship Defined

(4) TAO Procedures

(5) Where to File TAO Request

(6) Resolution of Requests for TAOs

(7) Reopening Closed Cases

(8) Period of Limitations

6. Installment Agreements

7. Disclosures by Tax Preparers

8. Tax Due Notices

9. Recovery of Reasonable Administrative and Litigation Costs

10. Extension of Interest Free Period

11. Joint Returns and Innocent Spouse Relief

12. Collection Activities

a. Requirements of Notice of Levy

b. Procedures for Levy

c. Principal Residence Exempt From Levy

d. Levy on Business Assets

e. No Levy While Offers and Installment Agreements Pending

f. Release of Levy

g. Sale of Seized Property

h. Withdrawal of Public Notice of Lien

i. Uniform Asset Disposal Mechanism

j. Jeopardy and Termination Assessments

k. Fair Tax Collection Practices

l. Due Process in Collection Activities

m. Approval for Liens, Levies and Seizures

n. Levy Prohibited During Pendency of Refund Proceedings

o. Refunds of Amounts Collected

p. Cataloging Complaints

13. Civil Actions for Damages

a. Damages for Unauthorized Disclosure of Returns and Return Information

b. Damages for Failure to Release Lien

c. Damages for Unauthorized Actions by IRS

d. Damages for Filing False Information Return

e. Prohibition on Requests to Taxpayers To Give Up Rights To Bring Actions

14. Expiration and Retroactivity of Regulations

II. Examinations: Basic Procedures

Introductory Material

A. Selection of Returns for Examination

1. In General

2. Criteria for Examination Selection

a. Discriminant Function System

b. IRS Compliance Research

c. Other Selection Methods

(1) Claims for Refund or Credit

(2) Alien Returns

(3) Change In Accounting Method

(4) Section 338 Elections

(5) Related Returns

(6) Multi-Year Examination

(7) IRS Initiated Examinations

(8) Miscellaneous Triggering Factors

d. Prohibition on Executive Branch Influence Over Taxpayer Examinations

3. Screening and Classification of Returns

4. Survey of Returns

B. Campus Examinations

1. In General

2. Examination Procedures

C. IRS Area Office Examinations

1. In General

2. Correspondence Examinations

3. Office Interview Examinations

a. Initiation of Examination

b. Procedures and Techniques

4. Field Examinations

a. Initiation of Examination

b. Procedures and Techniques

D. General Examination Procedures

1. Case Transfers

2. Conflict of Interest

3. Furnishing Credentials

4. Conduct of IRS Agents

5. Furnishing Advice and Counsel to Taxpayers

6. Bribery Attempts

7. Use of Witness on Behalf of Taxpayer

8. Assistance of Area or Division Counsel

9. Recognition of Taxpayer's Representative

10. Repetitive Examinations

11. Recording Conferences

12. Interview of Witness: Dual Representation

13. Suspending Cases

14. Examination Cycle

15. Duty/Authority of IRS Examiners

16. Documentation

E. Conclusion of Examination

1. Possible Outcomes of Examination

a. No Change Cases

b. Agreed Cases

c. Unagreed Cases

d. Partially Agreed Cases

2. Examination Reports

a. Regular Agreed Cases

b. Unagreed and Partially Agreed Cases

3. Quality Review

4. Processing of No-Change and Agreed Cases

5. Processing of Unagreed Cases

a. Procedures Before Thirty-Day Letter

b. Thirty-Day Letter

c. Response to Thirty-Day Letter

(1) Extension of Time

(2) Agreement

(3) Protest

d. No Response to Thirty-Day Letter

(1) Issuance of Notice of Deficiency

(2) Rescinding Notice of Deficiency

e. Protests, Correspondence, and Waivers Received After Issuance of Notice of Deficiency

