part4-239

4.31.1 
Introduction

This Handbook will explain the procedures for conducting a coordinated
pass through examination from both the field and campus perspective. The Handbook
is broken down into sections to allow the user to more easily find answers
to questions. Check sheets are provided as a job aid, and to ensure consistency
is maintained.

4.31.1.1 
(06-01-2004)
Overview

  1. The examiner of a pass-through entity must understand
    the different types of entities, and how they are examined.

  2. The key case examiner must also know how the tax
    returns of the related investors are eventually adjusted.

4.31.1.2 
(08-01-2006)
Terminology

  1. The terminology used in these sections to describe
    certain returns is provided below:

    1. Key Case – A pass-through return, usually a Form
      1065, U. S. Return of Partnership Income, a Form 1120S, U. S. Income Tax Return
      for an S Corporation, a Form 1041, U. S. Income Tax Return for Estates and
      Trusts, or other entity (an agency or promoter examination) that results in
      pass-through items to partners, shareholders, or investors (individual returns
      or another pass-through entity).

    2. Tier – A pass-through entity that passes through
      items for partners, shareholders, or beneficiaries that is itself a partner,
      a shareholder, or a beneficiary of a pass-through entity. This return appears
      on the PCS database as a key case record (PS) and an investor record (PN).

    3. Partner, Shareholder, or Beneficiary – An investor
      return that reflects pass-through items from a pass-through entity return,
      which is controlled (via PCS and AIMS). The investor return is usually a Form
      1040, U.S. Individual Income Tax Return.

    4. AAR – Administrative Adjustment Request – Notification
      to the IRS of any subsequent change by a TMP or partner, of the treatment
      of a partnership item. The AAR is filed on Form 8082, Notice of Inconsistent
      Treatment or Administrative Adjustment Request (AAR), and is filed with a
      claim for refund, an amended return, or a substitute for return. AAR procedures
      are in IRM 4.31.4.

    5. Affected Item – Any item that requires adjustment
      as a result of an adjustment made to a partnership item. There are two types
      of affected items: computational and factual. Factual affected items are those
      that require a determination at the partner level.

    6. FPAA – Notice of Final Partnership Administrative
      Adjustment – The statutory notice of adjustments (as distinguished from a
      statutory notice of deficiency) in a partnership proceeding that is subject
      to judicial review in the Tax Court, the Court of Federal Claims, or the district
      court where the partnerships principle place of business is located. Only
      partnership adjustments are identified. For partnership tax years ending after
      August 5, 1997, an FPAA may also include penalties that are determined at
      the partnership level.

    7. NBAP – Notice of Beginning of Administrative Proceeding
      – The required notice sent at the start of an examination of a TEFRA partnership
      to the TMP, and the copies of that letter sent to each notice partner.

    8. TMP – Tax Matters Partner – The designated partner
      to whom the Service looks as the primary representative of the partnership
      that is subject to a TEFRA proceeding.

    9. 60-Day Letter Package – Contains the letter sent
      to the TMP and notice partners proposing adjustments to partnership items,
      notifying them of their right to file a protest to Appeals, the schedule of
      adjustments, and a Form 870-PT or a Form 870-LT. (Form 870-P and Form 870-L
      are used for partnership tax years ending before August 6, 1997.)

    10. Campus TEFRA Function (CTF; formerly ESU) – The
      CTF is the suspense unit for investor returns located in the Brookhaven and
      Ogden campuses. The two CTFs will be maintained to obtain and control, through
      the AIMS and Partnership Control System (PCS), any partner, shareholder or
      investor returns related to key cases within their jurisdiction. For details
      see Campus TEFRA Function (CTF) IRM Sections 4.31.3 and 4.31.6

    11. Technical Services (TS) – This is the former review
      staff, QMS.

    12. Field TEFRA Coordinator – The TEFRA coordinator
      in the TS acts as a liaison between the area and the CTFs for both TEFRA
      and nonTEFRA cases for their SB/SE area and LMSB in the geographical area.

    13. Centralized Case Processing (CCP) – This function
      processes assessments and abatements and closes or transfers cases from the
      area to the campus or to files.

    14. Centralized Workload Selection & Delivery (CWSD)
      – This is the former PSP.

  2. The terminology used in these sections to describe
    certain agreements or settlement agreements is provided below:

    1. Form 870-PT, Agreement for Partnership Items and
      Partnership Level Determinations as to Penalties, Additions to Tax, and Additional
      Amounts. This agreement form allows the partner to agree to adjustments proposed
      to partnership items. Penalties are determined at the partnership level for
      partnership years ending after 8/5/1997. (See IRC section 6221.) Use this
      agreement form if only proposing adjustments to partnership items and partnership
      level penalties, but not to affected items.

