Section 9. Statutory Notices of Deficiency

(1) This transmits revised IRM 4.8.9, Technical Services, Statutory Notices of Deficiency.

Material Changes

(1) Significant changes to this IRM are listed below.

• Referred to IRM 4.8.9.8.10 for other items to review
• Included TXMODA as an IDRS print.
• Referred to IRM 25.15.6.5.2 when TC 971 with action code 065 is on the taxpayer’s account.
• Guidance on pulling a TXMODA on both the Primary and Secondary TINs to check for TC 640 payments. Included an example for a potential barred assessment if not checking for a TC 640.

• For mandatory review cases clarified the example when using Bureau of Labor Statistics for determining income.
• All tax years must be sent to Area Counsel even if only one tax year meets the substantial deficiency assertion.

• Removed the word “must” from IRM 4.8.9.23.1(1), Protests for Appeals.
• Added guidance regarding referring a protested case after the SNOD has been issue to Appeals. The TS reviewer will explain verbally or in writing what criteria the taxpayer is not meeting to be eligible to be referred to Appeals. If taxpayer cannot fix their protest and has indicated they do not intend to file a petition with Tax Court TS reviewer should contact counsel for advise on how to proceed.

Effect on Other Documents

This material supersedes IRM 4.8.9, dated October 13, 2020. This revision incorporates Interim Guidance Memorandum SB/SE-04-0621-0028, Interim Guidance on Returning Cases when an indirect adjustment to the Qualified Business Income Deduction (QBID) Has Not Been Addressed by Field Examiner, dated June 3, 2021; SB/SE-04-0121-0002, Interim Guidance Memorandum on Removing the Word “must” from IRM 4.8.9.23.1(1), Protests for Appeals, dated January 15, 2021 and NHQ-01-1019-0001, Memorandum on Clarification of Policy For Use of Fax in Taxpayer Submission, dated October 29, 2019.

Audience

Effective Date

Alfredo Valdespino
Director, Field Examination
SE:S:DCE:E:FE
Small Business/Self-Employed

Program Scope and Objectives

1. Purpose -This IRM section provides guidance on the preparation and issuance of statutory notices of deficiency.
2. Audience -These procedures apply to Small Business and Self-Employed (SB/SE) Examination Field Technical Services employees.
3. Policy Owner -The Director of SB/SE Examination, Field Examination.
4. Program Owner -The SB/SE Examination Operations, Field Examination.
5. Contact Information - To recommend changes or make any other suggestions to this IRM section, see IRM 1.11.6.5, Providing Feedback About an IRM Section - Outside of Clearance.
6. Program Goals -These procedures provide for the accurate and timely preparation and issuance of statutory notices of deficiency.

Background

1. When the Internal Revenue Service (IRS) issues a notice of deficiency, the notice must be sent by certified or registered mail.
2. When taxpayers disagree with a tax determination, they may petition the United States Tax Court (Tax Court) for a judicial determination of the tax liability after receiving a notice of deficiency, without prior payment in full of the tax at issue. This section outlines procedures used by Technical Services' staff for preparing, reviewing, and issuing statutory notices of deficiency under IRC 6212, Notice of Deficiency.
3. This section does not include procedures for preparing, reviewing, and issuing notices of determination of worker classification under IRC 7436, Proceedings for Determination of Employment Status. Those procedures are contained in IRM 4.8.10, Notice of Employment Tax Determination Under IRC 7436.

Responsibilities

1. The Director of SB/SE Examination Operations, Field Examination is the Executive responsible for providing policy and guidance to Technical Services employees.
2. Examination Area Directors in Examination Field with Technical Services territories have executive responsibilities for the preparation and issuance of Statutory Notices of Deficiency.

Acronyms and Codes

1. The following table lists the acronyms used throughout this IRM section:

Terms

1. Audience -The employees responsible for preparing the statutory notice of deficiency, or who require knowledge about the program, process, or activity.
2. Reviewer -The local reviewer assigned to complete the various required procedures for preparing the statutory notice of deficiency.
3. Defaults -Refers to notices of deficiency for which neither a petition, or agreement was received during the 90-day (or 150) period. The IRS is required to ensure the assessment of the deficiency on any defaulted notice of deficiency is made within the statutory period of assessment.
4. Notice of Deficiency-Waiver -Form 4089-B, Notice of Deficiency - Waiver, is included in the notice package to allow the taxpayer to agree to the assessment of the proposed deficiency on Form 4549, Report of Income Tax Examination Changes.

Related Resources

1. The following table lists the references used throughout this IRM section:

Notice of Deficiency Definition

1. A notice of deficiency, also called a "statutory notice of deficiency" (SNOD) or, "90-day letter" , is a legal notice in which the Commissioner determines the taxpayer's tax deficiency. IRC 6212 and IRC 6213 require that the IRS issue a notice of deficiency before assessing additional income tax, estate tax, gift tax, generation-skipping transfer tax and certain excise taxes unless the taxpayer agrees to the additional assessment. The notice of deficiency is a legal determination that is presumptively correct and consists of the following:

1. A letter explaining the purpose of the notice, the amount of the deficiency, and the taxpayer's options.
2. A waiver to allow the taxpayer to agree to the additional tax liability.
3. A statement showing how the deficiency was computed.
4. An explanation of the adjustments.

1. To comply with IRC 6213.
2. To ensure the taxpayer is formally notified of the IRS intention to assess a tax deficiency.
3. To inform the taxpayer of the opportunity and right to petition the Tax Court to dispute the proposed adjustments.

Criteria for Issuance

1. A notice of deficiency must be issued when there is a proposed tax deficiency with which the taxpayer does not agree and:

1. The statute of limitations is imminent, and no extension can be obtained,
2. The taxpayer does not respond to, or file a valid protest to, a 30-day letter, or
3. The taxpayer requests the issuance of the notice in order to petition the case to the Tax Court.

When Issued

1. If a 30-day letter (or equivalent) offering an IRS Independent Office of Appeals (Appeals) hearing was issued to the taxpayer, a notice of deficiency should be issued within 60 days of receipt of the case in Technical Services (TS). However, a notice will be issued earlier if the statute of limitations is imminent, and no statute extension can be obtained.
2. The Examination field group secretary will update Examination Returns Control System (ERCS) to the appropriate Technical Services code (TSC) and Status Code 21, In-Transit to TS, and forward the case file to TS for preparation and issuance of the SNOD.
3. If a case file that has been sent to TS for preparation of a notice of deficiency is selected for sample review, TS will affix the sample selection sheet to the case file and follow the guidelines outlined in IRM 4.2.8, Guidelines for SB/SE National Quality Review.

Authority to Issue Notices of Deficiency

1. The Secretary is authorized to issue a notice of deficiency pursuant to IRC 6212(a), Notice of Deficiency, In General.
2. See Servicewide Delegation Order (Del. Order) 4-8 in IRM 1.2.2.5.8, Delegation Order 4-8 (Rev. 1) (formerly DO-4-8 and DO-77, Rev. 28), Authority to Issue Notices of Deficiency or Execute Agreements to Rescind Notices of Deficiency for the officials delegated by the Commissioner to sign and issue a notice of deficiency.
3. See IRM 4.8.9.11 , Signing and Dating the Notice of Deficiency, and IRM 4.8.9.30.4 , Authority for Agreement to Rescind, for the authority to sign and date notices and to rescind notices of deficiency that have been issued, respectively.

Electronic Case Files (ECF)

1. SB/SE Field Examination is moving towards closing files electronically; eliminating the need to create a paper case file.

1. All SB/SE Field examination cases will now be uploaded to Report Generation Software (RGS) to create electronic documents.
2. Administrative files and closing documents will be scanned and uploaded to RGS by the IRS employee assign the case file.

Note:

Documents such as the SNOD, correspondence sent to the taxpayer and any relevant taxpayer records are scanned and saved to the RGS file.

Technical Services Electronic Case Assignment

1. TS group managers are responsible to check ERCS in-Transit Report or weekly Tableau Pivot Tables for any new electronic incoming cases. Electronic cases are identified on these reports with an "E" . Managers can use CEAS View Cases to view the electronic case file.
2. Once the TS group manager identifies the ECF, they will e-mail the administrative support staff member or the tax examiner (TE) and direct them to assign the ERCS and RGS records to the:

• TE if case is going to Appeals.
• TS Reviewer if the case requires a SNOD or other post-examination processing per IRM 4.8.2.3.2, Cases Requiring Post-Examination Processing.

Closing Electronic Docketed and Non-Docketed Cases to the IRS Independent Office of Appeals (Appeals)

1. The TE will use the RGS to perfect the Form 5344, if necessary, and use AMCLS to update AIMS to Appeals. The AIMS record must be updated to status code 81 on or close to the same date the electronic case is sent to Appeals through the Appeals Electronic Case Receipts SharePoint Site.

Note:

If a case has been selected for NQRS sample review, the TE will update the case to status code 23 (see Exhibit IRM 4.8.2-1). The NQRS sample reviewer will alert the TS group manager by e-mail when the case is ready to be closed to Appeals. The TE/TS group manager must contact the NQRS sample reviewer at the address shown on the ERCS NQRS selection notice and forward the protested appeal case to the address shown on ERCS NQRS selection notice if not subject to electronic case closure. NQRS sample reviewer will alert the TS group manager by e-mail when the case is ready to be closed to Appeals. After notification is received, the TE/TS group manager will update the status code to 22 and will proceed to normal case closure to Appeals. Refer to IRM 4.8.2.3.4, Multi-Year Examination with at Least One Unagreed Year and One Agreed/No Change Year, for guidance where the multi-year case is not selected for NQRS review.

• Electronic Case Receipts Check Sheet (completed by the Field examiner and saved in the RGS Case File Document folder).
• Form 3198, Special Handling Notice for Examination Case Processing.
• Report (i.e., Form 4549-A or Form 5278, Statement - Income Tax Changes).

Note:

Refer to Knowledge Management TS Closing Docketed Paperless Electronic Closures to Appeals site for more information.

• SNOD including: The letter giving the taxpayer access to Tax Court (i.e., Letter 531, etc.) and the report (i.e., Form 4549-A or Form 5278, Statement - Income Tax Changes).

Note:

Refer to IRM 4.8.1, Technical Services, Organization and Responsibilities for more guidance on TS TEFRA FPAA and BBA NOPPA FPA. Also refer to IRM 4.31.2, TEFRA Examination-Field Office Procedures and IRM 4.31.9, Centralized Partnership Audit Regime (BBA) Field Examination Procedures respectively for more information.

Note:

If the only defect is that the referral is missing documents indicated on the transmittal, APS will request the information from the TS group manager. If the issue is not resolved within 10 days, the case will be returned to the TS group as a premature referral.

Electronic Case File Document (CFD) Folder - Statutory Notice of Deficiency

1. The TS reviewer reviews the electronic case file in RGS.

Note:

Refer to IRM 4.46.5, LB&I Examination Process, Resolving the Examination and IRM 4.46.6, LB&I Examination Process, Workpapers and Reports Resources for LB&I electronic case files closed to TS

Note:

Refer to Naming Conventions for Office Documents and Case File Documents and IRM 4.10.15, for applicable file name convention when saving electronically created documents in RGS.

Note:

The certified or registered mailing numbers can be found on the envelope, or the certified mailing list, and a copy must be saved in RGS CFD or IMS.

Electronic Counsel Referral - Mandatory Statutory Notice Review

1. When a SNOD requires Counsel review, the reviewer prepares the following documents:

• Letter 531, Notice of Deficiency.
• Form 4089-A, Notice of Deficiency - Statement or
• Form 4089-B, Notice of Deficiency-Waiver.
• Form 4549, Report of Income Tax Examination Changes or
• Form 4549-A, Report of Income Tax Examination Changes (Without Taxpayer Signature).
• Form 886-A, Explanation of Items.

Note:

TEFRA FPAA and BBA NOPPA FPA are mandatory counsel reviews. The assigned TS pass-through coordinator (TSPC) is responsible for submitting the case to counsel. Refer to IRM 4.8.1, Technical Services, Organization and Responsibilities for more guidance on TS TEFRA FPAA and BBA NOPPA FPA. Also refer to IRM 4.31.2, TEFRA Examination-Field Office Procedures and IRM 4.31.9, Centralized Partnership Audit Regime (BBA) Field Examination Procedures respectively for more information.