f. Appeals Waiver of Jurisdiction After Issuance of 90-Day Letter

6. Reopening Closed Cases

a. When Cases Are Considered Closed

(1) Agreed Cases

(2) Unagreed Cases

(3) No Change Cases

b. Conditions for Reopening Closed Cases

c. Clearly Defined Substantial Error

d. Serious Administrative Omission

7. Interest

F. TEFRA Unified Examination Procedures

G. Specialized Examination Programs

1. Examination Guidelines

2. Large Case Program

a. Early Referral Procedures

b. Accelerated Issue Resolution

3. Technical Advisor Program

4. Examination Specialization

5. Appeals Coordinated Issues Program

6. Other Specialized Programs

III. Collateral Procedures

A. Obtaining Information - Examination and Summons Power of the IRS

1. Authority

2. Circumstances Under Which Issuance of Summons Is Considered

3. Issuance of Summons

4. John Doe Summons

5. Rights of Persons Summoned

6. Third-Party Contacts and Summonses

7. Summons for Computer Software

8. Summons Enforcement

a. Powell Requirements

b. Discovery and Hearing

c. Contempt

9. Privileges and Other Defenses to Summons

10. Designated Summons

B. Other Sources of Examination Information

1. Accountants’ Workpapers, Etc.

a. Tax Reconciliation Workpapers

b. Audit Workpapers

c. Taxpayer

d. Qualified or Adverse Opinions by CPA

2. Appraisals

3. Requests for Information from Government Agencies and Other Third Parties

C. Technical Advice

1. In General

2. Who Requests Technical Advice

3. When Technical Advice Is Available

4. Procedures for Requesting Technical Advice

5. Conference

6. Effect of Technical Advice

7. Section 7805(b) Relief

D. Technical Expedited Advice Memorandum

E. Field Service Advice

F. Extending the Period of Limitations for Assessment

1. In General

2. Types of Consent

a. Fixed-Period Consent

b. Open-Ended Consent

c. Restricted Consent

3. Miscellaneous Consent Procedures

a. Refund Claims

b. Multiple Taxable Years

c. Parent and Subsidiary Corporation Consents

d. Transfers of Consent Cases

4. Consequences

5. Termination of Extensions

G. Penalties

H. Special Situations

1. Jeopardy and Termination Assessment Cases

a. Notice

b. Administrative Appeal

c. Judicial Review

d. Notice of Deficiency

2. Request for Prompt Assessment

3. Executor's Discharge from Personal Liability

4. Bankruptcy Cases

a. Automatic Stay

b. Period of Limitations

c. Filing of Tax Court Petition

d. Request for Prompt Assessment

e. Tax Court or Bankruptcy Court Review

f. Refunds

IV. Appeals

A. General Overview

B. Jurisdiction of Appeals

C. Getting to Appeals

1. Non-Docketed Cases

a. Pre-90-Day Cases

b. 90-Day Cases

2. Docketed Cases

D. Early Referral Procedures

1. General Overview

2. Examination Early Referral Procedures

a. Criteria for Selecting Issues for Early Referral

b. Procedures for Initiating a Request for Early Referral

c. Procedures After a Request for Early Referral Is Initiated

3. IRS-Initiated Change in Accounting Method Early Referral Procedures

4. Employment Tax Early Referral Procedures

a. Background

b. Appropriate Issues for Early Referral

c. Requests for Early Referral

5. Collection Early Referral Procedures

6. Employee Plans/Exempt Organizations (EP/EO) Early Referral Procedures

E. The Collection Appeals Program

F. The Bankruptcy Appeals Program

G. Appeals Procedures

1. Prohibition on Ex Parte Communications

2. Preliminary Review

3. Period of Limitations

4. Technical Advice

5. Assistance from Counsel in Nondocketed Cases

6. Rebuttal of Protest and Pre-Conference Procedures for Large Cases

7. Related Cases

8. Appeals Coordinated Issues

9. Appeals Industry Specialization Program

10. Change of Appeals Officer

11. Availability of Appeals Officers and Videoconferencing

12. Transfer of Cases

13. Appeals Conferences

14. Post-Closing Conferences in LMSB Cases

15. Mutually Accelerated Appeals Process

16. Joint Committee Review

17. Penalty Appeals

a. Forms of Protest

b. Penalty Resolution Procedures

18. Mediation

a. Background

b. The Mediation Process

c. Fast Track Mediation

d. Mediation in Tax Court Cases

19. Arbitration

H. Settlement Practice and Collateral Procedures

1. General

a. Types of Settlements

(1) Mutual Concession Settlements

(2) Split Issue Settlements