    2. Form 870-LT, Agreement for Partnership Items and
      Partnership Level Determinations as to Penalties, Additions to Tax, and Additional
      Amounts and Agreement for Affected Items. This form permits the partner to
      agree to both partnership adjustments and affected items or only partnership
      adjustments.

    3. Form 870-PT(AD), Settlement Agreement for Partnership
      Items and Partnership Level Determinations as to Penalties, Additions to Tax,
      and Additional Amounts. This is the appeals version of the Form 870-PT.

    4. Form 870-LT(AD), Settlement Agreement for Partnership
      Items and Partnership Level Determinations as to Penalties, Additions to Tax,
      and Additional Amounts and Agreement for Affected Items. This is the appeals
      version of the Form 870-LT.

      Note:

      For partnership tax years ending before August 6, 1997, other settlement agreement
      forms are required to be used. These are the Forms 870-P, 870-L, 870-P(AD)
      and the 870-L(AD). If more information is needed on when to use these forms,
      contact your local TEFRA Coordinator.

  3. Signing an agreement or settlement agreement:

    1. Allows the TMP or any notice partner to agree with
      the treatment in the investors return of the examination (or settlement)
      results of the key case.

    2. Removes the investor from any further partnership
      proceeding.

    3. The TMP or notice partner will be agreeing to all
      proposed adjustments unless partial agreement language has been included on
      the settlement agreement form signed.

    4. No subsequent claim may be filed.

    5. The TMP can also agree for non-notice partners (partners
      holding less than a one percent profits interest in a partnership with more
      than 100 partners) if the Form 870-PT is modified to specifically state that
      the TMP is binding non-notice partners.

    6. All notice partners must sign their own separate
      agreements.

    7. A settlement by a pass-through partner binds indirect partners to adjustments
      to partnership items and partnership level penalties, but not to affected
      items.

    8. Non-notice partners may elect NOT to be covered
      by an agreement that may be entered into by the TMP, where the Form 870-PT
      may be modified to allow the TMP to agree for the non-notice partners. This
      election is made by filing a statement with the Service denying the TMP the
      right to enter into such a settlement.

    9. The TMP cannot agree to affected item adjustments
      requiring deficiency proceedings for non-notice partners. Similarly, a pass-through
      partner cannot bind indirect partners to affected items.

      Note:

      All settlement agreements signed
      by a taxpayer must be properly executed by the Service before an agreement
      is binding.

  4. Guidelines in these sections address the handling
    of suspensed related returns by either a field office or the CTF.

4.31.1.3 
(05-31-2005)
PCS Overview

  1. The PCS is a computer system designed to control
    and monitor pass-through entity and linked investor returns. It does not replace
    AIMS inventory control, but it provides the additional information needed
    to control investor and pass-through returns and meet the legal requirements
    of TEFRA. The PCS is described in depth in IRM 4.29, the Partnership Control
    System (PCS) Handbook including information on special features, the various
    user reports, letters, input documents, and indicators. IRM 2.2 covers information
    related to the specific command codes.

4.31.1.4 
(02-15-2008)
TEFRA

  1. Before TEFRA was enacted in 1982, partnership
    items appearing on individual and corporate taxpayer returns were determined
    by individual audits and notices of deficiency which included both partnership
    and nonpartnership items. Thus, multiple partners in the same partnership
    would be adjusted through separate proceedings unique to each partner.

    Statutory Notice – Partner A
    Statutory Notice – Partner
    B
    Statutory Notice – Partner C

    Each notice suspended only
    the period for assessment for one partner and began a petition period for
    only that partner. Alternatively, the partner could allow the notice of deficiency
    to default, pay the tax, and file a claim/suit for refund. Inconsistent results
    were possible.

  2. The Tax Equity and Fiscal Responsibility Act of
    1982 (TEFRA) changed the way the Internal Revenue Service conducts the examinations
    of those entities to which the TEFRA sections of the Internal Revenue Code
    apply. Along with the changes to the examination process, specific time frames
    and notice requirements were created. If these time frames and notice requirements
    are not properly adhered to, no assessments are allowable against any investor
    returns.

  3. After the enactment of the unified partnership
    audit and litigation procedures of IRC Sections 6221 through 6234 (TEFRA),
    one partnership audit, notice and judicial proceeding binds all partners:

    1. One Notice of Beginning of Administrative Proceeding
      (NBAP) is sent to the Tax Matters Partner (TMP) to signify the beginning of
      an audit. Notice partners are sent copies.

    2. One Notice of Final Partnership Administrative Adjustment
      (FPAA) is sent to the Tax Matters Partner (TMP) informing him/her of the Service’s
      adjustment to partnership items. Notice partners are sent copies, if their
      partnership items have not converted to nonpartnership items.

    3. Only the FPAA notice to the TMP suspends the statute
      of limitations for all partners and begins the petition period for a unified
      judicial proceeding.

    4. Only one petition based on the FPAA to the TMP may
      be filed on behalf of all partners in either the Tax Court, District Court
      or Court of Federal Claims; duplicate petitions will be dismissed.

    5. If the TMP does not file a petition within the first
      90 days after the FPAA was mailed, a petition may be filed within 60 days
      from the close of the 90 day period by any notice partner or 5 percent group.

    6. The single petition that goes forward will bind
      all remaining partners regardless of whether they participate or intervene.
      If no petition is filed, the defaulted FPAA will bind all partners remaining
      in the partnership proceedings.

    7. Once an FPAA is defaulted, no separate refund action
      is allowed. (IRC sections 6511(g) and 7422(h)) Thus, all adjustments that
      may result in a refund must be raised in a petition to the FPAA since this
      will be the sole opportunity to file a petition resulting in a refund.

    8. The Service computes the resulting assessments and
      refunds following the default of the FPAA or the final decision of the Tax
      Court. Petitions to District Court or the Court of Federal Claims are treated
      as defaulted FPAA’s for assessment and collection purposes in order
      to preserve the status of those forums as refund courts. (IRC section 6225.)

    9. Penalties are assessed using notice of deficiency
      procedures following the partnership proceeding. For partnership years ending
      after August 5, 1997, however, they may be determined at the partnership level
      and directly assessed following the partnership proceeding even if the amount
      they are computed on are affected items subject to deficiency procedures.

  4. The unified audit and litigation procedures (IRC
    sections 6221 – 6234) unified the procedures in three respects:

    1. All partners are governed by one administrative
      proceeding and one docketed proceeding (if applicable).

    2. All deficiencies and refunds are determined based
      on the single unified proceeding.

    3. IRC section 6229 sets forth a minimum assessment
      period for all partners running from the date the partnership return is filed
      or due to be filed, whichever is later.

  5. The existence of the Campus TEFRA Function (CTF)
    is to provide administrative assistance to the area offices. The CTF ensures
    the TEFRA requirements are met in accordance with the applicable sections
    of the Internal Revenue Code.

  6. If the examiner elects not to utilize the PCS
    and the CTF, then the examiner assumes all of the responsibilities of the
    CTF including administrative functions, issuances of all notices, the recognition
    of and the actions required within the proper time frames and the proper resolution
    of all of the related investor cases. The examiner must secure all of those
    returns for resolution. If an investor in a pass-through entity is itself
    another pass-through entity (a pass-through entity, also called a tier), then
    the examiner must also secure all investor returns of the pass-through entity.
    As long as this tiering situation exists, the examiner must continue to secure
    and control all of the related returns.

  7. If the examiner utilizes the CTF, substantially
    all of the burdens of administrative duties, time frames, notice requirements,
    investor examination report writing and tiering situations are shifted from
    the examiner to the CTF. The examiner is free to conduct the examination of
    the key case and the CTF will complete all of the required administrative
    functions. If the examiner wants to avoid the CTF initially, but then decides
    later to transfer responsibilities to the CTF, all of the actions that would
    have been completed by the CTF to that point must be completed by the examiner
    prior to any shifting of responsibilities. Anything less requires total and
    complete cooperation and approval between the area TEFRA Coordinator and the
    CTF TEFRA Coordinator.

4.31.1.5 
(06-01-2004)
NonTEFRA

  1. If the examiner elects not to use the PCS and
    the CTF for a nonTEFRA case, the examiner assumes responsibility for substantially
    all of the same functions as for TEFRA cases. NonTEFRA cases do not have the
    same notice requirements or time frames, but the tiering, case control and
    report preparation requirements still exist for the examiner. With nonTEFRA
    cases, if the examiner does not utilize the CTF, the examiner assumes complete
    and total statute control for all related investors. Unlike TEFRA cases where
    the statute for all related investors is controlled at the key case level,
    the statute control for all related investors of a nonTEFRA case is controlled
    at the ultimate investor level. The examiner must secure all investor returns
    (including pass-through entities) and secure statute extensions for all entities
    required.

  2. If the examiner utilizes the CTF in the nonTEFRA
    examination, then substantially all of the burdens of case control, statute
    protection and tiering are shifted to the CTF. As in TEFRA examinations, if
    the examiner starts out controlling the case but decides later to shift much
    of the responsibilities to the CTF, the examiner must have completed all necessary
    actions the CTF would have completed up to that time. The requirements for
    shifting responsibilities for nonTEFRA cases are much more stringent than
    the requirements for TEFRA cases. Before any transfers can take place, it
    requires complete and total agreement and cooperation between the field NonTEFRA
    Coordinator and the campus NonTEFRA Coordinator

4.31.1.5.1 
(06-01-2004)
Appeals Considerations

  1. If the key case is not linked on PCS, Appeals
    will only accept protesting investors cases if both of the following are met:

    1. The entity has five or fewer investors, and

    2. None of the investors is a pass-through entity.

  2. If a nonTEFRA key case is unagreed, the key case
    is not linked, and the case does not meet the criteria for sending multiple
    investor cases to Appeals, the key case examiner must either link the key
    case on PCS or hold the investor returns until the key case entity issues
    are resolved in Appeals. IRM 4.31.6, NonTEFRA Examinations-CTF (formerly ESU)
    Procedures describes the statute requirements for linking cases. The CTF will
    make no exceptions.

4.31.1.6 
(06-01-2004)
Responsibilities

  1. The following subsections contain the core responsibilities of each
    group. There may be other locally directed responsibilities in addition to
    these core responsibilities.

4.31.1.6.1 
(06-01-2004)
General

  1. Each designated Campus will maintain a Campus
    TEFRA Function (CTF) to obtain and control, through the AIMS and Partnership
    Control System (PCS), any partner or shareholder returns related to key cases
    within its jurisdiction. The PCS will also be used to identify and establish
    linkage on second and subsequent tier entities. AIMS and PCS are also used
    to identify and control indirect investors and/or pass-through entities.

  2. The CTF is responsible for maintaining centralized
    RAR files. The files should be maintained at least two years after closure.

  3. Coordination between the key case CTF and the
    key case field division (Examination and/or Appeals) is critical to ensure
    that all notices are timely issued.

  4. Each CTF will request and complete an AIMS IVL
    at least annually, or more often if necessary.

4.31.1.6.2 
(02-15-2008)
National Headquarters

  1. The Director, SB/SE Campus Compliance Services,
    Campus Reporting Compliance, is responsible for:

    1. Coordinating and staffing CTF operations;

    2. Selecting the campus(es) for the CTF;

    3. Ensuring that TEFRA procedural changes are promptly
      implemented through coordination with CTF personnel and with Compliance, in
      the field offices, area offices and territories of both the SB/SE and LMSB
      operating divisions;

    4. Monitoring and evaluating CTF operations and quality
      control procedures;

    5. Coordinating the resolution of CTF technical and
      operational problems;

    6. Initiating the development of training modules for
      all levels of CTF employees; and

    7. Updating Internal Revenue Manuals 4.31 and 4.29.

    8. The establishment of assessment and refund tolerances used by the Campus
      TEFRA Functions.

4.31.1.6.3 
(06-01-2004)
Campus Examination Operations Manager

  1. The campus Examination Operations Manager, or
    equivalent, who has a CTF is responsible for ensuring:

    1. The establishment and maintenance of TEFRA suspense
      files;

    2. The establishment of correct PCS and AIMS data bases;

    3. The effective use of PCS reports;

    4. The correction of data base rejects;

    5. The timely processing of TEFRA notices;

    6. The development of appropriate controls to ensure
      timely and accurate return and linkage establishment;

    7. Timely report writing;

    8. Timely assessments;

    9. The training of all employees in CTF procedures;
      and

    10. The timely notification to the field and the other
      CTF of significant events.

4.31.1.6.4 
(06-01-2004)
CTF Managers

  1. The CTF manager is responsible for:

    1. Maintaining updated copies of the Pass-Through Entity
      Handbook in their respective functions;

    2. Ensuring the training of their employees in CTF
      procedures;

    3. Establishing investor returns on PCS and AIMS;

    4. Maintaining correct data bases;

    5. Maintaining complete and accurate case files;

    6. Timely report writing and assessment of TEFRA deficiencies
      or overassessments within the one-year assessment statute date; and

    7. Coordinating with other functions and the other
      CTF, as necessary.

4.31.1.6.5 
(02-15-2008)
CTF Technical Employees

  1. Revenue Agents (GS-512) and Tax Compliance Officers
    (GS-526), Tax Auditors (GS-501) and Tax Examiner (592) Report Writers assigned
    or detailed to the CTF will perform all technical duties including coordinating
    with and assisting other units within the campus, the other CTF, and field
    offices nationwide.

  2. Specific technical responsibilities include the
    following;

    1. Report writing of IMF and BMF reports;

    2. Review of the FPAA, 60-Day, and Form 8340, PCS TEFRA
      Establish or Add, packages;

    3. Development and securing of statutory notice language;

    4. Classification and screening of returns;

    5. Execution of Forms 870-PT and 870-LT (Forms 870-P
      and 870-L are still used for partnership tax years ending before August 6th,
      1997);

    6. Coordinating the execution of Forms 870-PT(AD) and
      870-LT(AD) (Forms 870-P(AD) and 870-L(AD) are still used for partnership years
      ending before August 6th, 1997) with Appeals;

    7. Review of Form 906, Closing Agreement on Final Determination
      Covering Specific Matters;

    8. Identification of tier activities, including the
      determination of whether tax consequences on returns of tier investors warrant
      linking tier investors, writing tier RARs, and preparation of the appropriate
      distribution schedules for tiers;

    9. Providing advice on the appropriate statute of limitations;

    10. Preparation of Form(s) 3999, Statute Expiration
      Report, for barred statutes;

    11. Preparation of Form(s) 3999-T, Statute Expiration
      Report (for TEFRA key cases): e.g., tier statute expires;

    12. Assisting in bankruptcy cases;

    13. PCS coordination activities;

    14. Compliance Team (C-Team) coordination, where appropriate;

    15. C-Team assistance, where appropriate;

    16. PFN (Pre-Filing Notification) assistance, where
      appropriate;

    17. Assisting in training; and

    18. Assisting in the determination of the applicability
      of penalties from the key case RARs.

  3. Technical employees will coordinate with and assist the following other
    functions:

    1. Report writers;

    2. TAS Cases (Taxpayer Advocate Service);

    3. Clerical units;

    4. Campus Quality Assurance;

    5. Field Quality Measurement;

    6. Other campus operations;

    7. Field office TEFRA coordination;

    8. Criminal Investigation;

    9. Other Customer Service functions;

    10. Area PCS Coordinators;

    11. Centralized Case Processing;

    12. Taxpayers and their authorized representatives;

    13. Appeals Officers; and

    14. Area and Chief Counsels.

4.31.1.6.6 
(06-01-2004)
CTF Mail Clerk(s)

  1. The CTF Mail clerk will be responsible for acknowledging
    Form 3210 (Document Transmittal) within 3 days of receipt.

4.31.1.6.7 
(06-01-2004)
Key Case CTF Responsibilities

  1. Generally, key case CTF responsibilities are determined
    by Operating Division. Large and Mid-Sized Business (LMSB) cases are worked
    at the Ogden Campus and Small Business and Self Employed (SB/SE) cases are
    worked at the Brookhaven Campus.

  2. The key case CTF is responsible for:

    1. Linking investors through PCS;

    2. Issuing timely notices to investors;

    3. Receiving and executing agreements and settlement
      agreements;

    4. Establishing and maintaining the key case administrative
      file; and

    5. Setting the one-year assessment statute date.

    6. Preparing and mailing closing packages to functions (Compliance and Appeals)
      that have statute responsibility for investor returns.

4.31.1.6.8 
(08-01-2006)
Investor CTF Responsibilities

  1. Generally, the investor CTF services the investors
    according to the Operating Division of the key case (LMSB for Ogden Campus
    and SB/SE for Brookhaven Campus).

  2. The investor CTF is responsible for:

    1. Securing investor returns;

    2. Creating and maintaining investor files;

    3. Identifying tiers;

    4. Linking tier investors;

    5. Writing reports of examinations; and

    6. Making TEFRA/nonTEFRA assessments

  3. Generally, the key case CTF and investor CTF are
    the same. They may not be the same if the investor is linked to key cases
    or tiers in more than one Operating Division (i.e., LMSB or SB/SE). These
    are called multi-linked tiers or investors.

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