Electronic Case Closing to Centralized Case Processing (CCP)

1. With the exception of Memphis CCP, Cincinnati and Ogden CCP are no longer accepting paper case files. All cases closing to Cincinnati and Ogden CCP should be electronic or virtual case files unless a case is excluded from electronic closure. Refer to Cases Excluded from Paperless Electronic Closure in the virtual library for a current list of cases excluded from paperless electronic closure.

Note:

Cincinnati and Ogden CCP usually receives Specialty Exam and LB&I cases, which are closed virtually or electronically

Note:

For more information on LB&I paper case file closing refer to IRM 4.46.5.11.2.3, General Procedures for Paperless Case Closing to CCP and IRM 4.46.5.11.2.4(4), Exception to Paperless Case Closing to CCP.

1. ERCS Full Display Screen for Electronic Case indicator in the bottom right-hand portion of the screen.
2. Block Number 40X on Form 5344, (Field P38-40).

Note:

If the "E" Indicator is missing in ERCS the case file must be returned to the exam group to update ERCS. TS does not have the option to update ERCS with the "E" indicator.

Note:

For paper case files selected for review, the established virtual procedures will continue to be followed.

Who Prepares Notices of Deficiency

1. The following Technical Services employees prepare statutory notices of deficiency:

• Revenue agent (RA) reviewers.
• Tax auditor (TA) reviewers.
• Tax compliance officer (TCO) reviewers.
• Tax examiners (TE).

Cases Assigned to Tax Examiners

1. TEs prepare statutory notices of deficiency for the following:

1. TCO/TA no-show cases;
2. TCO/TA non-filer cases; and
3. TCO/TA cases with simple issues and deficiencies of $10,000 or less (may exceed $10,000 if it is a non-filer or no-show case).

1. Cases in which an indirect method was used to determine income;
2. Cases asserting the fraud penalty;
3. Transferee cases;
4. Cases involving a community property issue;
5. Cases involving a whipsaw issue;
6. Notices of determination of worker classification;
7. High profile taxpayers; and
8. Any case in which the manager feels is beyond the scope of the TE.

Cases Assigned to TCO/TA Reviewers

1. TCO/TA reviewers prepare statutory notices of deficiency for all other unagreed TCO cases that are not reviewed and prepared by TE reviewers.

Cases Assigned to RA Reviewers

1. RA reviewers prepare statutory notices of deficiency for the following:

1. All unagreed SB/SE Field Examination cases,
2. All unagreed LB&I cases, and
3. All unagreed Estate and Gift (E and G) cases.

Note:

Statutory notices of deficiency for E and G cases are prepared by the estate tax attorneys and reviewed by the RA reviewers prior to issuance.

Case Review Prior to Preparing Notices of Deficiency

1. All cases that require a SNOD require a limited review of unagreed issues and procedural requirements. The case should be able to withstand the scrutiny of Appeals and potential litigation in Tax Court.
2. The scope of the case review will be sufficient to ensure the following:

• Correct technical conclusions
• Proper consideration and computation of penalties
• Accurate computation of the tax deficiency
• Proper completion of all procedural requirements (e.g., ensuring the RGS electronic file is accurate, ensuring proper annotation is made on Form 3198 regarding interest (e.g., IRC 6621(c), IRC 6601(d), Rev. Rul. 99-40, etc.)
• Proper managerial involvement
• Proper protection of taxpayer rights

Reviewers must determine if the case is sufficiently correct to support the issues, which may require returning the case to the group examiner for clarification or error correction using Form 3990, Reviewer's Report. The reviewer should correct the error(s) in the case without returning it to the examiner, if at all possible.

Note:

Refer to IRM 1.2.65.3.4, SBSE 1-23-15 Error Tolerance Level for guidance whether to correct the error.

Caution:

The reviewer should ensure that no lead sheets, workpapers, or documents are deleted from the RGS electronic file if any revisions are made to the report.

Preliminary Administrative Items Needed for Case Review

1. When the case is received, the contents of the file are reviewed to ensure the following:

1. All returns are controlled on Audit Information Management System (AIMS) and ERCS, and the Report Generation Software (RGS) for all the years present. See IRM 4.10.15, Report Generation Software, as it defines the returns that must be in RGS.
2. All returns (original, amended, and superseding) are reflected on ERCS and are in the case file.
3. All claims are processed and have been considered in the report.
4. Amended returns (Transaction Code (TC) 976/977) have been considered in the report.
5. The case is in Status Code 25, Review Type 34 or 35, and Suspense Type 508 or 506.
6. The 30-day letter was sent to the taxpayer if adequate time remained on the statute(s).
7. The statute of limitations is correctly reflected on AIMS/ERCS.
8. Form 895, Notice of Statute Expiration, is properly completed, if required.

Reminder:

Reviewers must check the statute on Form 895 against AIMS, ERCS, and Integrated Data Retrieval System (IDRS), the stamped received date, and mailing envelope. Do not rely on the statements on Form 895 or AIMS/ERCS/IDRS. Reviewers must check these items personally, to ensure the information is correctly reflected.
If Form 895 statute information is correct, initial it. If Form 895 statute information is not correct, update the statute information, initial the change, prepare Form 5348, AIMS/ERCS Update, and submit Form 5348 with the case to the manager for approval of both the Form 5348 and Form 895.

IDRS Prints

1. Obtain current IDRS prints to verify the following information about the case:

1. AMDISA to verify the applicable years are on AIMS and to verify if any freeze codes are present. See note added in IRM 4.8.9.8.10 (2) (c) when reviewing the AMDISA for freeze codes.
2. INOLES (for each spouse's social security number(SSN), if applicable) to verify the taxpayer's name(s) and address(es).

Note:

IMFOLI/BMFOLI or TXMODA (for each spouse's SSN, if applicable) and RTVUE/BRTVU/TRDBV may also be utilized to verify the last return filed and the address on the last return filed if a concern is noted with the currency of the INOLES address.

Note:

Check the TC 150 and all TC 290/291/294/295/298/299/300/301/304/305/308/309 amounts to ensure that all applicable amounts are considered, not just the original tax as filed.

Note:

IMFOLR does not reflect negative taxable income. If necessary, the taxable income should be manually computed beginning with adjusted gross income on the TXMODA or IMFOLR. The result should agree with the taxable income per return (or as previously adjusted) as shown on the Revenue Agent Report (RAR).

Note:

When reviewing IDRS transcripts review for any pending transactions such as TC 290/291/294/295/298/299/300/301/304/305/308/309 or TC 976/977 etc. amounts

Note:

Obtain IRP transcripts for all years under examination for income purposes, as well as IRP transcripts for the most current year for address verification.

Example:

If Campus posts a TC 640 payment on the Secondary TIN and we hold the case open under the SNOD statute extension period and did not check for a TC 640 we may have a barred assessment.

Correct Technical Conclusions

1. Reviewers must ensure correct technical conclusions were reached. To do so, reviewers must verify the following:

1. Adjustments on Form 4318, Examination Work Papers Index or Form 5701, Notice of Proposed Adjustment, reconcile to Form 4549, Report of Income Tax Examination Changes, and the Form 4318 conclusions agree with the supporting workpapers.
2. Taxable income per return or as previously adjusted agrees with the taxable income reflected on IMFOLR/BMFOLR as discussed earlier.
3. Tax per return or as previously adjusted agrees with the tax amount reflected on IMFOLT/BMFOLT or TXMODA as discussed earlier.
4. Supporting workpapers support the examiner's audit conclusions and are technically correct.
5. To the extent possible, appropriate standard paragraphs are used to explain the adjustments in the examination report.
6. IRP transcripts reconcile to tax returns to determine that all significant income items have been considered. However, see IRM 4.10.4.3.1(4), Exception to the Minimum Requirements, for procedures when no income issues were identified on the primary return.
7. Estimated tax payments for non-filer cases are properly input in the appropriate RGS penalty screens for proper computation of applicable delinquency and estimated tax penalties.
8. Federal income tax withholding for non-filer cases is properly categorized in RGS and is not duplicated through improper input on penalty screens.
9. Return data was properly input in RGS by analyzing the variance report.

Proper Consideration and Computation of Penalties

1. All appropriate penalties should be asserted and computed correctly.
2. The penalty lead sheet should comment on the assertion or non-assertion of applicable penalties, including reasonable cause situations.
3. The negligence portion of the accuracy-related penalty should not be applied automatically in a no-show case per IRM 20.1.5.8.1(5), Negligence.
4. The substantial understatement portion of the accuracy-related penalty should be properly considered in a no-show case as discussed in IRM 20.1.5.9.2(6), Penalty Assertion.
5. The return filing date should be correctly input in RGS to ensure correct delinquency penalty computation, if applicable.
6. The case file should include a copy of the group manager's written approval for the assertion of any penalty other than Failure to File (FTF), Failure to Pay (FTP), or estimated tax penalties. The signed Penalty lead sheet must be included in the paper case file and saved to the electronic case file. For Field Examination the Lead Sheet 300, Civil Penalty and Approval Form must be saved in the RGS case file.
7. Confirm the examination case file reflects timely written supervisory approval of a penalty by following the Timely Supervisory Approval of Penalties for Notices of Deficiency Job Aid. If approval was not obtained timely, the penalty must not be included on the SNOD. When a penalty is removed, and the case is not returned to the field, an advisory report (Form 3990 Reviewer’s Report) must be prepared to advise the field group manager of non-compliance with the timing standard. A copy of signed Penalty Lead Sheet 300, Civil Penalty and Approval Form (page 2) or similar, must be attached to all SNOD issued to the taxpayer where penalties requiring supervisory approval are asserted. .
8. Refer to the following for guidance:

• IRC 6751(b), Approval of Assessment .
• IRM 20.1.5.2.3, Supervisory Approval of Penalties - IRC 6751, Procedural Requirements.
• IRM 20.1.5.4, Examination Penalty Assertion.
• IRM 20.1.5.3.5, Two and Ten Year Bans on Claiming the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and American Opportunity Tax Credit (AOTC).
• IRM Exhibit 4.2.8-1, Quality Attributes Rated by Field and Office Exam National Quality Reviewers (Attribute 617).

Accurate Computation of Tax Deficiency

1. RGS must be used to revise examination reports and explanatory standard paragraphs, to the extent possible.
2. The reviewer will ensure the computation of the tax deficiency is correct. To accomplish this, reviewers should verify the following:

1. The RAR reflects all statutory adjustments.
2. The RAR reflects correct taxable income and tax per return (or as previously adjusted), which agree with current IMFOLR/BMFOLR and IMFOLT/BMFOLT, respectively.
3. The RGS calculations are correct.
4. Any credits and other taxes are properly categorized in RGS and properly reflected on the RAR.
5. The computation of tax is correct based on correct return information input as verified through variance analysis. For example, Schedule C net loss is properly input on the appropriate screen to ensure proper calculation of self-employment tax, if applicable.

Error on 30-Day Letter Report

1. There are times when errors are noted on the examination report after the 30-day letter is issued.
2. If the corrected report reduces the deficiency reflected on the 30-day letter report and no new issues are raised, the notice of deficiency procedures can proceed. No new 30-day letter is required.

New 30-Day Letter Required

1. If the new report substantially increases the proposed deficiency or raises new technical issues, a new 30-day letter is required. The reviewer will forward the case back to the group for the new 30-day letter and the case will be suspended for 30 additional days at the group level if sufficient time remains on the statute of limitations.
2. For this purpose, "substantial" is defined by reference to the return case criteria in IRM 4.8.2, Case Processing.
3. Automatic adjustments inadvertently omitted from the 30-day letter report are not considered new technical issues. Similarly, correction of the categorization of an issue (e.g., a prepayment credit incorrectly categorized as an "other credit" ) or the income adjustment omitting income from Information Return Processing (IRP) is not considered a new technical issue that would require a new 30-day letter.
4. If the corrected report raises a new technical issue, a new 30-day letter should be issued regardless of the amount of the tax increase.
5. The objective behind issuing a new 30-day letter is to ensure the taxpayer is provided the opportunity to appeal all issues administratively before a notice of deficiency is issued.
6. Cases that meet the above requirements will be returned to the group by TS for issuance of a new 30-day letter prior to preparation and issuance of the notice of deficiency. If the statute of limitations is less than 210 days, the case will not require a new 30-day letter and the reviewer may proceed to prepare and issue the notice of deficiency.

Proper Completion of All Procedural Requirements

1. Reviewers should ensure procedural items are properly completed by the field examiner:

1. Form 5344, Examination Closing Record, must be properly completed and updated using the file server to reflect any changes made by the reviewer. The reviewer should change the disposal code to "10," Default, run a validation and print a new Form 5344 before issuing the notice of deficiency, since CCP relies on RGS for making assessments. It is also recommended to generate a new Form 3198 with the new disposal code.
2. Form 3198, Special Handling Notice for Examination Case Processing, must be flagged and notated if RGS cannot be used for some reason. Failure to do so could result in an improper assessment or a possible returned case since, absent appropriate comments, CCP will use RGS (or Bureau of National Affairs software (BNA)/Issue Management System (IMS) for LB&I cases) to close the case and make any assessment.
3. The case history record or activity record must be completed properly, including entries for any activity completed by the reviewer or manager.
4. The reviewer should ensure that IRC 6404(g) comments are included on the Form 4549, Form 3198, and Form 4318, where applicable.
5. The reviewer should ensure Form 3198 is properly flagged for restricted interest provisions, when it is applicable. Flagging these cases alerts suspense personnel and prompts them to refer the case to the TS restricted interest coordinator for preparation of the required Form 2285, Concurrent Determinations of Deficiencies and Overassessments in Cases Involving Restricted Interest Provisions of the Internal Revenue Code, prior to closure to CCP. See IRM 4.8.8.9, Carryback Adjustments Requiring Form 2285 for Restricted Interest Cases. See IRM 20.2.5.6.1, Reasons to Manually Compute Interest, for a list of reasons that require interest to be manually computed.
6. The reviewer should ensure a 30-day letter was issued and was suspended at the group level to allow the taxpayer time to file a protest if sufficient time remained on the statute of limitations. The date on the 30-day letter and the amount of deficiency should be annotated on the Form 3198 to ensure the proper calculation of interest per IRC 6621(c). If the tax is over $100,000, then the date and amount should be included on Form 5344 items 03 and 04. See IRM 20.2.5.8, Large Corporate Underpayment, for more information.
7. For non-filer cases, the reviewer should ensure Form 13496, IRC Section 6020(b) Certification is included in the case file for each Substitute for Return (SFR) year. If the reviewer makes any changes to the report, he or she must complete and sign a new Form 13496.

Proper Managerial Involvement

1. Managerial involvement during an examination is a significant contributor to case quality and efficiency. In the following situations, written managerial involvement must be included in the file prior to issuance of the SNOD:

1. Assertion of any penalty other than failure to file, failure to pay, and estimated tax penalties. IRM 4.8.9.8.4 (7) & (8).
2. Imposition of the 2-year EITC ban per IRC 32(k)(1)(B)(ii) or 10-year EITC ban per IRC 32(k)(1)(B)(i).
3. Imposition of the 2-year AOTC ban per IRC 25A(b)(4)(A)(ii)(II) or 10-year AOTC ban per IRC 25A(b)(4)(A)(ii)(I).

Note:

For tax years beginning after 12/31/2015, the 2- and 10-year bans have been extended to the child tax credit, additional child tax credit, and the American opportunity tax credit. Refer to IRM 20.1.5.3.5 for more information.

Note:

Proper Protection of the Taxpayer's Rights

1. Reviewers must ensure the taxpayer's rights have been protected by considering the following:

• Adherence to the Taxpayer Bill of Rights
• Power of attorney (POA) requirements
• Confidentiality privileges - accountant/client privilege
• Notification of appeal rights
• Innocent spouse relief
• Interest abatement
• Bankruptcy
• Consideration of collectibility
• Early referrals to the IRS Independent Office of Appeals
• Separate notice for joint filers requirements
• Employee contact information requirements
• Confidentiality of taxpayer information/privacy requirements
• Unauthorized access (UNAX) requirements
• Third-party contact requirements
• Form 10949, Statute Extension Checksheet

Use of Fax Machine or Enterprise e-Fax (EEFax)

1. Reviewers must remember to protect tax information when communicating electronically with the taxpayer by using a fax machine or EEFax or any other approved method of communication. IRC 6103 provides details on the confidentiality and disclosure rules that must be followed when working with taxpayer return or taxpayer return information. Refer to IRM 4.10.1.3.6, Use of Fax Machine or Enterprise e-Fax (EEFax) for Outgoing Taxpayer Communications for guidance. For additional information refer to IRM 21.2.3.5.5, Using Electronic Fax Services.

Other Items to Consider During the Review

1. When reviewing the case, the reviewer must ensure the following:

1. Corresponding adjustments are considered, including but not limited to self-employment tax, EITC, AGI adjustments, filing status, child tax credit, etc.
2. Other taxes and credits appear on the RAR correctly.
3. Corresponding basis is allowed if a capital gain was adjusted.
4. Standard paragraphs are used to explain the adjustments, including statutory adjustments, on the Form 886-A, Explanation of Items, (or equivalent), whenever possible.
5. For a delinquent tax return, the TC 160/166 (Failure to File penalty), the prepayment credits and the date the return was received agree with the RGS penalty schedule.
6. Taxable income on the Form 4549 reconciles to the taxable income amount on the IMFOLR/BMFOLR.
7. The POA is valid and current (if attached), or if a transcript reflects a TC 960, a current CFINK is secured.
8. Interest suspension is properly considered under IRC 6404(g), abatements, and is properly noted on Form 3198.
9. Transactions posted to the taxpayer's account should be reviewed to determine if a deficiency exists requiring the issuance of a SNOD.
10. Payments on the account are reviewed to see if the taxpayer has full paid the proposed liability by payments other than IRC 6603 deposit. See IRM 4.10.8.2.4.2, Execution of Audit Reports and Payment, for further information. To identify IRC 6603 deposits, see IRM 21.5.3.4.16.11, How to Identify A Deposit on the Tax Module.
11. Premium Tax Credit (PTC) is computed correctly after adjustments to the filed return are made. PTC is a refundable credit available to individuals who meet certain income requirements and purchase their insurance through the Health Insurance Marketplace. It may be paid in advance directly to the issuer on behalf of the individual to reduce the cost of health insurance premiums. Individuals claim PTC and reconcile any advance payments of PTC on their tax return; however, the PTC may be adjusted when the taxable income is changed due to the examination adjustments.

1. Establish the source of the last known address through information in the file such as correspondence, examiner's notes, etc.
2. Establish also-known-as names and additional addresses from current year IRPTRO, Form 3198, postal tracer, 30-day letter, and electronic asset locator and people locator service, if warranted. Check the Reference Net website at for the IRS's current asset locator/people locator electronic tool.
3. Check for freeze codes, which might indicate a duplicate return, innocent spouse, disaster area, bankruptcy, restricted interest, or criminal investigation among others.

Note:

If the AMDISA reflects a freeze code 12 per IRM 25.15.6.5.2, Form 8857, Received From PSP contact a TS innocent spouse subject matter expert for instructions.

Preparing Notices of Deficiency

1. The notice of deficiency is a legal determination that is presumptively correct. The notice of deficiency consists of the following:

• A letter explaining the purpose of the notice, the tax period(s) involved, the amount of the deficiency, and the taxpayer's options
• A waiver to allow the taxpayer to agree to the additional tax liability
• A statement showing how the deficiency was computed
• An explanation of the adjustments

Taxpayer Name

1. The taxpayer's name and address appears throughout the notice of deficiency. It is extremely important that the taxpayer is correctly identified since even minor typographical errors in the name or address may affect the validity of a notice of deficiency.
2. For corporations, use the name of the corporation as shown on the corporate seal. If unavailable, use the name shown on the tax return. In corporate reorganizations, include both the current and the former name. Similarly, if the corporation changed its name since filing the return, address the corporation on the letter, schedules, and attachments as "Dove Corporation, formerly known as Owl Corporation."
3. For individual married filing joint returns:

1. If both spouses use the same last name, the notice should reflect either "John and Mary Cod" or "John Cod and Mary Cod."
2. If the spouses use different last names, the notice should reflect "John Cod and Mary Bass."
3. If the spouse remarries, the notice should reflect "John Cod and Mary Bass, formerly known as Mary Cod."
4. For returns where the taxpayers are divorced or separated, one or both have changed their name or address since the return was filed, and the IRS was informed of the name or address change via Form 8857, Request for Innocent Spouse Relief, the IRS cannot disclose the new name or address to the spouse or ex-spouse. Use the names as shown on the return as filed. Each spouse's notice will bear his or her own current address, without reference to the address of the other.

1. If a fiduciary relationship is unknown, the notice should reflect: "John Cod (Deceased) and Mary Doe" or "John Doe (Deceased) and Mary Doe, Surviving Spouse."
2. If a fiduciary relationship is known, the notice should reflect: "John Cod (Deceased), Richard Carp, Executor and Mary Cod."
3. If a fiduciary is required to give notice to the IRS of the fiduciary relationship. Form 56, Notice Concerning Fiduciary Relationship, may be used for this purpose.

Taxpayer Address

1. The mailing address for a notice of deficiency must be the taxpayer's last known address.

Last Known Address

1. Treas. Reg. Section 301.6212-2(a) defines "last known address" as the address on the most recently filed and properly processed tax return unless the taxpayer has clearly and concisely notified the IRS of a change of address. The IRS may also update the taxpayer's address of record by using the United States Postal Service's (USPS) National Change of Address database (NCOA database) in accordance with Treas. Reg. 301.6212-2. The NCOA database is forwarded weekly to the IRS, at which time master file is updated with any changes. Address changes accepted and changed due to both the USPS and NCOA address updates are identified by a TC 014 on IMFOLE/BMFOLE/ENMOD with special Document Locator Numbers (DLNs). See IRM 3.13.5.40, Determining National Change of Address (NCOA) Address Changes, to identify NCOA DLNs.
2. If there is any doubt as to what the last known address is, additional duplicate original notices should be sent to each potential last known address.
3. For no show, no response cases for which the examiner has not followed the requirements of IRM 4.10.2.8.3, No Response/No Show Procedures for address verification, consideration should be given to returning the case to the group for additional research of the address when sufficient time remains on the statute of limitations.

Clear and Concise Notification

1. A statement signed by the taxpayer informing the IRS to change the address of record is considered clear and concise notification. The statement must also contain the taxpayer's full name, signature, old address, and taxpayer’s identification number.
2. Form 8822, Change of Address, may be used to make the change.
3. Correspondence sent by the IRS that solicits or requires a response from the taxpayer, which is returned to the IRS by the taxpayer with corrected taxpayer address information, constitutes clear and concise notification of a change of address (even if the taxpayer's signature is not on the correspondence).
4. Individually, the following situations will not constitute clear and concise notification of a new address and, therefore, should not result in a change to a taxpayer's address of record. A new address reflected on the following:

• Letterhead of taxpayer correspondence
• Return envelope
• Taxpayer's remittance form
• Post office notice (other than by means of United States Postal Service's (USPS) National Change of Address (NCOA) database
• The filing of Form 2848, Power of Attorney and Declaration of Representative or Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Returns.

Elements of a New Address

1. The following are elements of a new, complete address:

• Number and street (or P.O. box number)
• Apartment or suite number, if applicable
• City or town, state, and zip code

Note:

Abbreviations such as N., S., E., W., St., Ave., Rd., or Apt., which are verified with usps.com are acceptable for use in statutory notice of deficiencies.

New Addresses Secured by Telephone or Interview

1. Address changes may only be made from the taxpayer's oral statement (i.e., telephone or walk-in contact) to perfect an error in the existing address or if the conversation concerns an open account or adjustment request from the taxpayer. See Rev. Proc. 2010-16, 2010–19 I.R.B. 664 (2010).
2. Authentication of the caller's identity using the criteria in IRM 21.1.3.2.3, Required Taxpayer Authentication, and IRM 21.1.3.4, Other Third-Party Inquiries, is required before making changes to the taxpayer's address of record.
3. Any request solely for an address change, other than for perfection or in connection with an open account or adjustment request, must be in writing.

Establishing the "Last Known Address"

1. The following steps should be taken to determine the taxpayer's "last known address:"

1. Search IDRS for the most recently filed tax return and other information using appropriate CFOL and IDRS command codes including INOLES, SPARQ, IRPTRO, IMFOLE, ENMODA.
2. Search under both the primary and secondary SSNs, if applicable.
3. Search under the employer identification number (EIN) if the taxpayer has filed a Schedule C.
4. Search the administrative file for "clear and concise" notification since the date of the last filed return.
5. Scrutinize the power of attorney for a different address. Compare the signed dates found on the power of attorney to those found on the most current filed return. Discuss address concerns with representatives appointed under Form 2848, Power of Attorney and Declaration of Representative.
6. In no event should databases or information outside of IRS systems be consulted for addresses. Alternative addresses, to the extent that they are used, must have been provided to the IRS by the taxpayer or his representative (or another agent).

Fiduciary Relationship

1. Form 56, Notice Concerning Fiduciary Relationship, is used by an individual to notify the IRS of a fiduciary relationship. Other legal documents establishing fiduciary relationships may be substituted for the Form 56. If a document other than Form 56 is submitted, check with Area Counsel to determine if the document is sufficient to establish a fiduciary relationship.
2. A SNOD must be mailed to the fiduciary's mailing address as well as to the taxpayer's last known address as: "John Doe (Deceased), Richard Doe, Executor and Mary Doe."
3. If the IRS is aware that a taxpayer is deceased, it must be determined if a fiduciary exists prior to issuing the notice of deficiency. Do not assume the surviving spouse is the personal representative of the decedent. If the case file does not specifically identify a fiduciary, the case should be returned to the group to obtain the name of the fiduciary.

Divorced or Separated Taxpayers

1. Separate original notices will be sent to each spouse at their last known address. The notice letters and waivers will identify the names of both spouses but will only include the address of the spouse to whom the notice is sent without reference to the address of the other spouse.
2. For a married filing joint return where the taxpayers are divorced or separated, one or both have changed their name or address since the return was filed, and the IRS was informed of the name or address change via Form 8857, Request for Innocent Spouse Relief, the IRS cannot disclose the new name or address to the spouse or ex-spouse. Use the name as shown on the return as filed but only include the address of the spouse to whom the notice is sent without reference to the address of the other spouse.
3. For a married filing joint return where the taxpayers are divorced and one spouse remarries, duplicate joint notices are sent as follows:

Incarcerated Taxpayers

1. If a taxpayer is incarcerated at the time the notice of deficiency is mailed, duplicate original notices are sent to the following:

1. The address on the taxpayer's last filed return.
2. The address where the taxpayer is incarcerated.

APO/FPO Addresses

1. Deficiency notices sent to Army Post Office (APO) / Fleet Post Office (FPO) addresses must be mailed to such addresses by certified mail. However, if the Military Post Office (MPO) address is located outside of the United States, the taxpayer will be entitled to 150-days after the notice of deficiency was mailed to file a petition with the Tax Court.
2. The Military Postal Service (MPS) is a segment of the United States Postal Service (USPS) and provides postal service to members of the armed forces stationed outside the United States. The MPS consists of military post offices operated by each branch of the armed services and staffed by military personnel. Mail addressed to APO / FPO addresses are routed to gateway locations within the United States where APO / FPO mail is sorted and directed to the appropriate MPO. An APO / FPO address consists of a numerical code that identifies the location of an overseas MPO and the location of the United States gateway concentration point.
3. In Brown v. Commissioner, 78 T.C. 215, 221, acq. 1982–2 C.B. 1, the Tax Court held that a notice of deficiency mailed to a New York APO address where mail would be collected and directed to Saudi Arabia was mailed to an address outside the United States. Therefore, the taxpayer was entitled to 150-days after the notice of deficiency was mailed to file a petition with the Tax Court.

International Addresses

1. Deficiency notices sent to the U.S. Territories (i.e., American Samoa, Guam, Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands (Saint Croix, Saint John, and Saint Thomas)) must be mailed to such addresses by certified mail.
2. Deficiency notices sent to international addresses that will not be delivered by the U.S. Postal Services, or the U.S. Postal Service branches (Military Postal Service and U.S. Territories) must be mailed to such addresses by registered mail. See IRM 1.22.2.3, Overseas Military and Diplomatic Mail, IRM 1.22.2.3.1, Destination Treated as Domestic, and IRM 1.22.2.4, International Mail.

Notice of Deficiency Letter

1. Letter 531, Notice of Deficiency is the notice letter used most often in income tax cases. The most current version of the letter should be used.
2. The reviewer should not date the notice of deficiency letter. The date will be added when the notice is issued.
3. The notice must include the name, telephone number, and the unique identifying number of the person to contact.

Note:

This person must clearly identify himself or herself using his or her name and employee identification number when answering a specific taxpayer inquiry.

Waiver Preparation

1. Form 4089-B, Notice of Deficiency-Waiver, or Form 4549, Report of Income Tax Examination Changes, is included in the notice package to allow the taxpayer to agree to the assessment of the proposed deficiency. The waiver should contain the following:

1. Name and address of the taxpayer exactly as they appear on the Letter 531, Notice of Deficiency, or Letter 902, Notice of Deficiency.
2. Summary of the tax liability for each year with separately stated deficiencies and penalties. Each penalty should be listed separately by title and code section. If space does not permit the separate listing of the individual penalties on the Form 4089-B, a summary total of the penalties can be placed on the Form 4089-B (with a notation, SEE ATTACHED), with the details of the individual penalties reflected on a separate page labeled "attachment to the waiver form."

Multiple Addresses

1. As noted earlier, there are instances when it becomes necessary to issue a notice of deficiency to more than one address. In all instances, the address on the notice letter, the waiver, and the mailing envelope should be the same.
2. The waiver is required to use the name and address of the taxpayer exactly as they appear on the notice letter.
3. To the extent possible, reviewers are required to use RGS to generate notices of deficiency. The notice and any workpapers created by the reviewer should be saved in the RGS electronic file.
4. When the notice of deficiency includes Form 4549-A, Report of Income Tax examination Changes (Without Taxpayer Signature), (also known as the "unagreed" report) or Form 5278, Statement - Income Tax Changes, as the computation statement, the reviewer must also prepare Form 4089-B. When printing Form 4089-B, RGS will allow the reviewer to select "all addresses" and will print multiple Form 4089-B, each with different addresses as entered in the Case Information.
5. For MFJ cases, RGS will allow a current address for "primary," "joint," and "secondary" taxpayers, thus allowing three reports to be printed with different addresses. However, RGS does not allow for printing reports using Form 4549 or Form 4549-A with multiple addresses for "one person" returns (i.e., MFS, single, head of household). The reviewer must change the current address designation in the Case Information screen before printing each copy of the report. Depending on how many addresses are used, this procedure can be very time consuming.
6. Form 5278 does not reflect the taxpayer's address. Instead, as noted earlier, Form 4089-B, Notice of Deficiency Waiver, is included as the waiver, which includes the address information. For this reason, reviewers are encouraged to use Form 5278 and Form 4089-B for those notices of deficiency that require multiple addresses.

Computation Statement

1. Since Form 4089-B is used as a waiver, then Form 4549-A, Report of Income Tax Examination Changes (Without Taxpayer Signature), or Form 5278, Statement of Income Tax Changes, should be used for all individual, corporate, and fiduciary income tax returns to reflect the list of adjustments and the computation of the proposed deficiency. The layout is similar to the Form 4549 and the instructions for completing Form 4549 are applicable.

Note:

If the deficiency includes a Net Operating Loss (NOL) carryback, a breakdown of the general adjustment and the carryback should be included. For example, in a case where the total deficiency is $30,000 ($120,000 in tax and a carryback loss of $90,000), the original amount of tax was over $100,000 if the NOL is later disallowed.

Explanation of Adjustments

1. An explanatory paragraph in a notice of deficiency has two purposes:

1. To inform the taxpayer in clear and concise language of the adjustments, and
2. To state the position or positions of the IRS with respect to the adjustments being made.

1. The explanation of adjustments for the partner/shareholder should include a brief explanation that the taxpayer's share of income from the flow-through entity is adjusted.

Example:

Ordinary Income from Opal Corporation- It is determined from our examination of the books and records of the Opal Corporation known as Onyx, Inc. (EIN XX-1111111) that your correct share of its ordinary income for the taxable year 2001 is $25,000.00 rather than the $5,000,00 reported on your return. See Exhibit A for more details of the adjustment to Onyx, Inc. Accordingly, this adjustment increases your taxable income in the amount of $20,000.00 for the taxable year ended December 31, 2001.

Sentence Structure and Content

1. Use the present tense in wording paragraphs rather than the past tense. This presents the IRS position as of the issue date rather than a prior decision.
2. Use positive phrasing whenever possible. State that the "allowable amount is" rather than the "disallowance is." However, the position of the IRS should be clearly stated.
3. Do not use general qualifying phrases such as "based on the information in our files" since it implies the IRS is using information unknown to and withheld from the taxpayer. Instead, use the phrase "it is determined" where appropriate.
4. Do not describe an item as a "deduction" and then disallow it because it does not qualify as an allowable deduction.

Example:

Do not say: "It is determined that the deduction of $1,000 claimed as rent expense is not deductible since the amount was not paid or accrued during the taxable year." Instead say: "It is determined that the amount of $1,000 claimed as rent expense is not deductible since the amount was not paid or accrued during the taxable year."

1. Accordingly/therefore, taxable income is increased/decreased.
2. Accordingly/therefore, tax is increase/decreased.

1. Explanatory paragraph: A paragraph which determines that an unreported capital gain transaction results in $10,000 of long-term capital gain may be supplemented with a computation showing the amount realized, adjusted basis, and gain to be taken into consideration, as well as other pertinent figures, etc.
2. Exhibit: Use a separate exhibit or schedule to show voluminous details and reference the exhibit or schedule in the explanatory paragraph, such as "See Exhibit A attached." This is of particular concern when making income adjustments as the notice should contain sufficient detail to support the adjustment being made. For indirect methods, include an exhibit to show the computation. Refer to IRM Exhibit 4.10.4-4, Example of Financial Status Analysis for Individual Business Returns; IRM Exhibit 4.10.4-9, The Bank Deposits and Case Expenditures Method: Example of Computation of Gross Receipts; and IRM Exhibit 4.10.4-10, Source and Application of Funds Method: Example of Computation for Cash and Accrual Basis Taxpayers, for additional information and sample formats.
3. Depreciation calculation: For depreciation adjustments, Form 1914, Computation of Allowable MACRS/ACRS/Depreciation Deduction, may be included to show the depreciation computations. It is highly recommended to include this form for cases in which Form 1914, or equivalent, was not included with the 30-day letter as required by IRM 4.10.8.15.1, Depreciation.
4. Listing of sources: Identify the source of unreported income in the explanatory paragraph.

Citing Code Sections

1. Cite code sections only to the extent necessary to inform the taxpayer of the real nature of the adjustment. Use of code sections can unnecessarily limit or narrow the Commissioner's position. If code sections are cited, make sure all applicable code sections are cited.

1. Never use code citations as the only explanations for disallowance.
2. Do not use references to regulations or decided court cases.

Explanatory Paragraphs for Additions to Tax or Penalties

1. Include explanatory paragraphs for the additions to tax or penalties.
2. Show the paragraphs on the waiver or on a continuation sheet attached to the waiver. The paragraphs may also be placed behind the paragraphs explaining the various adjustments to income, credits, etc.
3. RGS penalty schedules:

1. The penalty schedule generated by RGS can be attached to the waiver or placed behind the explanation of adjustments.
2. If the RGS penalty schedules are included in the notice, the explanatory paragraphs described in paragraphs (1) and (2) will not be necessary since the RGS penalty computation schedules include appropriate explanatory paragraphs.
3. If the explanatory paragraphs included on the RGS penalty schedules are not acceptable, include explanatory paragraphs within the notice.

"Duplicate Original" Notices Defined

1. "Duplicate original" notices, a term used throughout this text, means an originally signed Letter 531, Notice of Deficiency that is sent by certified or registered mail. The "Duplicate" notice may reflect a different address for the taxpayer than the "Original" notice.

Reviewing the Notice of Deficiency

1. To ensure the accuracy of the statutory notice, the proposed notice should be checked to ensure it is legally sufficient before it is issued.
2. In certain instances, as outlined in IRM 4.8.9.10.2.1 , Mandatory Area Counsel Review, statutory notices will also be reviewed by Area Counsel.

Before Issuing the Notice of Deficiency

1. Before a statutory notice is issued, the proposed notice should be double checked to ensure it is legally sufficient and free of typographical errors.
2. This last check is limited to the following:

1. The accuracy of the taxpayer's name, taxpayer identification number (TIN), and address on the letter, the waiver, and the envelope.
2. The proper consideration of the taxpayer's last known address, including the use of multiple addresses, if appropriate.
3. The reconciliation of the adjustment amounts reflected on the computation statement (report) to the amounts shown on the attachments.
4. The reconciliation of the deficiency and penalties, if applicable, reflected on the Letter 531, Notice of Deficiency (or equivalent) to the amounts reflected on the computation statement (report) and to the amounts reflected on the waiver.

Area Counsel Review

1. The authority to issue a notice of deficiency rests with those IRS officials delegated the authority by Servicewide Delegation Order 4-8, as outlined in IRM 4.8.9.5 , Authority to Issue Notices of Deficiency. The role of Area Counsel in the notice of deficiency process is to provide advice on whether a notice of deficiency should be issued, and if so, to make recommendations concerning the issues asserted and the wording of the determination.
2. The notices of deficiency that are required to be reviewed by Area Counsel are listed in IRM 4.8.9.10.2.1 , Mandatory Area Counsel Review. However, the mandatory review may be waived if the area director and Area Counsel concur.
3. Other communications, whether formal written inquiry or informal verbal contact, with Area Counsel are encouraged to resolve questions while notices are being prepared. Area TS offices may seek informal advice for any case for which TS feels Area Counsel advice is warranted.

Mandatory Area Counsel Review

1. Cases containing any of the following issues require mandatory review by Area Counsel:

1. Fraud penalty, including notices where no fraud penalty is asserted against the taxpayer, but the statute of limitations is open because the case involves a fraudulent return prepared by a return preparer. See Allen v. Commissioner, 128 T.C. 37 (2007).
2. Notices of transferee liability.
3. Notices asserting substantial deficiencies (in excess of $100,000 per tax period, excluding penalties and interest) when the burden of production is on the IRS.

Example:

Indirect method of determining unreported income, solely using Bureau of Labor Statistics information for determining income, or the taxpayer raises a reasonable dispute of an Information Returns Process (IRP) amount and has fully cooperated with the IRS in accordance with IRC 6201(d). Refer to IRM 4.10.7.6.1.

Note:

All tax years in the SNOD must be sent to Area Counsel for mandatory review even if only one tax year meets the substantial deficiency assertion.

Note:

The Technical Services Pass-through coordinators review all BBA and TEFRA cases as well as prepare and issue all FPAs and FPAAs.

Area Counsel Recommendations

1. If Area Counsel suggests changes to the proposed notice, the following actions will be taken:

1. Area Counsel will provide written directions and guidance on how to perfect the notice, if necessary.
2. The reviewer will consider Area Counsel's proposed changes and modify the notice as directed, if in agreement.
3. If the reviewer disagrees with Area Counsel's recommendations, he or she will discuss the case with his or her group manager.
4. The TS group manager will then discuss the case with the Area Counsel attorney to resolve the disagreement.
5. In order to override Area Counsel's advice, the case file must include a memorandum from the area director outlining the reason(s) for not following Area Counsel's recommendations.

Area Counsel Review Time Frames

1. A notice of deficiency subject to mandatory review must be submitted to Area Counsel with at least 60 days remaining on the statute. If less than 60 days remain, the TS group manager will call the appropriate associate Area Counsel to advise him or her of the imminent statute case and to coordinate the case review. The case should be hand delivered, if possible.
2. Area Counsel will return the case to the TS reviewer within 45 days of receipt. The reviewer will follow-up on any case that has been pending in Area Counsel for more than 45 days.

Submitting Cases to Area Counsel

1. Refer to IRM 4.8.9.6.4 when submitting mandatory review cases to Counsel electronically.

Note:

Use this link to find the counsel office to send the mandatory review case: Counsel Case Routing Tool.

1. The taxpayer's name and TIN.
2. The tax period(s) involved.
3. The earliest statute of limitations date.
4. The reason for review of the statutory notice.
5. The reviewer's name and contact telephone number.
6. The identification of any related cases being submitted for information or related review.
7. Any other information the reviewer feels will assist Area Counsel in the review of the case.

Signing and Dating the Notice of Deficiency

1. IRC 6212(a) authorizes the Secretary (of the Treasury) to issue a notice of deficiency by certified or registered mail. The authority to issue notices of deficiency is further granted to the Commissioner, area directors and campus directors under Treas. Reg. 301.7701-9, Treas. Reg. 301.6212-1(a) and Treas. Reg. 301.6861-1.

Signing Notices

1. Servicewide Delegation Order 4-8 in IRM 1.2.2.5.8 delegates authority to sign notices of deficiency to other IRS officials. See IRM 4.8.9.5 , Authority to Issue Notices of Deficiency.
2. As it relates to Technical Services, Servicewide Delegation Order 4-8 delegates the authority to sign statutory notices of deficiency to TCO and TA reviewers GS-09 and above for office audit cases and RA reviewers GS-12 and above for field (RA, TA, and TCO) examination cases.
3. Delegated individuals may sign the notices in any of the following ways:

1. Manually or electronically sign the name of the specified official followed by the initials of the delegated signing official. Refer to IRM 4.10.1.4.4, Digital Signatures for guidance regarding appropriate use of electronic signature.
2. Imprint the specified official's signature using a signature stamp followed by the initials of the delegated signing official.
3. Add the initials of the delegated signing official to the machine-imprinted, specified official's signature.
4. The specified official may personally sign or imprint his or her signature and title using a signature stamp.
5. Manually sign as the delegated official and insert the word for to the left of the specified official’s name.

Note:

"Signing official" must always be a delegated official pursuant to Servicewide Delegation Order 4-8.
"Specified official" must always be a delegated official pursuant to Servicewide Delegation Order 4-8 but may, and generally would be, above the organizational level of the "signing official."
The "specified official's signature" is the signature of the individual designated by the particular function (e.g., TS territory manager), which is issuing the notice of deficiency, for having his or her signature reflected on the notice as the issuing official.

Dating Notices

1. Two dates are included on the notice letter:

1. The date the letter is issued.
2. The last day the taxpayer can file a petition with the Tax Court.

Reminder:

All cases with documents related to a signed and dated SNOD the TS reviewer/TE must create a SNOD RGS CFD or IMS folder to save the documents electronically. If the certified/registered numbers are not shown on the SNOD but are on the SNOD envelope or on the certified mail list, a copy must be saved in RGS CFD or IMS.

Caution:

While not typical, there have been times when a notice of deficiency was mailed to a taxpayer the IRS knew was outside the United States, but for whom the IRS only had a domestic address. Because of the affect the suspense period has on the Assessment Statute Expiration Date (ASED) of a case, as well as the protection of taxpayer rights, it is imperative that the taxpayer is provided the proper time period in which to file a petition with the Tax Court. If a situation similar to this is encountered, the reviewer should coordinate with Area Counsel to determine the proper suspense period based on the specific facts and circumstances of the case. The reviewer should clearly communicate the proper suspense period to the suspense unit personnel who will be completing Letter 531, Notice of Deficiency with the last day the taxpayer can file a petition with the Tax Court.

Disposition of Copies

1. Notices of deficiency will generally be prepared in duplicate.

1. The original, including all statements and attachments, is sent to the taxpayer by certified mail (if addressed to a domestic address) or registered mail (if addressed to a foreign address).
2. A copy is kept in the case file as evidence that the notice of deficiency was sent to the taxpayer. See Pietanza v. Commissioner, 92 T.C. 729 (1989). The file is then retained by the issuing office pending its ultimate disposition.

Reminder:

All cases with documents related to a signed and dated SNOD the TS reviewer/TE must create a SNOD RGS CFD or IMS folder to save the documents electronically. If the certified/registered numbers are not shown on the SNOD but are on the SNOD envelope or on the certified mail list, a copy must be saved in RGS CFD or IMS.

Separate Notices to Joint Filers

1. Married filing jointly taxpayers are given separate notices of IRS actions that may affect their joint and several liability and collection thereof.
2. The IRS must send the joint notice of deficiency to each spouse even when they reside at the same address.

1. Send the same joint notice of deficiency to each spouse in separate envelopes. For example, prepare duplicate originals of the notice to John and Mary Bass. Address one envelope to John Bass and one envelope to Mary Bass. Send both notices by certified or registered mail.
2. Ensure that separate notices of deficiency are sent to each spouse at all last known addresses.
3. Document how the notices were sent in the case activity record.

Power of Attorney

1. If a Form 2848, Power of Attorney and Declaration of Representative, is received by TS, the reviewer should check the status of the representative as described in IRM 4.11.55.2.1.2, POA Not Authorized to Practice Before the IRS.
2. If a taxpayer is represented by a duly authorized power of attorney and the Form 2848 is appropriately annotated, a copy of the notice mailed to the taxpayer(s) will be sent to the representative by regular mail. Letter 937 (DO), Transmittal Letter for Power of Attorney, is used as the cover letter to transmit the copy of the notice. The enclosure section of the letter should indicate Letter 531, Notice of Deficiency, or Letter 902, as appropriate.
3. If the power of attorney does not cover all years in the notice of deficiency, the notice should not be sent to the representative. Instead, Letter 4368, Statutory Notice Not Sent to Representative - Tax Periods Not Specified, should be included with the taxpayer's notice of deficiency. The letter advises the taxpayer, why a copy of the notice was not sent to the representative identified on Form 2848. If Form 2848 does not include all periods and a subsequent Form 2848 is submitted by the representative, a new page 2 must be signed by the taxpayer.
4. Effective with the March 2012 revision, Form 2848 requires a separate form for each taxpayer for married filing jointly taxpayers.
5. Effective with the October 2011 revision, Form 2848 requires an affirmative action by the taxpayer to check the box to indicate that a copy of all correspondence will be received by the representative.
6. Document the case activity record (Form 9984) for any actions taken regarding the power of attorney that may appear to be in conflict with the Form 2848 instructions, including but not limited to the following:

1. If a copy of the notice of deficiency is not sent to the representative because the Form 2848 does not cover all years included in the notice.
2. If a copy of the notice of deficiency is sent to the representative but the Form 2848 (pre-March 2004 revision) specifies the original is to be sent.

Unenrolled Return Preparer

1. Under Circular 230 (31 CFR 10.7(c)(viii)) and Treas. Reg. 601.502(b)(5)(iii), an unenrolled return preparer may only represent a taxpayer in the examination process for the tax returns that unenrolled return preparer prepared. An unenrolled return preparer may not represent a taxpayer beyond the examination process. A Form 8821, Tax Information Authorization designee is also limited in representing a taxpayer. Refer to Exhibit IRM 11.3.3-1, Quick Guide to the Powers of Attorney and Tax Information Authorization for limitations on representation.
2. A copy of a notice of deficiency will not be sent to an unenrolled return preparer or Form 8821 designee even if authorized to receive information at the examination level. A copy of the SNOD is not sent (even authorized to receive such notice) because receipt of the statutory notice may indicate to the unenrolled return preparer or Form 8821 designee that his or her power to represent the taxpayer goes beyond the scope of the examination process.
3. The taxpayer will be notified that a copy of the notice was not sent to the unenrolled return preparer or Form 8821 designee using Letter 4369, Statutory Notice Not Sent to Representative - Limitations to Practice Before the IRS.

Records of Mailing

1. Each TS group manager must maintain a record of the dates the notices were mailed since:

• The validity of the date of notice could be challenged by the taxpayer.
• The Tax Court does not have jurisdiction over a case when the taxpayer files a petition after the 90 th /150 th day or, if later, the date shown on the notice as the last day to file the petition.
• The Commissioner has the burden of proof in establishing the date of mailing.

Reminder:

All cases with documents related to a signed and dated SNOD the TS reviewer/TE must create a SNOD RGS CFD or IMS folder to save the documents electronically. If the certified/registered numbers are not shown on the SNOD but are on the SNOD envelope or on the certified mail list, a copy must be saved in RGS CFD or IMS.

1. Across the first line of each form, type the following or use a stamp to imprint:

Example:

Note:

The retained copy of the certified/registered mailing form may be attached to the file copy of the notice.

Reminder:

All cases with documents related to a signed and dated SNOD the TS reviewer/TE must create a SNOD RGS CFD or IMS folder to save the documents electronically. If the certified/registered numbers are not shown on the SNOD but are on the SNOD envelope or on the certified mail list, a copy must be saved in RGS CFD or IMS.

Consequences of an Incorrectly Mailed Notice

1. If the notice is incorrectly addressed and or mailed, the taxpayer may raise a challenge that the notice does not conform with statutory requirements.
2. A notice may be determined to be invalid if it is not mailed to the last known address or if it is not mailed by certified or registered mail, as required. Furthermore, a notice that is mailed utilizing a method that is not able to reach the address may be held to be invalid.
3. If the notice of deficiency is invalid and the assessment statute has expired, any assessments based on the notice cannot be made and, if already made, must be abated and a barred statute report, Form 3999 Statute Expiration Report must be prepared as per IRM 25.6.1.13.2.8.1, Procedures for the Submission of SB/SE Statutes Expiration Reports.

Preparing a Notice of Deficiency for an Estate Tax Case

1. Estate and gift groups are responsible for preparing the statutory notices for estate tax cases and for securing counsel approval, if required, prior to forwarding the cases to TS.
2. Technical Services RA reviewers are responsible for performing limited reviews of the notices, as defined in IRM 4.8.9.10.1 , Before Issuing the Notice of Deficiency to ensure the notices are legally sufficient and ready for signature and mailing.
3. Extra care and diligence must be used when dealing with the notice of deficiency for an estate tax case because the assessment statute cannot be extended. The following forms are used in an estate tax notice of deficiency:
4. Letter 902, Notice of Deficiency

1. Select the applicable first paragraph for the deficiency, penalties, and type of tax.
2. The first paragraph should include, after the deficiency and penalty amounts, the applicable penalty and interest paragraph. f

1. Change "Tax Year Ended" to "Date of Death."
2. Penalties and additions to tax are entered in columnar format under the "Deficiency" heading. Each penalty is listed separately.

Preparing a Notice of Deficiency for a Gift Tax Case

1. Similar to notices of deficiency for estate tax cases, estate and gift groups are responsible for preparing the notice of deficiency for gift tax cases. The gift tax cases are sent to TS for the issuance of the notice of deficiency. The TS RA reviewers are responsible for performing a limited review of the notices to ensure they are legally sufficient and ready for signature and mailing.
2. The following forms are used when preparing a gift tax notice of deficiency:

1. Letter 902, Notice of Deficiency. The first paragraph is modified for the deficiency, penalties, and type of tax. The first paragraph should also include the following statement, "Plus interest to be computed at the legal rate on the amount due."
2. Form 4089-B, Notice of Deficiency - Waiver or Form 4089 , Notice of Deficiency - Waiver. Change "Tax Year Ended" to Calendar Period. Penalties and additions to tax are entered in columnar format under the "Deficiency" heading. Each penalty is listed separately.
3. Form 3615-A, Gift Tax. This form is used to show the adjustments and how the deficiency was determined.
4. Form 886-A, Explanation of Items. This form is used to explain each adjustment made. This form is used to explain each adjustment made. Estate and Gift examiners may use standard paragraphs available to them in the Estate and Gift Notebook and on the Estate and Gift SharePoint.

Prior Period Adjustments

1. When adjustments are made to taxable gifts from prior periods and no deficiency is proposed for that period, the adjustment for the prior period and any explanations are included in the statement following the tax computation for the first taxable period covered by the notice of deficiency.
2. If sufficient time does not remain on the statute of an overassessment year to advise the taxpayer to file a claim for refund, the case will be coordinated with the estate and gift attorney who prepared the notice. The estate and gift attorney will review the case files and determine whether the statute may remain open under IRC 6511, Limitations on Credit or Refund, or IRC 6512, Limitations in Case of Petition to Tax Court.

Unagreed Excise Cases

1. Specialty Examination close their unagreed Excise cases to TS. TS sends unagreed Excise case to Appeals. See IRM 4.24.10.7, Case Routing Procedures for Unagreed Excise Tax Examination Cases to Appeals.
2. Unagreed Excise cases generally do not follow SNOD procedures.

Note:

IRC 6212 specifically identifies which excise taxes require notice of deficiency procedures. Please refer to IRM 4.24, Excise Tax, for more information on proposing excise tax assessments.

Multi-Year Examination Cases with At Least One Agreed or No-Change Year and One Unagreed Year

1. IRM 4.10.8.7, Multi-Year Examination Cases With At Least One Agreed/No-Change Year and One Unagreed Year, contains instructions for field and office examiners to split cases containing at least one agreed or no-change year(s) and one unagreed year(s) into separate case files when the case closes to TS. It also includes a list of documents required in each of the files.
2. For RGS purposes, both the agreed or no-change year(s) and the unagreed year(s) should have been split into two separate files by the examining agent on the RGS server.

Note:

When an agreed or no-change year(s) are required to remain with the unagreed year(s) due to an issue raised in the unagreed year(s) TS is responsible to print, date, and mail the closing letter to the taxpayer and/or the representative before closing the electronic case. Per IRM 4.10.8.2.3.1(3) Letters, the Field examiner prepares an undated closing letter, signed by the group manager and saved to the Case Field Documents.

Agreed/No-Change Year(s) Not Required to Remain Associated With Unagreed Year(s)

1. The agreed or no-change year(s) is not required to remain with the unagreed year(s) if the issues raised in the unagreed year(s) are not related to or dependent on the issues raised in the agreed or no-change year(s).

Note:

Any agreed or no-change year(s) received from the Field group that do not have an issue raised in the unagreed years should be returned to the Field group to close to CCP.

Agreed/No-Change Year(s) Required to Remain Associated with Unagreed Year(s)

1. If after review of the case files, the reviewer determines the agreed or no-change year(s) should remain associated with the unagreed year(s) and if the multi-year case is not selected for Field Exam NQRS review, then the reviewer will e-fax the forms listed below to CCP. See Knowledge Management CCP Exam EFax Numbers. for current e-fax numbers for CCP.

1. Form 3198 instructing CCP to make a partial assessment,
2. Form 4549, and
3. Form 5344 with appropriate entries completed for a partial assessment.

Note:

Cases Selected for Field Exam NQRS: 210 Days or Less Remaining on the Statute of Limitations

1. If a multi-year case is selected for Field Exam NQRS, and the earliest statute of limitations of a return in the case file has 210 days or less remaining, the case will be excluded from the Field Exam NQRS sample.
2. The Field Exam NQRS selection sheets will be e-faxed, mailed, or sent via secured e-mail to the appropriate Field Exam NQRS site with the following explanation: "The YYYYMM year(s) of the (name and TIN of taxpayer(s)) case is excluded from the Field Exam NQRS sample as the SOL of the YYYYMM return has 210 or less days remaining."
3. The case file should then be closed using the procedures in IRM 4.8.9.16.1 , Agreed/no-change Year Not Required to Remain Associated With Unagreed Year(s), or IRM 4.8.9.16.2 , Agreed or no-change Years Required to Remain Associated With Unagreed Year(s), depending on whether the agreed or no-change year(s) should remain associated with the unagreed year(s).

Cases Selected for Field Exam NQRS: More Than 210 Days Remaining on All Statutes of Limitations

1. If the multi-year case is selected for Field Exam NQRS and the statute of limitations of all returns is more than 210 days, the agreed or no-change file and unagreed file must remain together.

• Place the sample selection sheet on top of Form 3198.
• Update the returns to Status Code 23 and Review Type 33 on ERCS.
• Route the case with Form 3210 Document Transmittal, using ground service mail to the appropriate Field Exam NQRS review site. The Form 3210 will be notated in the remarks section "Alert: Live Case included, return case to (Technical Services office address) after review."

• Should be closed to CCP in Status Code 51 for assessment.
• Notate Form 3198"The YYYYMM year(s) were closed separately to Technical Services for a statutory notice of deficiency."
• Move the electronic case file for the agreed or no-change year(s) by RGS CEAS to the appropriate CCP RGS group for assessment and closure. See Knowledge Management, Access to RGS CEAS, RGS references on the latest group codes.

1. The reviewer will submit the paperwork to CCP to make a partial assessment for the agreed case. Once the assessment has been made, the related case file(s) should be closed to Appeals via AMCLS, Disposal Code 07, and enter $1 in Item 18 of Form 5344.
2. Normal closure procedures for the unagreed year(s) should be followed.

Overassessments and Claims

1. Multiple year examinations can result in a proposed deficiency for one or more years and a proposed overassessment for other year(s). To protect the taxpayer's right of appeal, careful consideration must be given to the statute of limitations for the overassessment year(s).
2. Generally, because the adjustments are related, the IRS will not process the overassessment until the deficiency can be assessed. However, if the issue(s) generating the overassessment is not related to, or is not the result of, the deficiency proposed in the other year(s), then the overassessment may be processed as prescribed in IRM 1.2.1.5.17, Policy Statement 4-41, Partial Overstatements May Be Allowed In Certain Contested Cases.
3. While the taxpayer may be advised in a notice of deficiency that there is an overassessment, the Tax Court has no authority to review or redetermine an overassessment.
4. The issuance of a notice of deficiency (and subsequent petition filed with the Tax Court) for the deficiency year does not extend the statute of limitations for the overassessment year.
5. The combination of (3) and (4) above could cause taxpayers to lose the refund to which they may be entitled if the statute on the overassessment year(s) expires before the deficiency year is resolved. Therefore, taxpayers will be invited to file a claim for refund.

Claim for Refund Invitation

1. When there is a proposed overassessment in one year (resulting from a related issue or adjustment from the deficiency year), the taxpayer will be advised in the notice of deficiency of the right to file a claim for refund within the time provided by law.
2. The following paragraph should be used and included in the explanation of adjustments/items if the taxpayer has not filed a claim for refund to protect the overassessment.

"When final determination is made as to the deficiency(ies) proposed in this letter, the overassessment(s) for (list year(s)) will be scheduled for adjustment to the extent allowable and applied as set forth in IRC 6402, provided you file a claim for refund on the enclosed Form 843, Claim For Refund and Request for Abatement, Form 1040-X, Amended U.S. Individual Income Tax Return, or Form 1120-X, Amended U.S. Corporation Income Tax Return, with the IRS prior to the expiration of the statutory period for filing timely refund claims. See IRC 6511."

Example:

When final determination is made as to the (deficiency or deficiencies) proposed in this letter, the (overassessment or overassessments) for (list year(s)) will be scheduled for adjustment to the extent allowable and applied as set forth in IRC 6402.

Disallowed Claims for Refund and Examination Results in Deficiency

1. In cases involving claims for refund, protests, or hearings, taxpayers could contend that they are entitled to deductions that were not claimed on their return or that items of income reported on their return should be excluded in whole or in part from taxable income.
2. If the examination of a return and the claim for refund filed for the same year result in a deficiency and the taxpayer does not exercise any appeal rights, a Letter 531, Notice of Deficiency is issued. The following actions will be taken regarding the claim for refund issues.

1. The taxpayer will be notified in the notice of deficiency that the claim has been considered.
2. In the “Other Information” section of Form 4549-A, or Form 4089-B the following paragraph will be included:

Example:

In making this determination of your (list year) tax liability, consideration has been given to your claim(s) for refund filed on (date). This is your notice of claim disallowance . If you choose not to petition the Tax Court, but still want to contest the disallowance, you may do so by filing such a suit with the United States District Court having jurisdiction, or the United States Court of Federal Claims. The law permits you to do this within two years from the date of the letter.

Example:

The issue(s) raised (in your claim for refund) (in your protest) (at the hearing) requesting a deduction in the amount of $--- for (year(s)) has been considered and it has been determined that no deduction is allowable (follow with proper explanation of reason for non-allowance).

Claims and Petitions to the United States Tax Court

1. If a taxpayer invokes the jurisdiction of the Tax Court in redetermining the amount of the deficiency, the taxpayer is precluded from instituting suit at a later date in the courts on a claim for refund filed for the same kind of tax for the same taxable year.
2. A claim for refund filed for the same kind of tax in the same taxable year raising an additional issue, which cannot be conceded, must be included in the petition.

Reminder:

Example:

If a petition to the Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made part of the petition to be considered by the Tax Court in any redetermination of our tax liability.

Claims Relating to Net Operating Loss or Capital Loss

1. Generally, the time to file a claim for refund related to a net operating loss or capital loss carryback is 3 years after the due date of the return (including any extension of time to file) for the tax year of the loss.
2. Depending upon the circumstances, a Tax Court proceeding may or may not affect a carryback-related refund claim. A Tax Court proceeding is conclusive with respect to an NOL or capital loss carryback that is an issue in the proceeding, even though the loss year itself is not before the court. However, taxpayers may still be entitled to refunds based on the carrybacks that were not at issue, even for deficiency years. For overassessment years, as with non-carryback-related claims, the limitation period for carryback-related claims is unaffected by the issuance of a deficiency notice. An application for tentative refund allowance (Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund) is not a claim for refund and, therefore, does not protect the refund statute of limitation.
3. Because of the complex nature of cases with net operating or capital losses, any update of a carryback statute must be coordinated with, and the files reviewed by, the designated technical person. This is necessary to determine whether the statute may remain open under IRC 6511 and what actions are appropriate to protect the taxpayer's right of appeal.

Tentative Carryback Refund

1. See IRC 6213(b)(3), Assessments Arising Out of Tentative Carryback or Refund Adjustments, for guidance.
2. Tentative carrybacks are filed using Form 1139 for corporations and Form 1045 for individuals.
3. If the examination of a carryback year results in an adjustment solely to the tentative carryback, the deficiency is not subject to notice of deficiency procedures. The case should close directly from the examination group to CCP for assessment. Since the deficiency is due solely to the disallowance of the carryback, in whole or in part, Form 2285, Concurrent Determinations of Deficiencies, is also not required. It is not necessary to manually calculate interest for this situation if Form 5344 is completed correctly and there are no issues that would otherwise prevent the IRS computer from systemically calculating interest. Item 11 should reflect the return due date of the loss year and Item 12 should reflect the TC 308 showing the carryback disallowance.
4. On the other hand, if the examination of a carryback year results in disallowance of the tentative carryback (in whole or in part) and other general adjustments, notice of deficiency procedures are applicable. The notice of deficiency will include all adjustments, including the adjustment to the tentative carryback with a breakdown of the general adjustment and the carryback. Additionally, upon default the case will be routed to the restricted interest reviewer to complete Form 2285 in order for interest to be properly computed. The Form 3198 should reflect the case involves restricted interest and is being sent to TS for preparation of a notice of deficiency. Multiple carryback years will also require the completion of Form 2285. Refer to IRM 4.8.8.9, Carryback Adjustments Requiring Form 2285, for additional information regarding restricted interest.

Rescinding Notices of Claim Disallowance

1. If a claim for refund is denied and additional tax is due, a SNOD is issued for the additional tax due. If the language found in IRM 4.8.9.17.2 , Disallowed Claims for Refund and Examination Results in Deficiency, is included in the notice of deficiency, then the notice also serves as the certified claim disallowance letter.
2. Per section 4.03 of Rev. Proc. 98-54, 1998-2 C.B. 531, "limitations regarding credits, refunds, and assessments relating to the rescinded notice are void and the rights and obligations of the parties that existed prior to the issuance of the notice of deficiency are reinstated." Based on this, if a notice of deficiency is subsequently rescinded ( IRM 4.8.9.30 ), the certified claim disallowance included within the notice is also rescinded.
3. The IRS has not adopted procedures for rescinding a "stand alone" certified notice of claim disallowance. There is case law that suggests a "stand alone" certified claim disallowance may be rescinded. See Chadrecha v. United States, 104 Fed. Cl. 296, 302–3 (2012). Certified claim disallowance letters should only be rescinded with Area Counsel approval.
4. The taxpayer's two-year period for bringing suit may be extended by agreement in writing between the taxpayer and the IRS under IRC 6532(a)(2), Periods of Limitations on Suits. Form 907, Agreement to Extend the Time to Bring Suit, is used for this purpose. Refer to IRM 4.10.11.2.16.1.1, IRC 6532 Two-Year Period to File to File Refund Suit - Consideration and Examiner’s Responsibilities for guidance when a taxpayer files Form 907..

Note:

Please follow TS Interim Guidance SBSE-04-0822-0007 for guidance on executing Form 907 until it is published in IRM 4.8.8, Miscellaneous Responsibilities.

Special Issues

1. The following includes instructions for issues requiring non-routine treatment when preparing notices of deficiency.

Accumulated Earnings Tax, IRC 531

1. In a proceeding before the Tax Court involving accumulated earnings and profits, the burden of proof as to the allegation that earnings and profits have been permitted to accumulate beyond the reasonable needs of the business is on the Commissioner, unless notification is sent to the taxpayer under IRC 534(b), Burden of Proof.
2. If notification is sent to the taxpayer and (1) the taxpayer timely submits (within 60 days after the mailing of the notification, Treas. Reg. 1.543-2(d)(2)) the statement (i.e., the grounds on which the taxpayer relies to establish that there has been no accumulation of earnings and profits beyond the reasonable needs of the business) and (2) in the statement such grounds are supported by sufficient facts on which taxpayer relies to show the basis for the taxpayer's position that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business per IRC 534(c), Burden of Proof, then the burden of proof will be on the Commissioner as to the grounds given in the statement. See Treas. Reg. 1.534–2(a)(2), Burden of Proof on Commissioner.
3. Letter 572, Proposal to Issue a Notice of Deficiency for Excess Accumulated Earnings Under IRC 531, is the notification letter sent to the taxpayer and is sent by certified or registered mail. The letter is issued before the notice of deficiency unless the statute of limitations is imminent. Officials delegated to sign notices of deficiency pursuant to Delegation Order 4-8, Rev. 1 (formerly DO-4-8 and DO-77, Rev. 28), IRM 1.2.2.5.8, are also empowered to sign notifications under IRC 534(b), Burden of Proof.
4. The notice of deficiency is prepared using Letter 531, Notice of Deficiency. The sample paragraphs that may be used in the explanation of adjustments for accumulated earnings tax cases are contained at Exhibit 4.8.9-4 , Accumulated Earnings Tax Sample Paragraphs.
5. Refer to IRM 4.8.8.2 for additional information regarding cases involving accumulated earnings tax under IRC 531.

Failure to File (FTF) and Failure to Pay (FTP) Penalties -Delinquency Penalties

1. Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.
2. Penalties encourage voluntary compliance by the following:

1. Defining standards of compliant behavior.
2. Defining consequences for noncompliance.
3. Providing monetary sanctions against taxpayers who do not meet the standard.

Failure to File Penalty

1. The Failure to File (FTF) penalty under IRC 6651(a)(1), Failure to File Tax Return or to Pay Tax, applies to any delinquent return or substitute for return, except when the failure to file was due to reasonable cause and not willful neglect.
2. The amount used to compute the penalty is the tax required to be shown on the return that is not paid on or before the date prescribed for payment. Absent an extension of time to pay affected by IRC 7508, Time for Performing Certain Acts Postponed by Reason of Service in Combat Zone or Contingency Operation, or IRC 7508A, Authority to Postpone Certain Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions, the date prescribed for payment is generally the return due date without regard to extensions.

Note:

The amount used to compute the penalty is not decreased by late payments, even if those payments are made prior to the extended return due date.

• $450 if the return is due on or after December 31, 2022.
• $435 if the return is due between January 1, 2020 and December 31, 2022.
• $210 if the return is due between January 1, 2018 and December 31, 2019.
• $205 if the return is due between January 1, 2016 and December 31, 2017.
• $135 if the return is due between January 1, 2009 and December 31, 2015.
• $100 if the return is due on or before December 31, 2008.

Example:

Taxpayer A filed his 2015 tax return 6 months late, reflecting a $400 balance due, which was paid with the return. There was no extension of time to file or pay. IRS assessed the $205 minimum FTF penalty based on the tax shown on the return, and an FTP penalty of $12, or $2 per month.
Upon examination of the return, an additional deficiency of $200 is determined. The total unreduced FTF penalty is now $600 x 5% x 5 months, which is $150.00, and which now exceeds the minimum FTF penalty. Since the FTP penalty was charged on $400 for the same five months as the FTF penalty, the total FTF penalty must be reduced by $10, which is the amount of the FTP penalty charged for those five months. The reduced FTF penalty is $140, of which $5 is includible in the notice of deficiency.

Failure to Pay Penalty

1. The failure to pay (FTP) penalty under IRC 6651(a)(2) applies to originally filed delinquent returns or to substitute for returns only. The penalty for failure to pay amounts not shown on a return (e.g., examination deficiencies or other subsequent adjustments) under IRC 6651(a)(3) applies after 21 calendar days (10 business days, if the amount in the notice and demand is $100,000 or more) from the notice and demand for payment (23C date) and therefore is not asserted on an examination report on a delinquently filed return.
2. Since there is no failure to pay penalty on a deficiency for a tax return that has been filed, only a notice of deficiency for a substitute for return will include a failure to pay penalty. See IRM 4.8.9.18.2.1 (4) and (6), Failure to File Penalty, concerning coordination of failure to file and failure to pay. Form 5344 should reflect Priority Code 9 which will allow for the penalty to be calculated systemically.
3. The FTP penalty for failure to pay amounts shown on the return as filed, applies on the amount due from the return due date to the date paid. The FTP rate is one-half of one percent (.005) per month, or portion thereof, not to exceed 25% (50 months).

Fraudulent Failure to File (FFTF) Penalty

1. For delinquently filed returns, the Fraudulent Failure to File (FFTF) penalty with respect to tax shown on a filed delinquent return is not subject to deficiency procedures. It must be assessed prior to the expiration of the normal statute and must be approved by Area Counsel prior to assessment.
2. When the FFTF penalty is proposed on a delinquent return, the reviewer must ensure the examiner sent the taxpayer a 30-day letter that was approved by Area Counsel. If the 30-day letter was not sent to the taxpayer and if adequate time remains on the statute, the reviewer must send the case back to the examiner to secure Area Counsel approval (if not already approved) and to issue the 30-day letter. The group must suspend the case for the normal 30-day period.
3. If no protest was received from the taxpayer, the examiner should have made a partial assessment of the FFTF penalty before the case was sent to TS for the notice of deficiency. See IRM 4.8.9.18.2.6 , Delinquent Return Filed During Examination. A TC 240 with Reference Number 686 should be present on the taxpayer's module to indicate the assessment was made. Thus, the notice of deficiency will not reflect the FFTF penalty on the portion of total corrected tax attributable to the return as filed (delinquent return). See IRM 20.1.2.3.7.5, Fraudulent Failure to File-IRC 6651(f).
4. When the FFTF penalty is proposed on a Substitute for Return (SFR), the penalty is based on the total corrected tax per the examination. The FFTF penalty asserted on an SFR is subject to deficiency procedures and is included in the notice of deficiency. In such a case, the notice requires Area Counsel approval prior to issuance.

Penalty Explanations

1. The following penalty explanation is used for the failure to file penalty under IRC 6651(a)(1) when the failure to pay penalty under IRC 6651(a)(2) does not apply (i.e., delinquent return filed):

Example:

"Since you did not file an income tax return for the taxable year ended December 31, YYYY within the time prescribed by law and you have not shown that your failure to file on time is due to reasonable cause, a penalty of 5 percent per month up to a maximum of 25 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(a)(1) of the Internal Revenue Code."

Example:

Since you did not file an income tax return for the taxable year ended December 31, YYYY within the time prescribed by law and you have not shown that your failure to file on time is due to reasonable cause, a penalty of 5 percent per month up to a maximum of 25 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(a)(1). Since you also did not pay your tax when due, we have reduced the amount of this penalty by the amount of your late payment penalty for any month where both penalties apply.

Example:

Since you did not file your return within the time prescribed by law, you have not shown that such failure to timely file your returns was due to reasonable cause, and the failure to file your returns timely is determined to be fraudulent for the taxable year ended December 31, YYYY, a penalty of 15 percent per month up to a maximum of 75 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(f).

Example:

Since you did not file your return within the time prescribed by law, you have not shown that such failure to timely file your returns was due to reasonable cause, and the failure to file your returns timely is determined to be fraudulent for the taxable year ended December 31, YYYY, a penalty of 15 percent per month up to a maximum of 75 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(f). Since you also did not pay your tax when due, we have reduced the amount of this penalty by the amount of your late payment penalty for any month where both penalties apply.

Example:

In the alternative, if the fraudulent failure to file penalty is determined not to apply, the failure to file penalty under IRC 6651(a)(1) does apply. Since you did not file a tax return for the taxable year ended December 31, YYYY within the time prescribed by law and have not shown your failure to file was due to reasonable cause, a penalty of 5 percent per month up to a maximum of 25 percent of the total tax is added to the amount required to be shown as tax on such return as provided by IRC 6651 (a)(1).

Example:

Since you have not shown that the underpayment of tax for the taxable year ended December 31, YYYY was due to reasonable cause, a penalty of 0.5 percent per month (but not to exceed 25%) is added to the tax from the due date of the return (without regard to extension) until the date of payment as provided by IRC 6651(a)(2).

Substitute for Return IRC 6651(g)

1. Per IRC 6020(b), Returns Prepared for or Executed by Secretary, a Substitute for Return (SFR) is prepared by the IRS when it is determined that a taxpayer is liable for filing the tax return but failed to do so after receiving notification from the IRS.
2. If a taxpayer fails to file a delinquent return when requested and the SNOD defaults, the IRS will assess the FTF and FTP penalties. See IRM 20.1.2, Penalty Handbook, Failure to File/Failure to Pay Penalties. Priority Code 9 can be input which allows the master file to compute the FTP penalty systemically and should be reflected on Form 5344.

Note:

• Form 13496, IRC 6020(b) Certification.
• Form 4549, Report of Income Tax Examination Changes or equivalent.
• Form 886-A, Explanation of Items, appropriate issue lead sheet or similar form.

Note:

Since the penalty explanations are shown on the penalty computation sheets generated in RGS, further explanation is not necessary in a separate Form 886-A, Explanation of Items.

Form 13496 and Form 4549-A must be signed by the examiner and must be dated on or after the date of the 30-day letter.

Estimated Tax Penalty

1. Under IRC 6654, Failure by Individual to Pay Estimated Income Tax, payment of tax, either through withholding or by making quarterly estimated payments, must equal the lesser of 90 percent of total liability for the current year or 100 percent of the taxpayer's tax liability for the prior year ("i.e., the required percentage" ). If the payments or withholding amounts do not add up to the required percentage, the addition to tax under IRC 6654 is automatic, unless the petitioner shows that one of the statutory exceptions apply.

Note:

For certain high-income taxpayers, the "required percentage" is greater than 110% of the prior year tax. See IRM Exhibit 20.1.3-3, Required Annual Payment, and IRM 20.1.3.3.1.1, Determining the Required Annual Payment.

1. The tax shown on the return (or if no return was filed, the tax), reduced by credit allowed under IRC 31, Tax Withheld on Wages, is less than $1,000; or
2. The individual did not have any tax liability for the preceding year if the preceding year was a taxable year of 12 months and the individual was a citizen or resident of the United States throughout the proceeding taxable year.

Reminder:

Similar to the failure to pay penalty, at the examination level, the estimated tax penalty is applicable to originally filed delinquent returns and SFR years only.

Delinquent Return Filed During Examination

1. When a taxpayer files a delinquent return with Examination (either the field group examiner or the reviewer), the statute of limitations begins to run for both the tax shown on the return and for any applicable penalties attributable to that tax. Therefore, it is in the government's best interest to ensure both the tax and the applicable penalties are assessed as soon as possible after the delinquent return is filed.
2. IRM 4.4.9, AIMS Procedures and Processing Instructions, Delinquent and Substitute for Return Processing, provides details regarding how to process these delinquent returns, whether they are filed before a TC 150 from an SFR has posted or after a TC 150 from an SFR has posted.
3. In either case, the reviewer must ensure that when the delinquent return was processed, the applicable delinquency penalties (FTF, FFTF with Area Counsel approval prior to assessment, FTP, and failure to pay estimated income tax) were assessed as warranted.
4. A notice of deficiency issued for a delinquently filed return should not include any penalty amounts attributable to the tax shown on the return as filed. As noted earlier, the portion of the penalties attributable to the tax shown on the return as filed are not subject to deficiency procedures.
5. The reviewer must carefully review the IMFOLT/BMFOLT or TXMODA to ensure the appropriate penalties have been assessed when the delinquent return was processed.
6. If FTF, FFTF, FTP, and estimated tax penalties are applicable to the original tax shown on the delinquently filed return but these penalties were not assessed, the reviewer may return the case to the field to complete the partial assessment if sufficient time remains on the statute. Otherwise, the reviewer should take steps to have the penalties assessed prior to issuing the notice of deficiency. The reviewer will need to prepare a partial assessment that will consist solely of the penalty amounts:

1. Print an examination report that will reflect no adjustments to taxable income and no additional tax liability, but reflects the applicable penalties based on the tax originally reflected on the return and the date filed.
2. Print a Form 5344, Examination Closing Record, which reflects only penalty transaction codes in Item 12. Use the applicable disposal code (i.e., Disposal Code 12).
3. E-Fax the first two pages of the delinquent return, the examination report (with penalty schedules), and the Form 5344 to the appropriate FORT Unit for a partial assessment. Note on the e-fax cover sheet that the partial assessment is for purposes of assessing penalties that should have been assessed when the delinquent return was originally processed.

Note:

At the examination level, the failure to pay estimated income tax under IRC 6654 or IRC 6655, Failure by Corporation to Pay Estimated Income Tax, and the failure to pay penalty under IRC 6651(a)(2) only apply to the tax shown on an originally filed return or to the tax shown on an SFR. Neither the estimated tax penalty nor the failure to pay penalty are asserted on an examination report for an additional deficiency. Refer to IRM 20.1.2, Penalty Handbook, Failure to File/Failure to Pay Penalties, and IRM 20.1.3, Penalty Handbook, Estimated Tax Penalties, for further details.

Open Criminal Cases

1. If the case is an active criminal case, there are less than 210 days remaining on the statute, and a consent needs to be obtained or a notice of deficiency needs to be issued to protect the statute, follow the procedures in IRM 25.1.4.3.8, Statute Protection, to submit Form 10498-B, Intent to Commence Civil Action - Statute Protection, to the appropriate Special Agent in Charge (SAC).

Note:

The reviewer preparing the notice should discuss the case with the appropriate TS fraud coordinator to ensure all issues and procedures are adequately considered.

1. If the decision is made to issue the notice of deficiency, use Letter 531-C, Notice of Deficiency for Open Criminal Case, and Form 4089-A, Notice of Deficiency Statement, for the letter and substitute for the waiver in the statutory notice.
2. No waiver or other form permitting the taxpayer to agree to a deficiency will be prepared.
3. Area Counsel's written approval of the notice of deficiency is required prior to issuance.
4. Once issued, a copy of the notice of deficiency should be provided to the appropriate special agent in charge (SAC).

Civil Fraud Penalty (IRC 6663)

1. If the taxpayer is convicted (after trial or upon guilty plea) of a violation under IRC 7201, Attempt to Evade or Defeat Tax, the taxpayer is collaterally estopped from denying liability for a civil fraud penalty. Thus, the civil fraud penalty is automatic and cannot be conceded by Examination.
2. The doctrine of collateral estoppel does not apply if the taxpayer was convicted of a violation of IRC 7203, Willful Failure to File Return, Supply Information or Pay Tax, or IRC 7206(1), Declaration Under Penalties of Perjury. Thus, in these circumstances, the civil fraud penalty is not automatic.
3. The delinquency and fraud penalties can be asserted concurrently. If asserting the IRC 6651(f), Fraudulent Failure to File Penalty, and the IRC 6663, Fraud Penalty, on the same tax period of the taxpayer, see IRM 20.1.5.16.2, Penalty Assertion.

Alternative to Civil Fraud Penalty

1. The accuracy-related penalty (IRC 6662) should be included in the explanation of adjustments as an alternative penalty to the civil fraud penalty except in the following situations.

1. A criminal conviction under IRC 7201, Attempt to Evade or Defeat Tax, collaterally estops the taxpayer from denying fraud, or
2. The statute of limitations has expired in the absence of a finding of fraud.

Example:

In the alternative, if it is determined that the underpayment of tax in the amount of $0.00 for the taxable year ended December 31, YYYY is not due to fraud, then it is determined that the underpayment of tax in the amount of $0.00 is due to negligence or disregard of rules or regulations under section 6662(b)(1) of the Internal Revenue Code or the underpayment constitutes a substantial understatement of income tax under the provision of IRC 6662(b)(2).

Fraud Penalty - Joint Return

1. On a joint return the fraud penalty per IRC 6663 does not apply to a spouse unless some part of the underpayment is due to civil fraud on the part of that spouse. See IRC 6663(c).
2. If only one spouse is liable for the fraud penalty, separate notices of deficiency are issued. The fraud penalty will be included on the notice for the culpable spouse only. See IRM 21.6.8, Split Spousal Assessments (MFT 31) and IRM 4.4.12.5.44.5, MFT 31 for MFT 31 procedures to make the assessments for each spouse. See IRM 4.8.9.18.6.1 for procedures for the spouse liable for IRC 6663. See IRM 4.8.9.18.6.2 for procedures for the spouse not liable for IRC 6663.

Note:

The procedures may be altered if necessary, to fit the facts and circumstances of a case, or on the advice of Counsel.

Procedures - Culpable Spouse

1. Letter 531, Notice of Deficiency is prepared for the spouse liable for the IRC 6663 fraud penalty (culpable spouse) as discussed below:

1. Use the names of both spouses on the letter and the primary SSN.
2. Use the address of the culpable spouse.
3. Direct the salutation on the letter to the culpable spouse.
4. Include the IRC 6663 penalty in the table on page one of the letter.
5. On a continuation sheet of Letter 531, add a statement to the standard explanation of the fraud penalty that the non-culpable spouse is not liable for the IRC 6663 civil fraud penalty in accordance with the provisions of IRC 6663(c). See suggested language as follows: (Taxpayer name) is not liable for the IRC 6663 fraud penalty for tax year(s) XXXX in accordance with the provisions of IRC 6663(c).

1. Use only culpable spouse’s name, address, and SSN.
2. Include the IRC 6663 penalty on Form 4089, Notice of Deficiency - Waiver.

1. Prepare one Form 5278 / Form 4549-A using both names and primary SSN.
2. Include the IRC 6663 penalty on Form 5278 / Form 4549-A. For Form 5278, put a footnote saying that the non-culpable spouse is not liable for the IRC 6663 fraud penalty in accordance with the provisions of IRC 6663(c). For Form 4549-A, include a statement in the "Other Information" section on page two of the report saying that the non-culpable spouse is not liable for the IRC 6663 fraud penalty in accordance with the provisions of IRC 6663(c).

Note:

A separate Form 5278 / Form 4549-A can also be prepared for each spouse showing the adjustments, deficiency and penalties that are applicable to each.

Procedures - Non-culpable Spouse

1. Letter 531, Notice of Deficiency is prepared for the spouse not liable for the IRC 6663 fraud penalty (non-culpable spouse) as discussed below:

1. Use the names of both spouses on the letter and primary SSN.
2. Use the address of the non-culpable spouse.
3. Direct the salutation on the letter to the non-culpable spouse.
4. Do not include the IRC 6663 penalty on the letter.

1. Use only non-culpable spouse’s name, address, and SSN.
2. Do not include the IRC 6663 penalty on Form 4089.

1. Prepare Form 5278 / Form 4549-A using both names and primary SSN.
2. Include the IRC 6663 penalty on Form 5278. For Form 5278, put a footnote saying that the non-culpable spouse is not liable for the IRC 6663 fraud penalty in accordance with the provisions of IRC 6663(c). For Form 4549-A, include a statement to the "Other Information" section on page two of the report saying that the non-culpable spouse is not liable for the IRC 6663 fraud penalty in accordance with the provisions of IRC 6663(c).

Note:

A separate Form 5278 / Form 4549-A can also be prepared for each spouse showing the adjustments, deficiency and penalties that are applicable to each.