part4-18

4.2.2 
Miscellaneous Examination Procedures

4.2.2.1 
(10-01-2003)
Collateral Examinations

  1. A collateral examination is requested when an exchange of information
    between areas is essential to resolve an issue of material consequence. Collateral
    examinations are used only when the information cannot be obtained from the
    taxpayer, the taxpayers representative, or third parties. Every reasonable
    effort must be made to secure the information rather than to routinely request
    a collateral examination.

  2. Collateral activity is the performance of work of short duration, work
    that does not require the examination of books and records, and work that
    calls for little independent judgement or conclusions. For example, a collateral
    examination would be justified where:

    1. An interview is required to get specific information for the examiner;

    2. A document is to be obtained;

    3. A transcript of an account or a listing of invoices is needed; or

    4. A summons needs to be served.

  3. All collateral requests must receive priority treatment. If the collateral
    examination results in a finding of nationwide interest, the receiving area
    will furnish the information to Headquarters. A Technical Coordination Report
    would be used to furnish this information to Headquarters (See IRM 4.2.3).

  4. Collateral examination requests involving tax shelter cases will be
    identified as such on the top of Form 6229, Collateral Examination. The receiving
    area will acknowledge receipt of the collateral request and provide a status
    report to the requesting office within 45 days and provide status reports
    to the initiating area every 30 days.

4.2.2.1.1 
(10-01-2003)
Collateral Examination Procedures: Initiating Area

  1. Form 6229, Collateral Examination, is used by all areas to request or
    exchange information between areas to resolve an issue(s) of material consequence.
    Form 6229 is prepared as early as possible in each examination when a collateral
    examination is needed from another area.

  2. The examiner assigned the return will prepare the original Form 6229.
    Part 2 of the form is retained in the case file. The original Form 6229 and
    three copies are forwarded.

    1. The narrative section of Form 6229 must include sufficient background
      information to clearly state the problem. Additional schedules and attachments
      are included as needed. A copy of the out-of-area return is also included,
      if available.

    2. Be specific on the exact information requested.

    3. The examiners name and telephone number must be included so the receiving
      area has the correct person to contact for clarification of the issue, if
      needed.

    4. The completed Form 6229 is submitted to the group manager for review.
      After approval, the group manager will forward Form 6229. If Campus action
      is required (i.e., requesting the return), Form 6229 is forwarded to the Campus
      servicing the receiving area. If no Campus action is required, the initiating
      area will submit the request to the applicable Territory Manager of the receiving
      area. The initiating area will photocopy the retained Part 2 and put an
      “X”
      next to the
      “Follow-up”
      line when furnishing
      information to the receiving area.

4.2.2.1.2 
(10-01-2003)
Collateral Examinations: Receiving Area

  1. The receiving area must acknowledge receipt of the request by completing
    Part 3 of Form 6229 and returning it to the initiating area.

    1. The receiving examiner must include his/her name, address, telephone number
      and date received. If the case is reassigned, the new examiner must notify
      the initiating area of the change.

    2. Photocopies of Part 4 of Form 6229 are used for subsequent communication
      with the initiating area.

    3. The receiving examiner must provide a clear, concise response to each
      question raised.

  2. If the receiving area believes the results of the collateral examination
    would not justify the time and cost involved, a memorandum explaining that
    decision is attached to Form 6229 and forwarded to the initiating area. The
    Territory Manager will approve any declination memorandum with a copy sent
    to the respective Planning and Special Programs (PSP) sections. Territory
    Managers should resolve disagreements between the initiating and receiving
    areas concerning the need for a collateral examination. Area Directors will
    resolve any disagreement between the respective Territory Managers.

4.2.2.2 
(10-01-2003)
Examination of Returns with APO/FPO Addresses

  1. Returns of taxpayers who are stationed overseas having APO/FPO addresses
    are selected under the DIF system. Military personnel stationed overseas or
    on ships generally file these returns. Examinations of returns with APO/FPO
    addresses are conducted by SB/SE, Area 15. Any questions should be referred
    to the Area 15 Planning and Special Programs (PSP) Chief.

4.2.2.3 
(10-01-2003)
Extensions of the Replacement Period of Involuntarily Converted
Property

  1. Applications for extension to replace involuntarily converted property
    are filed with the Area Director or Director of Field Operations (DFO) where
    the return is filed for the first taxable year when any gain from the involuntary
    conversion is realized. The Area Director or DFO forwards the application
    to the Area Technical Services (Exam) for determination.

    Note:

    The request
    is more likely to be received by the Commissioners Representative in miscellaneous
    mail forwarded by the Campus.

  2. If the converted property is owned by several taxpayers under the jurisdiction
    of different Area Directors offices, the Area Technical Services (Exam) where
    the property is actually located will conduct the investigation to determine
    whether reasonable cause exists for not replacing the converted property within
    the required time period.

4.2.2.3.1 
(10-01-2003)
Involuntarily Converted Property Extension Procedures

  1. The Area Director forwards the extension request to the Technical Services
    (TS) staff, who reviews the request and determines whether the request to
    extend the replacement period is timely and meets the requirements of a proper
    request to include reasonable cause. TS will take final action to approve
    or deny the request as delegated by SBSE Delegation Order 4.24 (subject to
    revision). (See IRM 4.8.8)

  2. If the extension request is granted, Letter 1039 is used to advise the
    taxpayer that an extension has been granted. Generally, extensions longer
    that one year are not granted. The taxpayer must notify the Service when the
    property is replaced.

  3. Letter 1954 is used to follow-up on the extension granted in Letter
    1039.

  4. If the extension is not granted, the taxpayer is notified the extension
    has not been granted and the reason(s) why.

  5. When the extension response relates to involuntary conversions that
    result from condemnations, a statement should be included informing the taxpayer
    that interest received on the award is taxable as ordinary income. This interest
    is paid to compensate the taxpayer for a delay in payment of the award and
    is not included in the gain or loss computations.

4.2.2.4 
(10-01-2003)
Identification of Bad Payer Data

  1. During the examination of Information Returns Selection System (IRSS)
    cases, examiners may determine that information provided by the payer is incorrect.

  2. Bad payer data is defined as any situation where the payer made an error
    on the information return of a type that could occur on other information
    returns.

  3. Where errors have occurred on ten or more of these documents filed by
    one payer or transmitter, bad payer data exists.

  4. Examples of bad payer data include but are not limited to:

    1. Duplicate filing of Forms W-2 or 1099;

    2. Corrected Forms W-2 or 1099 not identified as a corrected, thus appearing
      to duplicate the original filing;

    3. Misplaced decimals;

    4. Additional digits added to amounts;

    5. Nontaxable income reported as taxable; and

    6. Income reported on the wrong form.

  5. When examiners determine that bad payer data exists, they will briefly
    explain the identified reason on a copy of the IRSS transcript and route this
    copy to the Territory Manager or designate. The Territory Manager or designate
    will ensure the reasons are clear and will forward all copies to the Campus
    on a weekly basis. The copies will be directed to the attention of the IRP
    Magnetic Media Coordinator.

4.2.2.5 
(10-01-2003)
Awards Received by Informants

  1. Informant awards for confidential services are often received from the
    Bureau of Customs, Federal Bureau of Investigation, Central Intelligence Agency,
    Secret Service, local Police Departments, and other similar sources. It is
    imperative that the source of income not be revealed in the examiners report
    and that the identify of the informant be protected.

  2. When asked to explain the source of unidentified income reported on
    the return or the source of unreported income discovered during the examination,
    the taxpayer may explain that the income was received for services of a confidential
    nature.

    1. If verification of the source of income is necessary, then verification
      should be secured through inquiry of the official in charge of making the
      payment.

    2. If the official is in the same locality as the examiner, then the official
      will be interviewed personally without any written communication or other
      report. If a personal interview is not possible, the examiner will prepare
      for the personal signature of the Area Director, a letter to the official
      marked
      “Personal — To be opened by addressee only.”
      requesting
      verification of the payment for confidential services.

  3. If the taxpayer states that the unidentified or unreported income was
    received for services of a confidential nature, the case will be processed
    in the usual manner without disclosing the source of the payment.

    1. In the case file, the description of the income will state
      ”
      miscellaneous income –source verified.”

    2. Correspondence used to verify the source of income will not remain in
      the case file but will be maintained in special file, confidential in nature,
      under the personal control of the Area Director.

4.2.2.6 
(10-01-2003)
Recognition of Witnesses During the Examination Process

  1. The taxpayer has the right to use the services of any person he/she
    may elect as a witness to explain the taxpayers books, records, or returns
    to the examiner during the examination process. The fact that the person is
    not enrolled or ineligible to practice before the Internal Revenue Service
    does not disqualify him/her to act a witness.

  2. Witnesses should be afforded courteous treatment but should not be permitted
    to represent the taxpayer as an advocate when controversies arise out of the
    factual development of the case. To avoid misunderstandings as to the role
    of a witness, the examiners should explain the provisions of Rev. Proc. 68-29,
    1968-1 C.B. 812, to the taxpayer and the witness.

Law Offices of Darrin T. Mish, PA

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