(3) Nuisance Value Settlements

b. Partial Settlement

c. Fast Track Settlement

2. Raising New Issues

a. Definition of New Issue

b. Definition of Substantial Grounds

c. Definition of Material

3. Settlement of Whipsaw Cases

4. Settlements of Nonexamined Years Affected by Appeals Settlements

5. Settlements Affecting Subsequent Tax Years

I. Agreements

1. Form 870 and 870-AD Agreements

a. In General

b. Finality of Form 870-AD Agreements

2. Closing Agreements

3. Collateral Agreements

4. Offers In Compromise

5. Unagreed Cases

6. Cases Docketed Before Tax Court

7. Reopening Cases

J. Recovery of Reasonable Administrative Costs

1. In General

a. Administrative Proceeding Defined

b. Administrative Proceeding Date Defined

c. Reasonable Administrative Costs Defined

d. Prevailing Party Defined

(1) Substantially Justified

(2) Amount in Controversy

(3) Most Significant Issues Presented

(4) Net Worth Requirements

(5) Determination of Prevailing Party

2. Procedures for Recovering Costs

3. Where Request Must Be Filed

4. When Request Must Be Filed

5. Notice to the Taxpayer

6. Appeal to Tax Court

V. Refund Claims: Examination and Appeal Procedures

A. In General

B. Processing Claims for Refund

C. Claims in Open Cases

D. Cases Previously Closed by Appeals

1. Form 870 Agreement

2. Form 870-AD Agreement

3. Technical Advice

E. Notice of Claim Disallowance; Waiver

F. Appeals

1. Time Restrictions on Acceptance of Refund Claims

2. Conclusion of Appeals Consideration

3. Reconsideration of Disallowed Claims Cases

4. Cases Previously Closed by Appeals

G. Penalties

H. Partnerships

I. Joint Committee Cases

1. Examination

2. Appeals


Working Papers

Table of Worksheets

Worksheet 1 Structure of the Internal Revenue Service

Worksheet 2 [Reserved]

Worksheet 3 Sample Power of Attorney (Form 2848)

Worksheet 4 Sample Form 5701 (Notice of Proposed Adjustment)

Worksheet 5 Sample 30-Day Letter

Worksheet 6 Sample 90-Day Letter: Notice of Deficiency Under § 6212

Worksheet 7 Sample Letter to Request an Extension of Time to File a Protest to Examination Changes Proposed in 30-Day Letter

Worksheet 8 Sample Protest to 30-Day Letter

Worksheet 9 Sample Piggyback Protest for Same Issue Raised in a Subsequent Tax Year

Worksheet 10 Sample Piggyback Protest for Officer of Corporation that Is at Appeals

Worksheet 11 Sample Request for Mediation Under § 7123

Worksheet 12 Sample Agreement to Mediate Under § 7123

Worksheet 13 Sample Mediation Consent To and Acknowledgement of Disclosure of Return and Return Information Under § 6103

Worksheet 14 Sample Request for Arbitration Under § 7123

Worksheet 15 Sample Agreement to Arbitrate Under § 7123

Worksheet 16 Sample Arbitration Consent To and Acknowledgement of Disclosure of Return and Return Information Under § 6103

Worksheet 17 Sample Form 870 Waiver of Restrictions on Assessment Under § 6213(d) and Collection of Deficiency in Tax and Acceptance of Overassessment

Worksheet 18 Sample Form 870–AD (Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment)

Worksheet 19 Sample Form 872 Consent to Extend the Time to Assess Tax Under § 6501

Worksheet 20 Sample Form 872–A Special Consent to Extend the Time to Assess Tax Under § 6501

Worksheet 21 Sample Form 872–T Notice of Termination of Special Consent to Extend the Time to Assess Tax Under § 6501

Worksheet 22 Sample Closing Agreement (Form 906) Under § 7121

Worksheet 23 Sample Offer in Compromise (Form 656) Under § 7122

Worksheet 24 Sample Request for Taxpayer Assistance Order Under § 7811 To Prohibit Sale of Taxpayer's Residence To Allow For Refinancing

Worksheet 25 Sample Installment Agreement (Form 433-D) Under § 6159

Worksheet 26 Sample Minimum Bid Sheet (Form 4585) for Sale of Seized Property

Worksheet 27 Sample Summons (Form 2039)

Worksheet 28 Sample Claim for Refund Under § 6402

Worksheet 29 Publication 1, Your Rights as a Taxpayer

Worksheet 30 Publication 5, Your Appeal Rights and How to Prepare A Protest If You Don't Agree

Worksheet 31 Publication 556, Examination of Returns, Appeals Rights, and Claims for Refund

Worksheet 32 IRS Market Segment Specialization Program Training Guides-List




Legislative History:


Internal Revenue Manual:

Treasury Rulings: