part4-371

4.75.28 
Discrepancy Adjustments

4.75.28.1 
(03-01-2003)
Overview

  1. The discrepancy adjustment program was established in order to reduce
    the number of referrals by TE/GE to Large and Mid-Size Business Division (LMSB),
    Small Business/Self-Employed Division (SB/SE), and Wage and Income Division
    (W&I) for what may require essentially a minor recalculation of tax. This
    program allows Exempt Organization (EO) examiners to make certain line item
    adjustments to federal income tax returns for issues arising from an examination
    of a return of an exempt organization with respect to tax adjustments to:

    1. Form 1040, U.S. Individual Income Tax Return; and

    2. Form 1120, U.S. Corporation Income Tax Return.

  2. An adjustment may arise when there is a discrepancy between an income
    tax return and facts developed during an examination of an exempt organization,
    or during other EO compliance activities such as compliance projects.

  3. These discrepancy adjustment procedures do not constitute an inspection
    of the taxpayer’s books and records under IRC § 7605(b).

  4. Discrepancy adjustments fall within the scope of section 4.02, paragraph
    (10) of Rev. Proc. 94-68, 1994-2 C.B. 803, and as such do not constitute examinations,
    inspections, or reopenings.

  5. The adjustments and penalties are reported on Form 4549-E, Income Tax
    Discrepancy Adjustments. Refer to IRM 4.75.15 line item instructions for completing
    Form 4549 which is substantially the same as for Form 4549-E.

    Note:

    See IRM
    20.1, Penalty, for detailed information concerning penalty considerations.

4.75.28.1.1 
(03-01-2003)
Referrals to Other Operating Divisions

  1. The discrepancy adjustment program does not entirely preclude examiners
    from making referrals to one of the other operating divisions.

  2. The examiner must prepare a referral on Form 5666, TE/GE Referral Information
    Report, for income tax adjustments otherwise treated as discrepancy adjustments
    when the related income tax return:

    1. Is a Form 1120-S, U.S. Corporation Tax Return for an S-Corporation;

    2. Is a Form 1065, U.S. Partnership Return of Income;

    3. Shows a net operating loss;

    4. Was filed by a taxpayer that has filed for bankruptcy;

    5. Was filed by a taxpayer that was dissolved, merged or sold;

    6. Is under the jurisdiction of LMSB – International;

    7. Is under the jurisdiction of LMSB as a Coordinated Industry Case;

    8. Was never filed; or

    9. Is currently under examination by another operating division.

      Exception:

      Situations described in (a) through (d) above may be processed as discrepancy
      adjustment cases by examiners with the concurrence of the Director, EO Examinations.
      If the Director, EO Examinations, approves the exception, the concurrence
      of the affected operating division Director will be requested before the discrepancy
      adjustment is processed.

  3. The examiner should consider the preparation of a referral to another
    operating division on Form 5666, TE/GE Referral Information Report, if:

    • The discrepancy adjustment involves complex income tax returns, or

    • A more detailed inspection of the taxpayers books and records is necessary
      to resolve an income tax issue.

4.75.28.1.2 
(03-01-2003)
Examination Activities by Other Operating Divisions

  1. If the examiner finds a potential discrepancy adjustment on a return
    that:

    1. Is currently under examination by another operating division, the discrepancy
      issue will be referred to the other operating division;

    2. Is assigned to another operating division but is in an inactive status,
      the examiner will contact the other operating division and have the return
      assigned for examination by that operating division as soon as possible;

    3. Has been examined and closed by another operating division, the examiner
      will process the discrepancy adjustment provided that case was
      not       previously closed after consideration by Appeals Offices or District
      Counsels.

    Note:

    The income tax return must be closed off of the other operating
    division’s AIMS before it can be established on AIMS as a discrepancy
    adjustment. Although it can take up to 365 days to drop off of the other operating
    division’s AIMS from the time the case is closed by the other office,
    the return may still be secured. It may, however, be preferable for the examiner
    to secure an amended return.

4.75.28.2 
(03-01-2003)
Identifying Discrepancy Adjustments

  1. The examiner is responsible for identifying the discrepancy during the
    course of the examination.

  2. The following are some examples of discrepancy adjustments that may
    result from an examination of an EO return:

    1. Compensation to employees not included on Form W-2 or Form 1099;

    2. Payments to an independent contractor, for services rendered, which were
      not reported on a Form 1099;

    3. Capital gains or interest to a seller when an exempt organization purchases
      real property;

    4. Adjustments to the return of a taxable subsidiary of an exempt organization.

4.75.28.3 
(03-01-2003)
Processing Discrepancy Adjustments

  1. The examiner is responsible for initiating the discrepancy adjustment
    process and must be satisfied that the correct amount of income has been reported
    on the related income tax return.

  2. Discrepancy adjustments are controlled and processed within Exempt Organizations
    using AIMS, BMF, and IMF systems.

  3. The project codes for discrepancy adjustments for the related income
    tax returns are the same as those for the related EO return. The source code
    is always 87.

  4. Refer to IRM 25.6, Statute of Limitations for detailed instructions
    on income tax return statutes.

    Note:

    Restricted consents should rarely be
    accepted on discrepancy adjustment cases. See IRM 25.6 for the limited circumstances
    when restricted consents may apply and for special procedures to be followed.

  5. Any notices including, but not limited to, letters and a notice of deficiency
    shall be sent to each spouse. If the husband and wife live at the same address,
    the notice shall be sent to each spouse in a separate envelope, in accordance
    with the rules under IRC § 6015. Refer to IRM 4.75.28.3.3, Relief from
    Joint & Several Liability for detailed instructions.

  6. A RTVUE or BRTVU print will be accepted as the equivalent of a tax return
    if it provides sufficient detail to determine if there is a discrepancy, or
    if it gives sufficient line item detail to compute 1040 or 1120 income taxes.
    For unagreed cases, the EO Mandatory Review staff will obtain the original
    return before the case is sent to the tax court or appeals.

4.75.28.3.1 
(03-01-2003)
Case Processing Instructions

  1. If a discrepancy adjustment is warranted, the tax return will be established
    on AIMS with Form 5597, TE/GE IMF/BMF/EPMF Request, and except as otherwise
    provided in item (2) below, a 30-day letter and a discrepancy adjustment report
    will be mailed to the taxpayer by certified mail.

  2. The discrepancy adjustment report package consists of the following:

    1. 30-day letter (Letter 3605);

    2. Form 4549-E, Income Tax Discrepancy Adjustments (two copies);

    3. An explanation of the issues for which discrepancy adjustments are being
      proposed;

    4. Publication 3498, The Examination Process;

      Note:

      The Publication 3498 is
      used in lieu of Publication 1, Your Rights as a Taxpayer, and Publication
      594, What You Should Know About The IRS Collection Process, as an enclosure
      to the discrepancy adjustment 30-day letter. If the examiner does not have
      access to a current version of the 30-day letter listing Publication 3498
      as an enclosure, Publications 1 and 594 can be used.

    5. Publication 5, Your Appeal Rights and How To Prepare a Protest If You
      Don’t Agree;

    6. Publication 556, Examination of Returns, Appeal Rights, and Claims for
      Refund;

    7. Publication 504, Divorced or Separated Individuals and Publication 971,
      Innocent Spouse Relief, if the adjustment is to a Form 1040, individual income
      tax return.

    Note:

    If prior to issuance of a 30-day letter, a signed Form 4549-E
    is secured from the taxpayer or the taxpayers representative under Form 2848,
    it is not necessary to issue a 30-day letter or Publication 3498, however,
    Publication 1 must be issued in these cases.

  3. If the taxpayer provides additional information during the 30-day period,
    the examiner will consider the effect of the information received on the proposed
    discrepancy adjustment and:

    IF the additional information submitted THEN the examiner will issue letter
    Shows that no adjustment is necessary 3604 and close as a
    “no change”
    case.
    Changes the discrepancy amount or penalties, 3619 with a revised report
    Does not change the original report 3603 along with a copy of the report.
    Contains income tax records or other information requiring further
    development     		The examiner should make a referral on Form 5666 to the appropriate
    operating division for examination.

  4. If the taxpayer files a protest which does not change the report, the
    examiner will:

    1. Verify the protest is complete.

      Note:

      See IRM 4.75.20, Final Case Processing,
      for detailed information concerning verifying the completeness of a protest.

      ;

    2. If necessary, prepare a memorandum to Appeals with a brief response to
      the protest. Place the memorandum in the case file and provide a copy to the
      taxpayer;

      Caution:

      The memorandum must be shared with the taxpayer.
      Failure to do so will result in a prohibited ex parte communication. See IRM
      4.70.2, TEGE Examinations – TEGE Communications with Appeals.

    3. Close the case to EO Mandatory Review Staff.

  5. If the taxpayer files a protest and the protest:

    Shows The examiner will issue letter
    The proposed adjustment is not appropriate 3604 and close as a
    “no change”
    case.
    Changes should be made to the proposed discrepancy amount or penalties

    		 3619 with a revised report.

  6. If the taxpayer does not protest within the 30-day period, but previously
    indicated his/her intention to do so, the examiner will issue Letter 923(DO)
    which grants an additional 15 days to respond.

  7. If the 30-Day Letter is returned as undeliverable to the address on
    file, then an attempt will be made to obtain the correct address.

    1. If the taxpayers correct address is determined, the 30-Day Letter will
      be re-mailed to the new address. The period in which the taxpayer may reply
      starts with the date the letter was re-mailed.

    2. If the taxpayers correct address cannot be determined, the case will
      be closed unagreed to the EO Mandatory Review Staff.

  8. If the taxpayer neither agrees nor protests within the 30-day period,
    the case will be closed to the EO Mandatory Review Staff for issuance of a
    statutory notice of deficiency.

  9. If the taxpayer (and spouse, if a jointly filed Form 1040) or the POA
    agrees to the discrepancy adjustment by signing and dating the Form 4549-E,
    the examiner will close the case under the agreed case closing procedures
    in IRM 4.75.16, Case Closing Procedures.

4.75.28.3.2 
(03-01-2003)
Special Processing Instructions

  1. If the total discrepancy adjustment to one taxpayer results in an overassessment,
    or an agreed but unpaid deficiency, of $50,000 or more, the case must be processed
    within 22 calendar days (16 business days) after the agreement is filed or
    the overassessment is determined. See section 3103 of the IRS Restructuring
    and Reform Act of 1998 (RRA 98).

  2. The examiner will close the discrepancy adjustment cases with the related
    EO case, unless:

    1. The discrepancy adjustment case must be closed before the related EO case
      due to statutory period of limitations considerations, or

    2. The discrepancy adjustment case must be closed within 22 calendar days
      and the EO case cannot be closed within this time period.

  3. The examiner should include copies of all materials from the related
    EO file which are necessary to document the discrepancy that gave rise to
    the adjustment.

  4. Partially agreed discrepancy adjustments should be processed in accordance
    with IRM 4.75.15, Report Writing and IRM 4.75.16, Case Closing Procedures.

  5. If a case is unagreed due to
    lack of response to Form 4549-E, the case will be closed to Mandatory Review
    staff to issue a Notice of Deficiency, Letter 531 (DO).

  6. If a discrepancy adjustment(s) is a result of an unagreed EO issue on
    the primary return, e.g., revocation or modification, the 30-day letter(s)
    and the discrepancy adjustment report(s) will be issued by the Mandatory Review
    staff at the same time the 30-day letter is issued on the primary return.
    The group should close the discrepancy adjustment(s) to Mandatory Review before
    Letter 3605 is issued. The primary return and the discrepancy adjustment(s)
    should be closed to Mandatory Review at the same time.

4.75.28.3.3 
(03-01-2003)
Relief from Joint & Several Liability

  1. If a discrepancy adjustment is warranted with respect to a joint return
    under IRC § 6015, the following procedures should be followed:

    1. The last known address for each spouse should be verified. The current
      address for each spouse should be confirmed by researching IDRS and the Master
      File should be updated if the address has changed. For detailed procedures
      on locating taxpayers and what constitutes proper notice, see IRM 7.75.10.

    2. A copy of the discrepancy adjustment report should be sent separately
      to each spouse, even if they live at the same address.

    3. In the case of multiple year adjustments where the taxpayers filed a joint
      return in one year and separate returns in the other, the examiner will issue
      separate reports which must be mailed separately to each spouse, and must
      only contain information pertinent to the appropriate taxpayer.

  2. If Form 8857, Request for Innocent Spouse Relief, under IRC § 6015,
    or a statement containing substantially the same information signed under
    penalty of perjury is submitted, and the case is closed, the receipt date
    will be stamped on such Request for Innocent Spouse Relief, and it shall be
    sent to:

    Internal Revenue Service
    CSC, Stop 829, Unit 11
    201 West Rivercenter
    Boulevard
    Covington KY 41019

4.75.28.3.4 
(03-01-2003)
Claims

  1. If a taxpayer files a formal claim with a service center on Form 843,
    Claim for Refund and Request for Rebate, Form 1040X, Amended U.S. Individual
    Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return,
    while the income tax return is open on AIMS in an EO office, the service center
    will forward the claim to the examiner for action.

    1. On receiving a formal or informal claim, the examiner will contact the
      EO Classification office.

    2. The examiner will either be given assistance in ruling on the claim or
      will be instructed to transfer the claim to the appropriate operating division
      for examination.

  2. If EO retains jurisdiction over the claim and the discrepancy adjustment
    is open, the disposition of the claim must be described in the
    ”
    Other Information”
    section of Form 4549-E. See IRM 4.75.15 which provides
    specific guidance on statements used to describe the disposition of claims.
    Since discrepancy adjustments do not constitute an
    “examination
    ”
    the statements describing disposition of the claims should not make
    any reference to an
    “examination.”

    1. If the claim is fully or partially allowed, the claim description and
      amount allowed should be entered on the appropriate adjustment line of Form
      4549-E.

    2. If a formal claim is fully or partially disallowed, the report shall also
      contain Form 2297, Waiver of Statutory Notification of Claim Disallowance.

  3. If a taxpayer who makes a credible claim that he or she is unable to
    manage his or her own affairs by reason of physical or mental impairment,
    requests additional time to file a claim under IRC § 6511(h), the matter
    should be referred to the appropriate operating division on Form 5666 TE/GE
    Information Referral.

Exhibit 4.75.28-1 
(03-01-2003)
Discrepancy Adjustment Letters and Forms

Old Number New Number  
LETTER/FORM TITLE
F 4549-E F 4549-E Income Tax Discrepancy Adjustments
L 2652P L 3605 Initial 30 Day Discrepancy Adjustment
L 923(DO) L 923(DO) Letter Extending Time to File Protest
L 2656P L 3604 No Change Letter – Follow-up to 30 Day Letter
L 2657P L 3619 Revised Report – Follow-up 30 Day Letter
L 2658P L 3603 Follow-up Response to 30 Day Letter – No Change to Initial Proposal
L 531 (DO) L 531 (DO) Notice of Deficiency

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