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Part 4. Examining Process

Chapter 25. Estate and Gift Tax

Section 1. Estate and Gift Tax Examinations

4.25.1  Estate and Gift Tax Examinations

Manual Transmittal

October 25, 2011

Purpose

(1) This transmits revised IRM 4.25.1, Estate and Gift Tax, Estate and Gift Tax Examinations.

Background

IRM text pertains to Estate and Gift Tax examination procedures. This IRM provides direction which is Estate and Gift Tax specific.

Material Changes

(1) Editorial changes and revisions have been made throughout the IRM to enhance clarification.

(2) Added an index to the IRM to enhance ease of use.

(3) Updated the included IRM citations. IRM 4.25.1.1

(4) Revised to include additional classification procedures for classifiers. IRM 4.25.1.1.1

(5) Added content to further clarify the definition of significant examination activity. IRM 4.25.1.1.5

(6) Added new procedures pertaining to requests for prior gift tax returns during a gift tax examination. IRM 4.25.1.1.6.2(3)

(7) Revised content to provide that examiners must consider applicable penalties anytime there is an adjustment to a return. See IRM 4.25.1.1.6.3

(8) Added a new subsection which includes information regarding estate and gift tax return preparer penalties program procedures. IRM 4.25.1.1.6.4

(9) Added a new subsection regarding the required use of Inventory Management System and the Notebook Tool by E&G examiners and the location of the IMS and Notebook manuals, documents and alerts. IRM 4.25.1.1.8

(10) Updated this section to include a reference to revised IRM 20.1.1.3.6.3. IRM 4.25.1.1.6.3(2)IRM 4.25.1.1.6.3

(11) Included information regarding the Form 890-T . IRM 4.25.1.1.11

(12) Added information regarding the closure of no change cases and moved content previously included in IRM 4.25.1.1.3 to IRM 4.25.1.1.4 to the following subsections. IRM 4.25.1.1.12 and IRM 4.25.1.1.13

(13) Included more specific content pertaining to the various types of case closures in the Estate and Gift Tax program. IRM 4.25.1.1.12 to IRM 4.25.1.1.16

(14) Added procedures and information to determine when a case should be closed utilizing a 30-Day letter or a 90-Day letter and a cross-reference to the partially agreed case closing report sub-section. IRM 4.25.1.1.15

(15) Revised title and content so that the section includes only information pertaining to miscellaneous forms that may need to be included with the examination report. IRM 4.25.1.4

(16) Revised and updated the claims section to clarify the procedures to be followed for protective claim cases. IRM 4.25.1.4.2.

(17) Added the requirement that Form 890 -T be used for agreed transferee transfer liability cases. IRM 4.25.1.4.3

(18) Added information regarding the requirement that Form 14247, Art Appraisal Services Referral must be used for all referrals to Art Appraisal Services. IRM 4.25.1.5.8.1 and IRM 4.25.1.5.8.2

(19) Added procedures for making mandatory referrals to Art Appraisal Services. IRM 4.25.1.5.8.1 and IRM 4.25.1.5.8.2

(20) Added instructions regarding when referrals for Engineering Services are required. IRM 4.25.1.5.8.3

(21) Updated the minimum amount at which an Outside Fee Appraisal request requires Territory Manager and E&G Chief approval. IRM 4.25.1.5.8.5

(22) Added new procedures requiring referrals to Estate and Gift Tax be submitted to E&G PSP Referral Coordinator. IRM 4.25.1.5.10

(23) Updated IRC section 6166 closing procedures to Appeals to delete the inclusion of the 'Emerging Issue' language on the Form 3210 submitted to Appeals. IRM 4.25.1.5.12.3, IRM 4.25.1.5.12.4, IRM 4.25.1.5.12.5, and IRM 4.25.1.5.12.6

(24) Added new content regarding Appeals pre-conference procedures. IRM 4.25.1.5.14

(25) Removed content previously included in Exhibit 4.25.1-3 that was duplicative of content in IRM 4.25.1.7. IRM 4.25.1.5.14

(26) Added Exhibit 4.25.1–3, Quick Reference Guide for preparing Return Preparer Penalty forms and letters is added as a new exhibit.

Effect on Other Documents

This material supersedes IRM 4.25.1, dated July 31, 2009. SBSE 04-1210-069, Interim Guidance on the Issuance of No Change Reports, SBSE-04-0311-027, Interim Guidance On Return Preparer Penalty Procedures For Estate & Gift Preparer Penalty Cases, SBSE -04-0610-028, Interim Guidance On Issuance of Statutory Notice of Deficiency, SBSE-04-0111-008, Interim Guidance on Referrals for Art Appraisal Services and SBSE -04-0111-002, Interim Guidance on Referrals for Engineering Services, when a referral to Engineering is required have been incorporated into this IRM.

Audience

This section contains instructions and guidelines for Small Business/Self-Employed Estate and Gift Tax Specialty Programs employees, and for Cincinnati Campus Compliance Operations employees, and Collection employees dealing with estate and gift tax issues.

Effective Date

(10-25-2011)

John H. Imhoff, Jr.
Director, Specialty Programs
Small Business/Self-Employed

4.25.1.1  (10-25-2011)
Examination Procedures

  1. This section provides general instructions and direction for classification activities, examination procedures, valuation of securities, surveying returns, and processing generation-skipping tax returns.

  2. Examiners should refer to the following examination chapters for guidance not included herein or for additional guidance: IRM 4.10.1, Overview and Basic Examiner Responsibilities; IRM 4.10.2, Pre-Contact Responsibilities; IRM 4.10.6,Penalty Considerations; IRM 4.10.11, Power of Attorney and Related Authorizations; IRM 4.11.55, Issues Involving a Taxpayer's Representative and IRM 4.11.57, Third Party Contacts.

4.25.1.1.1  (10-25-2011)
Classification of Returns - General

  1. Classification guidelines and priorities are established by the Chief, Estate and Gift Tax Program in coordination with the Estate and Gift Territory Managers.

  2. The National Gatekeeper will ensure classifiers receive all information needed for a classification detail and will host the Pre-Classification Conference Call.

  3. Prior to classification an Estate and Gift Tax Planning and Special Programs(PSP) paralegal will send the "Classifiers Information Needed" e-mail to each classifier for the upcoming classification session with all the information needed for the classification detail. The classifier is responsible for reviewing this information and any other information provided by PSP prior to the classification detail.

  4. Pre-classification teleconferences between PSP and the classifiers may be held prior to a classification detail to discuss and identify workload requirements for the various Estate and Gift (E&G) groups. The classifier is responsible for attending the pre-classification conference call to receive instructions for the classification detail and information on emerging issues and projects. Included in the discussion will be the following:

    1. Number of returns requested by each E&G group, and

    2. Classification guidelines.

  5. During classification, classifiers are required to review all schedules on all returns to identify any significant issues and any art issues. Such issues must be clearly and completely identified with sufficient detail on the classification folder or the classification sheet.

  6. The National Gatekeeper will oversee classification sessions, assist classifiers and answer technical and procedural questions. The National Gatekeeper is not a classifier.

  7. The PSP Paralegal will be available during a classification session to assist the classifiers with the following:

    • BMFOL-I: To ascertain whether a Form 706 has been filed for the Form 709 classification

    • RealQuest Research: To check if property has been sold and amount of property taxes paid

    • Stock Valuation Research: To determine whether the return should be submitted for verification of stock valuation.

    • Verification of Schedule O Charities/Foundations.

    • Search for Returns (i.e. spouse that needs to be associated)

    • Verification of estimated income tax liability

  8. The National Gatekeeper and the Group Manager are responsible for reviewing returns that are accepted as filed. A list of most frequently missed issues will be included in the "Classifiers Information Needed" e-mail sent to classifiers for the next classification detail and will be discussed during the pre-classification conference call

4.25.1.1.1.1  (07-31-2009)
Classification of Estate Tax Returns

  1. The Estate and Gift Tax Operation at the Cincinnati Campus will:

    1. Generate an IDRS transcript of account (BMF MCC Transcript Complete - MFTRA Type C). Generally, this transcript will provide information on gift tax filings for the most recent 5 year period. Returns filed prior to this will be listed on the transcript as "MODULES REMOVED TO RETENTION REG." In these cases, the Estate and Gift Tax Campus Operation will request a BMF MCC Transcript - Type E. The Type E transcript contains information on gift tax returns listed on the Type C transcript as well as additional older gift tax returns. Campus will associate the transcripts with the return. Campus will attempt to secure all related gift tax returns (as shown on the MFTRA Type C and Type E transcripts); however, not all gift tax returns may be included in the file.

    2. Associate the Examination Assembly ( Form 5546, Examination Return Charge-Out Sheet, and Examination Labels) and any of decedent's related Form 709s with each estate tax return.

    3. Segregate returns by activity code.

    4. Generally, classify returns within 60 days of receipt from the files area. Classification responsibilities will be shared between the Campus, PSP and the Territory offices.

    5. Classify returns at the Campus using a team of Campus and Field estate tax attorney(s), estate tax manager(s), paralegal(s) and transfer tax technician(s). The number of classifiers will vary based on the number of returns available and instructions provided by the Chief, Estate and Gift Tax Program.

  2. The Campus will review all Forms 706 with an election under IRC section 6166, IRC section 2032A and IRC section 2057. The returns are assigned to an E&G Tax group at the Cincinnati Campus or in the Field.

    Note:

    An election under IRC section 2057, qualified family-owned business deduction, is not applicable for decedent's dying after December 31, 2003.

  3. At classification, an estate tax attorney will consider whether the initial eligibility requirements to make the IRC section 6166 election appear to have been met. The estate is eligible under IRC section 6166 to make the election if the decedent was a US citizen, the decedent’s interest in the closely held business exceeds 35 percent of the adjusted gross estate (not including passive assets), and the notice of election under IRC section 6166 was attached to a timely filed estate tax return. The business must also qualify as a closely-held business, as defined in IRC section 6166(b). In certain cases there may be additional eligibility requirements. See IRC section 6166(b) - (h). If all IRC section 6166 requirements have been met and there are no other issues pending, the return may be "Accepted as Filed" on classification. The form should be stamped to indicate that it is "Accepted as Filed" . The Classification sheet or Folder should be annotated by checking the "Lien Only" box. These returns will be sent to the Estate and Gift Tax Group at the E&G Campus.

  4. E&G Campus must submit a lien package, as described in IRM 4.25.1.5.12(10), to the attention of the Advisory Estate Tax Group Manager. The lien packages shall be sent to Advisory along with a Form 3210 listing each item included in the lien package.

  5. E&G Campus will close the case, issue a closing letter, and confirm that installment payments are established.

  6. E&G Campus will hold the original tax return for 90 days once the lien package is sent to Advisory, in case additional information is needed.

  7. At classification, classifiers will determine if the IRC section 2032A and/or IRC section 2057 requirements appear to have been met. See IRC section 2032A and IRC section 2057 for election requirements. If all IRC section 2032A and/or section 2057 requirements have been met and there are no other issues pending, the return may be "Accepted as Filed" on classification. The form should be stamped to indicate that it is "Accepted as Filed." The Classification Sheet or Folder should be annotated that this case should be processed for "Lien Only."

  8. IRC section 2032A and/or IRC section 2057 returns that are "Accepted as Filed" will be sent to the Estate and Gift Tax Group at the Cincinnati Campus. The Estate and Gift Tax Group at the Cincinnati Campus will close the case and issue a closing letter. The group will ensure that a lien package is prepared and forwarded to Advisory.

  9. After classification is complete, the Cincinnati Campus will:

    1. Close AIMS record using Disposal Code 20 (Accepted as Filed) or Disposal Code 35 (Surveyed Excess Inventory) as appropriate.

    2. If the return is not selected for Field consideration, assure the return has a stamp to indicate "Accepted as Filed" by classification. Issue Letter 627, Estate Tax Closing Letter.

    3. For returns selected for Field consideration, update ERCS/AIMS information to the receiving group, including tracking codes and project codes where applicable.

    4. After updating ERCS/AIMS information, returns selected for Field consideration will be sent to the appropriate Field office within 30 days of selection, accompanied by a Form 3210, Document Transmittal, indicating the number of returns included with each shipment. An AIMS status label will be attached to Form 5348, AIMS/ERCS Update for each return.

4.25.1.1.1.2  (07-31-2009)
Classification of Gift Tax Returns

  1. Gift tax classification guidelines and priorities are established by the Chief, Estate and Gift Tax Program in coordination with the Territory Managers.

  2. After classification, the E&G Campus will:

    1. Request and associate the historical file of the donor, if available, for each return selected for Field consideration

    2. Conduct a search for and associate any related spousal returns, if applicable and available, for each return selected for Field consideration

    3. Establish selected returns on AIMS/ERCS, input any tracking codes and project codes, and associate Form 5546, Examination Return Charge-Out Sheet, and Examination Labels with returns before shipment to the E&G Field offices.

    4. Send returns selected to the appropriate E&G Field office within 30 days of selection, accompanied by Form 3210, Document Transmittal indicating the number of returns included with each shipment. Attach an AIMS status label to Form 5348.

4.25.1.1.1.3  (12-31-2002)
Valuation of Listed and Over-the-Counter Securities

  1. The Cincinnati Campus may verify the valuation of listed and over-the-counter securities as part of the estate and gift tax returns classification process. The Cincinnati Campus will use the automated valuation services vendor contracted by Headquarters.

  2. Classifiers will determine which stocks and bonds will be valued. The determination is a matter of judgment, and although no rigid rule applies, the case is referred for valuation verification when:

    • Valuation changes impact the tax liability,

    • Large blocks of stocks or bonds are present, or

    • There is likelihood of substantial valuation change.

  3. E&G Field personnel may ask the Cincinnati Campus to value specific securities.

4.25.1.1.2  (07-31-2009)
Returns Selected for Examination - Survey

  1. The estate tax group manager may survey cases before assignment and contact if, after reviewing the return and evaluating the audit potential, workload considerations and the availability of personnel to conduct the examination, the manager determines that the examination of the return will not likely result in a material change in the taxpayer's tax liability, provided no records have been inspected and no contact has been made with the taxpayer or the taxpayer's representative other than for file perfection.

  2. The examiner may survey a case after assignment if no contact has been made and if, after reviewing the return and evaluating the audit potential, the examiner determines that the conditions in paragraph (1), above, regarding the inspection of records and contact with the taxpayer, are met.

  3. Contact is:

    1. Talking with or writing to the taxpayer, the taxpayer's personal representative, return preparer, or other authorized representative of the estate, or the donor, in such a manner that they are aware that the return is being examined, or

    2. Requesting information which is not required to be filed with the return. The instructions for the returns and IRC Regulations 20.6018–4, 25.6019–3, and 25.6019–4 list required documents.

  4. Requesting information that should have been filed with the return is considered perfection of the return and shall not be considered contact.

    1. An estate tax return file perfection is limited to requesting information required to be disclosed by the return and/or instructions and to the following:

      • Certified copy of will if decedent died testate;

      • Certified copy of death certificate;

      • Form 712, Life Insurance Statement, for all life insurance policies listed on return;

      • If alternate valuation is elected, evidence of sale or distribution of assets made during the alternate period;

      • If transfer is by trust, a copy of the instrument;

      • Power of Appointment instruments;

      • Appraisals on included real estate;

      • Financial data on non-public enterprises;

      • State certification of payment of state death taxes;

      • Copies of Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, filed by and for decedent;

      • Form 706–CE, Certificate of Payment of Foreign Death Tax;

      • For non-resident citizens, copies of inventory and other documents filed in a foreign probate court; and,

      • For non-resident, possibly a former citizen, documents relating to possible expatriation.

        Note:

        Requesting and receiving items beyond those items enumerated or not required to be filed with the return will result in the start of an examination which requires an audit determination (change or no change decision). In this situation, the return cannot be surveyed.

    2. A gift tax return file perfection is limited to requesting information required to be disclosed by the return and/or its instructions and to the following:

      • Information showing how the value of the gift was determined;

      • Financial data on non-public enterprises;

      • Form 712, Life Insurance Statement, for all life insurance policies listed on the return;

      • If transfer is by trust, a copy of the instrument; and,

      • Any appraisal used to determine the value of real estate or other property.

        Note:

        If the donor is deceased or has been declared legally incompetent, verification that the person signing the return is the authorized representative of the donor or the donor's estate is considered perfection.

  5. Time spent reviewing a return and its attachments and/or perfecting the file may be shown as below-the-line time on Form 4502, Exam Technical Time Report, using Code 615, Survey. The number of hours spent reviewing the return and perfecting the file is not a consideration in determining whether the return has been examined.

  6. If an examiner decides that a case is likely to result in a change in tax and there is a plan to examine the return, the case should be opened (AIMS status 12) and time charged to the case. This time may include time for further review and/or file perfection. If it is later determined that contact with the taxpayer or the taxpayer's representative will not be made, the examiner may survey the return, even with time charged to the case on ERCS, provided there has been no activity beyond that of a survey.

  7. Examiners who survey a case after assignment will utilize Form 3187, Survey After Assignment, to explain the reasons for the survey decision or include a complete written explanation in the Form 9984 and the appropriate work papers. The total number of hours on the case, including time charged directly to the case and time charged to Code 615, Survey, will be noted on the Form 3187 in the "Enclosures" block. If the Form 3187 is not used, then the total number of hours, including time charged directly to the case and time charged to Code 615, Survey, should be noted on the Form 9984. The case will be hand-stamped "Survey After Assignment" and must display the dated signature of the examiner and group manager.

  8. If the examiner determines and documents a decision in the case file that the estate qualifies for the election under IRC section 6166 and there appears to be no substantive audit issues on the return, the return may be surveyed. The examiner should refer to the procedures at IRM 4.25.1.5.12.2.

4.25.1.1.3  (07-31-2009)
Protection of Returns

  1. Estate tax returns and gift tax returns are prepared under penalties of perjury. They frequently involve large sums of money. In the event of litigation it is highly important that the entire return, as originally filed, and unaltered in any manner, be available for introduction into evidence. If the original return is not available for introduction into evidence, legal problems may arise to the prejudice of the Government's interest. For example, the absence of the original return, or the presence of any writing or erasures made on the return after it was filed makes it much more difficult to obtain a conviction for filing a fraudulent return.

  2. All data attached to the return when filed, including the appraisals, financial statements, probate records, etc., should remain with the return and not be separated, reorganized or filed in your work papers.

  3. The problem of alteration or defacement deserves special consideration. The return shall not be used as a work paper and neither notes nor writings shall be recorded on the return by the examiner.

  4. Instead of making marks on the return, notes should be entered on separate work papers or lead sheets, or a work copy of certain schedules of the return may be made and used to record examination information.

4.25.1.1.4  (07-31-2009)
Limited Scope Examinations

  1. During classification, returns may be identified as limited scope examinations.

  2. The Cincinnati Campus will input the project code 0902 on AIMS/ERCS before shipping the return to the Field offices.

  3. These cases will be started (taxpayer contact) within 45 days of receipt in the Field group.

  4. The Field offices may conduct limited scope examinations of items which are conducive to correspondence examinations and do not require significant substantiation by the taxpayer.

  5. Limited scope examinations do not require a probe for omitted assets and undisclosed transfers. Thus, the only lead sheet required for a limited scope examination is a limited scope examination lead sheet.

  6. To make adjustments, complete reports in accordance with IRM 4.25.1.1.11.

4.25.1.1.5  (10-25-2011)
Inventory Management for Estate Tax Examinations

  1. Generally, it is recommended that examination and processing of returns be completed within 18 months of filing.

    1. Returns will be examined in accordance with the required Examination Process and Documentation (EPD) tools and procedures.

    2. Cases assigned by a group manager to an examiner should be opened as an examination or surveyed within 45 days after assignment.

      Note:

      Limited Scope Examinations are an exception and must be started within 45 days of receipt in the Field group.

    3. Significant and meaningful examination activity and/or taxpayer contact is required at least every 45 days. Significant and meaningful examination activity and/or taxpayer contact includes but is not limited to:

      1. Discussions with the taxpayer or the taxpayer’s representative which significantly move the examination toward completion.

      2. Contacts that inform the taxpayer of the progress of the examination.

      3. Requests for records.

      4. Contacts that specify issues to be discussed with the taxpayer.

    4. When a taxpayer or a taxpayer's representative has failed to meet two deadlines to provide information or documentation requested by the examiner, the manager should be informed and should get involved in the examination to prevent further delays.

    5. Examinations extending beyond 18 months may require frequent managerial involvement.

    6. When an examination is beyond the 18 month cycle, managers should ensure that the Service does not become a party to the continuing delay in effecting the completion of the examination. See Policy Statement 4-52.

  2. Generally, examine estate tax returns in the order in which they are filed. Factors to consider:

    • Program priorities or initiatives

    • Return complexity

    • Geography

  3. Examiners may be required to examine cases in states other than their own. Online resources as well as a list of state-law experts are available to assist in understanding various state laws that may be encountered. The online resources are meant to be a starting point for the research and not a comprehensive listing.

    1. Contacting state law experts should be done after research has been performed and questions still remain. The listing of contact names and numbers is located at State Law Contacts on the Estate and Gift Tax Program internal web site.

    2. Online resources for researching state law may be found at the Electronics Research Page on the Estate and Gift Tax Program internal web site. These resources include LexisNexis, Accurint, CCH, Westlaw and the IRM Online.

    3. Examiners should make the best use of electronic research and the IRM to enhance performance.

4.25.1.1.6  (10-25-2011)
General Instructions Regarding Examinations

  1. Quality attributes set guidelines for conducting quality examinations.

  2. National Quality Reviewers and Estate Tax Group Managers will apply these standards to each case reviewed to determine whether the examination standards have been met.

  3. The Estate and Gift Tax Embedded Quality Review System (EQRS) and the National Quality Review System (NQRS) are discussed below at IRM 4.25.1.2.

  4. The recommended national standard timeframes for which action should be taken are as follows:

    • 45 days from first action to first appointment.

    • 45 days between significant activities. See IRM 4.25.1.1.5(c)

    • 1 day (next business day) to return telephone call to the taxpayer/representative.

    • 14 days to consider and act on correspondence and/or documents received from the taxpayer or the representative.

    • 15 days for case closure for agreed or no-change examinations - from the date that the waiver is received or the date that the no-change status is communicated to the taxpayer to the date the case is closed from the group.

    • 20 days for case closures for unagreed examinations - from the date the 30-day letter defaults or the date that the request for appeals conference is received from the taxpayer or authorized representative to the date the case is closed from the group. A Rebuttal should be prepared addressing the issues raised in the Protest. The time period for closure is not extended while preparing the Rebuttal.

    • Any IRM requirement for expedite processing will take precedence over these time frames.

      Note:

      All days are calendar days. Reasonable delays with explanations will not result in a rating of "No."

  5. Cases assigned by a group manager to an examiner should be opened as an examination or surveyed within 45 days after assignment.

  6. Indicate on Examination Planning and Work Papers Index any large, unusual, or questionable items that should be verified, any significant items that should be verified, and any significant items that should not be verified (such as a large asset passing as part of a charitable deduction). Use this to make pre-examination determinations:

    • Examine or survey.

    • Scope of audit.

    • Request specialized assistance or activities.

  7. Use Form 9984 as an activity record and show:

    1. When forms and significant documents were sent or received.

    2. Internal contacts.

    3. Taxpayer contacts.

    4. Any other significant contacts or activities.

  8. If a Classification Sheet is included in the case file, the examiner should attach it to the Examination Planning and Work Papers Index. A copy of the classification folder should be made and attached to the index if a separate classification sheet was not provided.

4.25.1.1.6.1  (10-25-2011)
Estate Tax Examinations

  1. Examine estate tax returns in a manner that will promote public confidence as stated in the Mission of the Service. Policy Statement 1-1. IRM 1.2.10.1.1.

  2. At the beginning of each examination, request a current IDRS transcript of account (BMF MCC Transcript Complete - MFTRA Type C) if one is not available in the file. This transcript is associated with the estate tax return at classification. MFTRA Type C transcripts generally provide information on gift tax filings for the most recent 5 year period. Returns filed prior to this will be listed on the transcript as "MODULES REMOVED TO RETENTION REG." In these cases, the Cincinnati Campus will request a BMF MCC Transcript - Type E. The Type E transcript contains information on gift returns listed on the Type C transcript as well as additional older gift tax returns. Although the Cincinnati Campus will attempt to secure all related gift tax returns (as shown on the MFTRA Type C and Type E transcripts), not all prior gift tax returns may be included with the file.

  3. The first step in locating gift tax returns is reading the transcript. Before starting the examination, the examiner should review the transcript to ensure all gift tax returns are included in the estate tax return audit package. If the returns are not included, the examiner should request the missing gift tax returns by completing a Form 2275, Records Request, Charge and Recharge (commonly referred to as "Charge-Out " ). The returns are stored at the C-Site in Kansas City, MO, based on alphabetical spelling of the last name and on the Campus or Service Center where they were originally filed. Some taxpayers may have appropriately filed returns at various Service Centers and Campuses during their lifetime. The first two digits of the DLN, the file location codes, will identify the Campus or Service Center with which a return was filed. DLN file location codes should be utilized to locate the gift tax returns. A list of Campuses and their file location codes may be found in Document 6209,IRS Processing Codes and Information

  4. Two copies of the Form 2275 should be faxed to the Cincinnati Campus. If the examiner requests a current year Form 709, 2 copies should be faxed to the Cincinnati Campus. The fax numbers can be found on the E&G Web Site. The examiner must prepare a Form 2275 for each service center where a Form 709 may have been filed. On the fax cover sheet, the examiner should "request a fax of charge out information if tax return is not found." If ordering a current year Form 709, fax 2 copies of the Form 2275 to the Cincinnati Campus.

  5. If the examiner is unable to locate the gift tax return, a copy may be requested from the taxpayer.

  6. If the examiner decides to examine a prior gift tax return as part of the estate tax examination, the source code should be updated to Source Code (SC) 50, Non-DIF Related Pickup - Filed Return.

  7. If the examiner needs assistance in securing a transcript or interpreting a transcript, call the Processing Unit at the Cincinnati Campus that services your territory. A list of the Managers for each Processing Unit is found on the E&G Web Site.

  8. When possible, schedule an examination appointment with the taxpayer or authorized representative, unless information concerning questionable items appearing on a tax return can be readily furnished by mail or by telephone. When the initial contact with the taxpayer or authorized representative is by telephone or in person, examiners will explain/discuss the taxpayer’s rights as outlined in Publication 1, Your Rights As A Taxpayer, and answer any questions the taxpayer may have concerning their rights. See IRC section 7801 and IRM 4.10.2.7.3.

  9. When the initial contact is by correspondence, the following documents must be mailed to the taxpayer along with the initial letter addressed to the taxpayer and the enclosures noted:

    1. Publication 1, Your Rights As A Taxpayer

    2. Notice 609, Privacy Act and Paperwork Reduction Act

    See IRM 4.10.2.7.4.2(4).

  10. Except for a limited scope examination, probe for omitted assets and undisclosed transfers.

  11. Maintain significant and meaningful examination activity and/or taxpayer contact at least every 45 days. IRM 4.25.1.1.5(c)

  12. Practitioners are subject to regulations contained in Treasury Circular No. 230. Examiners should be mindful of the regulations contained in Treasury Circular No. 230 and initiate a referral to the Office of Professional Responsibility regarding practitioners who fail to comply with these regulations. See IRM 4.25.1.1.10

  13. Request internal specialists, outside fee appraisers, and paraprofessional support, when their participation enhances the quality, accuracy, and fairness of the examination. However, the examiner to whom the return is assigned, under the direction of the group manager, is responsible for making the recommendation of tax liability, ensuring conclusions are properly supported by the facts and law, and explaining adjustments to the taxpayer.

  14. Obtain omitted copies of documents and information required to be filed with the estate tax return. Upon receipt, these documents should be attached as exhibits to the workpapers.

  15. Information and copies of documents should not be obtained and made a part of the case file unless they are:

    1. Required to be filed with the return. See IRM 4.25.1.1.2(4)(a).

    2. Necessary to support adjustments.

    3. Necessary for a complete examination of the return.

    4. Needed for complete explanation of questioned items which resulted in a no-change.

4.25.1.1.6.2  (10-25-2011)
Gift Tax Examinations

  1. Chief, Estate and Gift Tax Program will establish guidelines for the gift tax program.

  2. In examining a gift tax return, it is the responsibility of the examiner to obtain a MFTRA Type C and/or Type E transcript to determine if prior gift returns were filed. If you need help in securing a transcript or interpreting it, call the Processing Unit at the Cincinnati Campus that services your territory. A list of the Managers for each Processing Unit is found on the E&G Web Site.

  3. Prior year gift returns should be requested through PSP. PSP will request the return from Caves and scan the return with any attachments. The scanned return will be uploaded to IMS via the Team Web Site to the requesting examiner and PSP will ship the return back to Caves. If the examiner decides to audit a prior gift return related to a gift tax return under audit, the return should be requested on ERCS using source code 40, Non-DIF Related Pickup - Multi-Year Exam-Filed Return. Each original gift tax return secured as part of a gift tax examination needs to be controlled on ERCS.

  4. If the examiner is unable to locate the gift tax return, a copy may be requested from the taxpayer.

  5. Examine gift tax returns in a manner that will promote public confidence as stated in the Mission of the Service. Policy Statement 1-1. IRM 1.2.10.1.1.

  6. When possible, schedule an examination appointment with the taxpayer/representative, unless information concerning questionable items appearing on a tax return can be readily furnished by mail or by telephone. When the initial contact with the taxpayer or authorized representative is by telephone or in person, examiners will explain/discuss the taxpayer’s rights as outlined in Publication 1, Your Rights As A Taxpayer, and answer any questions the taxpayer may have concerning their rights. See IRC section 7801. See IRM 4.10.2.7.3.

  7. When the initial contact is by mail, the following documents must be mailed to the taxpayer along with the initial letter addressed to the taxpayer and the enclosures noted:

    1. Publication 1, Your Rights As A Taxpayer

    2. Notice 609, Privacy Act and Paperwork Reduction Act

    IRM 4.10.2.7.4.2(4).

  8. Except for a limited scope examination, probe for undisclosed transfers.

  9. Maintain significant and meaningful examination activity and/or taxpayer contact at least every 45 days. IRM 4.25.1.1.5

  10. Practitioners are subject to regulations contained in Treasury Circular No. 230. Initiate a referral to the Office of Professional Responsibility regarding practitioners who fail to comply with these regulations. See IRM 4.25.1.1.10 for specific procedures.

  11. Request internal specialists, outside fee appraisers, and paraprofessional support, when their participation enhances the quality, accuracy, and fairness of the examination. However, the examiner to whom the return was assigned, under the direction of the group manager, is responsible for making the recommendation of tax liability, ensuring conclusions are properly supported by the facts and law, and explaining adjustments to the taxpayer.

  12. Obtain omitted copies of documents and information required to be filed with the return. Such documents should be attached as exhibits to the workpapers.

  13. Information and copies of documents should not be obtained and made a part of the casefile unless they are:

    1. Required to be filed with the return. See IRM 4.25.1.1.2(4)(b).

    2. Necessary to support adjustments.

    3. Necessary for a complete examination of the return.

    4. Needed for complete explanation of questioned items which resulted in a no-change.

4.25.1.1.6.3  (10-25-2011)
Penalties Applicable to Estate and Gift Taxes

  1. Examiners must consider applicable penalties anytime an adjustment is made to the return. Any penalty consideration will be made based on the merits of that particular issue, i.e., the imposition of the penalty provision will not be the subject of bargaining in order to achieve agreement on the case. See Commissioner's Policy Statement 20-1 (formerly P-1-18) (effective 06/29/2004). IRM 1.2.20.1.1.

  2. Any assertion of a penalty must be reflected in the work papers and on Form 3198. Document the consideration, assertion or non-assertion and computation of all applicable penalties using the Examination Planning and Workpapers Index and applicable worksheets. "Applicable penalty" is defined as those penalties for which the legal premise for application is present in the case. In addition, the taxpayer's representation of reasonable cause or justification must be reflected in written format, preferably given under the penalty of perjury (exceptions will be made for a de minimus penalty amount). See IRM 20.1.1.3.6.3.

  3. Reasonable cause criteria include but are not limited to the following:

    1. Unavoidable postal delays (See also IRC section 7502);

    2. The taxpayer's timely filing of a return with the wrong IRS office (See also IRC section 6091);

    3. The taxpayer's reliance on the erroneous advice of an IRS officer or employee;

    4. The death or serious illness of the taxpayer (executor) or a member of his immediate family;.See United States v. Boyle, 469 U.S. 241 (1985).

    5. The taxpayer's unavoidable absence;

    6. Destruction by casualty of the taxpayer's records or place of business;

    7. Failure of the IRS to furnish the taxpayer with the necessary forms in a timely fashion;

    8. The inability of an IRS representative to meet with the taxpayer when the taxpayer makes a timely visit to an IRS office in an attempt to secure information or aid in preparation of a return.

  4. If a case is in Status 10 (assigned but not yet opened by an examiner) or Status 12 (opened by an examiner), any request for a penalty abatement must be handled by the examiner to whom the case is assigned.

    1. If the request is submitted to the Cincinnati Campus, a secured E-mail notification of such claim will be transmitted to the Field Group Manager responsible for such case;

    2. Even if there are no other issues, the case cannot be surveyed after assignment; it must be made the subject of an audit examination, limited to the penalty abatement request;

    3. Under no circumstances will a request be made by the examiner to the Cincinnati Campus for consideration of the penalty for returns assigned to the Field;

    4. Conversely, if a case is no longer assigned to a Field Group, then any request for abatement must be referred to the Supervisory Attorney, Estate & Gift Tax (Cincinnati Campus) for consideration.

  5. If a case has been assigned to a group (Status 10) and not yet to an examiner, the Group Manager will assign the case if a request for abatement of any penalty is in the file or is received to associate with the file.

  6. The Cincinnati Campus will consider penalty issues if the request for abatement is received before the return has been classified or alternatively, if the return has been accepted as filed during the classification process or the examination is closed.

  7. If a return is selected for examination, the examiner will determine whether or not to reassert a penalty if:

    1. The Cincinnati Campus clearly erred as a matter of law in its decision to abate a penalty, or

    2. The fact situation was not as represented to the Cincinnati Campus,

    In the interest of taxpayer relations, care should be taken to ensure that either (a) or (b) applies before reversing the decision of the Cincinnati Campus.

4.25.1.1.6.4  (10-25-2011)
Return Preparer Penalties Program Procedures

  1. The purpose of proposing and assessing penalties on return preparers is to increase voluntary compliance. When examining a return prepared by a tax return preparer, it is an examiner’s responsibility to ensure that the identification and conduct provisions of the Code are followed. If the provisions are not followed, it is the examiner’s responsibility to assert the penalties. During every examination, examiners should determine whether return preparer violations exist. This determination will be made based on oral testimony and/or written evidence during the examination process.

  2. Statute Of Limitations: The statute of limitations on assessment for IRC sections 6694(a) and IRC section 6695 expires three years from the date the related return or claim for refund was filed.

    • There is no statute of limitations on assessment for IRC sections 6694(b), IRC section 6700 and IRC section 6701 penalties.

    • There is no statute of limitations on actions to enjoin preparers or promoters under IRC section 7407 or IRC section 7408.

      Note:

      Extending the statute on a ‘taxpayer’s return” with a Form 872 does not extend the statute for the return preparer penalty case. See Form 872-D,Consent to Extend the Time on Assessment of Tax Return Preparer Penalty.

  3. Complete Estate & Gift Tax Audit: Generally, no return preparer penalty will be proposed until the estate or gift tax examination is completed at the group level. If the estate or gift tax case is unagreed, the examiner may pursue the preparer penalty after the unagreed estate or gift tax case is submitted at the group level. The determination and settlement of the estate or gift tax examination will at all times proceed without regard to the return preparer penalty issue.

    Note:

    The requirement that the underlying estate or gift tax case be closed may affect the decision whether to initiate a return preparer investigation. Also, note that IRC section 6694(d) provides that the IRC section 6694 penalty must be abated where there is a final administrative determination or final judicial determination that there was no understatement of liability.

  4. When A Return Preparer Problem Is Not Identified: When facts and circumstances in the examination do not give rise to the development of a penalty issue, it should be noted on the appropriate workpaper and penalty lead sheet in the Notebook lead sheets and workpapers function of Notebook.

  5. When A Return Preparer Problem Is Identified: Each estate or gift tax examination is separate and distinct from the return preparer penalty case relating to the estate or gift tax examination. Examiners will not propose or discuss conduct penalties in the presence of the taxpayer.

    1. Contact Preparer and Conduct Comprehensive Interview - Use Letter 4523, Preparer Contact Letter, to contact the return preparer to schedule the initial appointment (include Pub. 1). A comprehensive interview is the method used to identify misconduct by a tax return preparer. During the interview process, the examiner should pose questions to the executor or donor regarding the return preparation. Some examples of questions are listed below.

      • Did you meet with the preparer?

      • Did you complete a questionnaire and/or have a face to face meeting with the preparer?

      • What documentation was provided to the preparer?

      • Did you receive a copy of the return?

      • Was the preparer compensated?

    2. Remember to ask follow-up questions. While we are required to ask basic interview questions, crucial information may be provided in the responses to the follow-up questions. The questions that you ask of the preparer are important to determine if any misconduct transpired during the return preparation. If the preparer is also the representative, you may want to ask:

      • About the “interview” with the taxpayer.

      • What documentation was provided to prepare the return?

      • What authorities did you rely upon?

      • Was a copy of the return provided to the taxpayer?

      • Are you aware of any errors, omissions or mistakes on the return under examination?

      • Were you compensated?

    3. More often than not, representatives will review the return and the taxpayer client’s records prior to your scheduled initial interview. If there is an error they will probably know in advance. While representatives are not required to disclose the error, they may reveal the information to establish their credibility. As you continue to work your case, the extent of the representative’s knowledge will become apparent.

    4. When interviewing the taxpayer or preparer ask if any other services have been provided by the preparer’s firm and how long the preparer has been preparing returns for the taxpayer. For example, did they prepare previous gift tax returns, or did they prepare Form 706 for the predeceased spouse. These simple questions will give you an idea of the extent of the preparer’s knowledge regarding the taxpayer’s financial situation/status and alert you as to the applicability of penalties. A tax return preparer who has been providing estate planning services may be more knowledgeable than a preparer who has not been providing any other services.

    5. The examiner should document the case file following the conversation with the taxpayer and/or power of attorney(POA). While each examiner has their own interview style, examiners should be consistent in the documentation of the facts. Use of the examination lead sheets, work papers and case history should ensure consistency in documentation.

      Note:

      All information on the return preparer's activities and the applicability of any penalties relating to the return preparer should be separated from the taxpayer's case file. A Return Preparer Penalty Case File should be created and the taxpayer's answers to these inquiries as well as a separate activity record should be included in this case file and not included in the taxpayer's case file. Do not include any information about the return preparer’s conduct gathered from other sources or conclusions about the assertion or non assertion of the preparer penalty in the underlying case file. The taxpayer’s case file should only reflect the fact that the required inquiries on the return preparer issues were completed.

  6. Disclosure Issues: A preparer penalty determination action is an individual federal tax matter of the preparer. As with any individual tax matter, an examiner may disclose federal tax information to that individual (the preparer in this instance), in accordance with IRC section 6103(e)(1)(A)(i) or to the preparer’s attorney in fact, or duly authorized power of attorney, as permitted by IRC section 6103(e)(6).

    1. Return Preparer Penalty Case Files may include copies of tax returns or portions of tax returns prepared by the preparer who is being considered for the penalty. The case files may also include other information taken from examination administrative files, including workpapers and transcripts of account of the taxpayers whose returns were prepared by the preparer, as well as information received directly from the preparer.

    2. Information taken from the returns or copies of returns prepared by the preparer and information from the examination files related to such returns may be incorporated into the Return Preparer Penalty Case File. Such information may be disclosed to the preparer or authorized power of attorney if the information relates to the resolution of the penalty issue. See IRC section 6103(h)(4). These disclosures may be made by the examiner during the course of the penalty determination or subsequent tax administration activity.

    3. Remember that an examiner may disclose information about the prepared returns because that information relates to the penalty determination, not because the preparer prepared the return or may have had a power of attorney to represent the taxpayer. If there is any information in the Return Preparer Penalty Case File that does not relate to the penalty determination, such as the taxpayer’s current address or current employer, that information may not be disclosed to the preparer or the preparer's authorized power of attorney.

    4. If the Return Preparer Penalty Case File includes information that would seriously impair federal tax administration if disclosed, that information must be withheld by the examiner’s manager in accordance with the manager’s authority to withhold information in accordance with IRC section 6103(e)(7). Delegation Order 11-2 contains the specific delegation of authority.

  7. Obtain Group Manager Approval & Return Preparer Coordinator Approval

    1. Prepare Form 5809,Preparer Penalty Case Control Card.

    2. Form 5809 must remain in the Return Preparer Penalty Case File.

    3. If the E&G manager does not approve, return to IRM 4.25.1.1.6.4(4),"When A Return Preparer Problem Is Not Identified."

    4. If the E&G Group Manager approves Form 5809 then the manager must obtain additional approval of the Return Preparer Coordinator ( RPC).

    5. The manager must forward the Penalty Lead Sheet to the RPC electronically or by fax. The RPC shall approve or deny, within thirty days of the date of transmission of the Penalty Lead Sheet.

    6. The RPC will advise if the return preparer is under investigation by the Criminal Investigation Division. The RPC will provide assistance as needed to examiners at the start of a return preparer investigation regarding audit techniques, questions and direction.

      Note:

      The E&G RPC is listed on the E&G website in the Penalty section

    7. In addition, the RPC will provide coordination if more than one investigation of the same preparer, by different examiners, is ongoing or is contemplated.

  8. Opening A Return Preparer Penalty Case File.

    1. Prepare Form 5809, Preparer Penalty Case Control Card, to Establish on ERCS – Not AIMS. The examiner establishes ERCS control using Form 5809 as the ERCS Input Document. These cases are not controlled on AIMS. In addition to the information concerning the preparer, record on Form 5809 the relevant information from the taxpayer’s tax return. Use of this document allows the establishment of the non-AIMS case on ERCS for purposes of time application and is a means of keeping a manual record of penalty action on the Preparer. Creating a separate card for each penalty allows the RPC to track data on a preparer to determine when and if a Program Action Case (PAC) case may be necessary. Use the Return Preparer’s TIN and Name to prepare the Form 5809.

      Note:

      Form 5345-D, - ERCS (Examination Returns Control System) Users, (“Blue Card”) is NOT USED to establish a preparer penalty on ERCS.

    2. Most of these penalty cases will derive from Form 706 or Form 709 selected for audit. However, some cases may come from the Cincinnati campus because the cases involve a questionable tax practitioner. If cases are sent from the Campus in this manner, source code 49 should be used only for the primary return (estate or gift tax return) selected as part of the Program Action Case (PAC) client sample originating from the Cincinnati campus. If multi-year cases are developed in the Cincinnati Campus for delivery to the groups, only the primary return should reflect source code 49.

    3. Aging reason code 49 should be added to all return preparer program returns including the primary and multiple-year returns.

    4. Establish a separate ERCS record for each client/year/proposed penalty combination (if you are establishing a separate case, with one or more penalties against the same preparer, establish a different ERCS record) using one of the following guidelines:

      • In the TIN field, record the SSN or EIN of the Preparer

      • In the Name field, record the “Preparer’s Name”

      • In the Tax Period field, record the tax period of the client’s return

      • In the Statute field, record the statute of the client’s return – P2 penalties should be assigned an alpha statute of “XX”

      • In the Activity Code (ActCd) field, record one of the following codes

        ActCd 501 Section 6694(a) penalty MFT P1
        ActCd 502 Section 6694(b) penalty MFT P2
        ActCd 503 Section 6695(f) penalty MFT P3
        ActCd 504 Section 6695(a), (b), (c), (d), or (e) MFT P4
        ActCd 505 Section 7407 injunctions MFT P5
        ActCd 828 Indirect Exam Time Use only for closing the Return Preparer Penalty Case File when the only time charged is for unsuccessful attempts to locate the preparer.

    5. Place a copy of the signed Penalty Lead Sheet in the Return Preparer Penalty Case File.

  9. Determination of the Statute: If the remaining assessment statute of limitations is greater than 180 days, then proceed to subsection (10); however, if the remaining assessment statute is less than 180 days, then follow the steps immediately below. There must be a minimum time of 6 months (180 days) remaining on ASED at the date when the case reaches the Office of Appeals. See IRM 25.6.23.8.1 and IRM 4.20.5.2.1.

    • If the preparer agrees to extend the statute, the statute on a return preparer penalty case under IRC section 6694(a) and IRC section 6695 can be extended using Form 872–D, Consent to Extend the Time on Assessment of a Tax Return Preparer Penalty. See Rev. Rul. Rev. Rul. 78–245 Use Letter 907-P,Return Preparer Penalty Statute Extension Request to send the consent to the preparer.

    • A transcript of the return on which the preparer penalty is based should be included in the Return Preparer Penalty Case File for accurate monitoring of the expiration date.

    • If the preparer does not agree to extend the statute, proceed to IRM 4.25.1.1.6.4(17)(b)

  10. To charge time to the Preparer Penalty Case, use one of the codes included in the table at IRM 4.25.1.1.6.4(8)(d).

  11. Forward a copy of the completed Form 5809 (Copy B) to the RPC at the start of the penalty investigation.

  12. Contact the preparer and conduct the interview. See IRM 4.25.1.1.6.4(5).

  13. If Preparer Penalties are not warranted, proceed by using the following instructions:

    1. Close the case No Change. The Group Manager will review the Return Preparer Penalty Case File and document concurrence.

    2. The examiner will prepare Letter 1120, No Change Letter- Preparer's Penalty, mail the original to the preparer and include a copy in the case file. Show only the last four digits of the taxpayer’s identification number.

    3. The examiner will complete Form 5809.

    4. The examiner will note the Penalty Lead Sheet “No Change.”

    5. The group will update ERCS to status 90 and forward the case, marked Closed NO CHANGE, to the RPC for review. The RPC will extract pertinent information from the file to be retained for not less than one year. The balance of the no-change case file does not need to be retained.

  14. If Preparer Penalties are warranted, proceed by using the following instructions:

    1. The preparer should be afforded an opportunity to meet with the Group Manager to resolve the issues.

    2. Document the actions taken on Form 4665, Report Transmittal, if the preparer is not going to agree.

    3. If penalties are being proposed during a conference with the preparer, the examiner provides the preparer with Form 5816, Report of Income Tax Return Preparer Penalty Case, and Form 886-A, Explanation of Items.

    4. When penalties are based on many different prepared returns, attach a list of client names, SSNs, EINs and tax periods. Use a separate form for each year return combination.

    5. If penalties are being proposed via mail, send Letter 1125, Transmittal of Examination Report, Form 5816,Form 886-A, Pub. 5 and Pub. 3498.

  15. If this is an agreed case, proceed using the following instructions:

    1. Preparer signs Form 5816. Solicit payment from preparer and if the preparer pays, prepare Form 3244-A, Payment Posting Voucher – Examination.

    2. Also secure Form 5838, Waiver of Restrictions on Assessment and Collection of Tax Return Preparer Penalty.

    3. Complete Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

    4. When more than one penalty under different IRC sections will be assessed against the same preparer for the same period, complete a separate Form 8278 for each penalty.

    5. Prepare Letter 1195, Acceptance Letter - Agreed Preparer Penalty Case, and addressed envelope and include in the case file. Attach Form 3198, Special Handling Notice, to each case file, identifying it as a return preparer penalty case in the “Other” section and referencing the applicable IRC section.

    6. On Form 3198, if the preparer filed a joint income tax return, annotate with either “Assess on Primary SSN” or “Assess on Secondary SSN” in the ‘Other’ section to identify the individual against whom the penalty is to be asserted. Annotate to forward the case file to the RPC and to indicate Letter 1195 and addressed envelope are enclosed in the case file.

    7. The group secretary or clerk will update the return preparer case on ERCS to status 41 and use Form 3210 to mail the case for normal closing.

    8. Notify the RPC of the final results.

  16. If this is an unagreed case and the remaining assessment statute is greater than 180 days, proceed using the following instructions:

    1. The examiner provides the preparer with: Letter 1125, Transmittal of Examination Report, Form 5816, Report of Income Tax Return Preparer Penalty Case, with the bottom part of the form removed, Form 886-A, Explanation of Items, Form 5838, Waiver of Restrictions on Assessment and Collection of Tax Return Preparer Penalty, Pub. 3498 and Pub. 5.

    2. The case then goes into suspense for 30 days, during which time the preparer may agree or protest.

    3. If the response is agreed or there is no response, proceed to IRM 4.25.1.1.6.4(15) to process as an agreed case.

    4. If the preparer submits a pre-assessment protest (written) within 30 days, the case file will be reviewed for the following:

      • Adequacy of the protest

      • Development of the issue(s)

      • Managerial involvement

    5. The examiner will prepare an assessment document, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. When more than one penalty under different IRC sections will be assessed against the same preparer for the same period, complete a separate Form 8278 for each penalty.

    6. The group will then update ERCS to Status 41 and forward the case marked UNAGREED, to the RPC for review.

      Note:

      Appeals and Unagreed Closings: If the taxpayer's income tax examination case is unagreed, the unagreed preparer penalty case file cannot be submitted to Appeals before the tax examination case file.

      Note:

      An unagreed preparer penalty case file cannot be submitted to Appeals for pre-assessment consideration if there is less than 180 days remaining on the assessment statute of limitations. There must be a minimum time of 6 months (180 days) remaining on ASED at the date when the case reaches the Office of Appeals. See IRM 25.6.23.8.1 and IRM 4.20.5.2.1. Form 872-D is used to extend the statute in a preparer penalty investigation. If the statute is not extended and there is less than 180 days remaining on the assessment statute, proceed to IRM 4.25.1.1.6.4(17)(b)

    7. When closing cases to appeals, the following language must be included on Form 3198 and Form 4665.

      • Form 3198 or Form 3198-A for TE/GE (This only applies to a coordinated issue between E&G and TE/GE): Special action requirement for receiving Appeals Officer. As of 7/23/2003, preparer and promoter penalties are coordinated as an Appeals Coordinated Issue. Under the provisions of IRM 8.7.3.4.2, the Appeals Officer is required to contact/make a referral to Technical Guidance.

      • Form 4665 Appeals Coordinated Issue: Special action requirement for receiving Appeals Officer. As of 7/23/2003, preparer and promoter penalties are coordinated as an Appeals Coordinated Issue. Under the provisions of IRM 8.7.3.4.2 , the Appeals Officer is required to contact/make a referral to Technical Guidance.

    8. After review, Centralized Case Processing (CCP) then updates ERCS to Status 21 and forwards the case through Technical Services to Appeals (use Form 3210).

  17. If this is an unagreed case and the remaining assessment statute is less than 180 days, proceed using the following instructions:

    1. Request the extension of the statute from the preparer. If the preparer agrees to extend then:

      • The statute on a return preparer penalty case under IRC section 6694(a) and IRC section 6695 can be extended using Form 872–D, Consent to Extend the Time on Assessment of Tax Return Preparer Penalty. See Rev. Rul. 78– 245.

      • Use Letter 907-P,Return Preparer Penalty Statute Extension Request to send Form 872-D to the preparer.

      • A transcript of the return on which the preparer penalty is based should be included in the case file for accurate monitoring of the expiration date.

      • Since the case is unagreed, regular unagreed case closing procedures should be followed. See IRM 4.25.1.1.6.4(16)

        Note:

        There must be a minimum time of 6 months (180 days) remaining on ASED at the date when the case reaches the Office of Appeals. See IRM 25.6.23.8.1 and IRM 4.20.5.2.1.

    2. If the extension is requested and the preparer does not agree to extend the statute, follow the instructions below.

      • Send the preparer a Form 5816, Report of Income Tax Return Preparer Penalty Case, with the bottom part of the report removed along with an explanation of the reason for the quick assessment and a discussion of the preparer’s Appeals rights.

        Note:

        Letter 1125, Transmittal of Examination Report is NOT sent to the preparer.

      • Forward to the Return Preparer Coordinator (RPC) a copy of Form 5816 along with a completed Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties and Form 2859, Request for Quick or Prompt Assessment.

      • Annotate Form 3198 with “Quick Assessment” on the ‘Other’ line in the ‘Expedite’ section.

      • Centralized Case Processing (CCP) will direct immediate assessment of the penalty.

      • The Return Preparer Penalty Case File should be forwarded to the Return Preparer Coordinator when completed.

      • Upon request, the preparer will be provided the same Appeals rights post-assessment as would have been provided if the request for Appeals consideration was received before the assessment.

  18. Referral to the Director of the Office of Professional Responsibility: The Office of Professional Responsibility (OPR) exercises jurisdiction over Attorneys, CPAs, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers. Examiners should exercise discretion in making referrals of specific cases. In matters involving non-willful conduct, a referral should only be made when it can be established that the preparer has a pattern of failing to meet the required standards of Circular 230. An isolated instance in which a penalty may apply should not, in and of itself, require a referral unless willful conduct is involved. Accordingly, the imposition of penalties under IRC 6694(a) and IRC 6695(a) through IRC 6695(e) should not automatically generate a referral to the Director of OPR. For further discussion regarding referral criteria, see IRM 4.11.55.4.2.2

    1. When making a referral to OPR, examiners will Prepare Form 8484, Report of Suspected Practitioner Misconduct, and obtain signature approval of their manager and send the completed Form 8484 to the RPC for routing to the Director, Office of Professional Responsibility.

  19. In cases in which a referral is not prepared but was considered, a comment should be made on the Examination Planning and Work Paper Index and/or the Penalty Lead Sheet explaining why the referral was not made.

  20. A Quick Reference Guide regarding forms and letter preparation for return preparer cases is attached. See Exhibit 4.25.1-3.

4.25.1.1.7  (10-25-2011)
Estate and Gift Tax Program Examination Process and Documentation

  1. The Estate & Gift Tax Examination Process and Documentation (EPD) defines how cases are examined. It is a uniform system of planning, communication, risk analysis and documentation. The EPD defines how returns are examined to ensure case quality, employee satisfaction and customer satisfaction.

  2. The EPD is designed to foster good communications with the group manager, taxpayers and representatives. In addition, it has also been structured to assist the examiner in producing a quality work product. Furthermore, it improves planning and documentation of the file.

  3. From the onset of the examination, the examiner must document and communicate the actions taken by using mandatory and non-mandatory workpapers. These include:

    • Administrative lead sheets for recording time and prompting activities to comply both with administrative and procedural matters, as well as technical information.

    • Issue specific lead sheets, which assist the examiner in the steps needed to resolve issues.

      Note:

      These lead sheets can be found in the Mandatory Forms folder and the Lead Sheets Folder in the Notebook Tool.

  4. Limited Scope Examinations (those that do not require significant substantiation by the taxpayer) do not require an Asset Probe Lead Sheet.

  5. A key component of the EPD is risk analysis. Risk analysis helps examiners make decisions on whether to proceed with an issue or to begin developing a new issue that was discovered during the examination.

  6. Adherence to the principles of the EPD results in a well-organized case that can be easily reviewed by subsequent users such as reviewers, Appeals, Counsel and examiners.

  7. The Office of Policy Manager is responsible for the ongoing monitoring of the system to make appropriate changes to the forms and procedures based on the needs of the system's users of the EPD.

  8. A Quick Reference Guide to the lead sheets is attached. See Exhibit 4.25.1-1.

4.25.1.1.8  (10-25-2011)
Inventory Management System and the Notebook Tool

  1. The Inventory Management System (IMS) application and the Notebook Tool comprise the Estate and Gift Tax case management system.

  2. E&G examiners must use both IMS and Notebook to manage their case inventory and examinations.

  3. The Notebook tool is the only authorized report writer for E&G. Until the Inter-Est program is removed from all E&G computers, examiners may continue to utilize that program for inter-related calculations that Notebook does not have the capability of currently performing and also as a check of the accuracy of Notebook for more routine calculations. However, regardless of the access to other programs or systems capable of preparing reports, all Examination Reports must be created utilizing Notebook.

  4. The IMS manual and the Notebook manuals, updates and alerts are located at http://wsep.ds.irsnet.gov/sites/co/dcse/sbse/specialty/egt/EG_Notebook/default.aspx

4.25.1.1.9  (07-31-2009)
Generation-Skipping Transfer Tax

  1. Reserved.

4.25.1.1.10  (07-31-2009)
Procedures for Referrals to the SBSE Lead Development Center and the Office of Professional Responsibility

  1. Procedures for Referrals of Appraisers

    1. In making determinations regarding the appropriate value of assets for estate and gift tax purposes, examiners frequently must analyze the methodology and accuracy of appraisals provided in support of values reflected on estate and gift tax returns. In questionable cases, the applicability of the aiding and abetting penalty under IRC section 6701 should be considered. In certain cases, appraisers may be subject to this penalty. A referral must be prepared and submitted to the SBSE Lead Development Center (LDC).

    2. In cases of appraiser misconduct, a referral of the appraiser for possible disciplinary action should be made to the Office of Professional Responsibility(OPR). The assessment of a IRC section 6701(a) penalty is not a prerequisite to making a referral to OPR.

  2. Procedures for Referrals of Practitioners

    1. Practitioners, who are defined as attorneys, certified public accountants, enrolled actuaries and enrolled retirement plan agents, are subject to the regulations contained in Treasury Department Circular 230 (Rev. 6-2011).

    2. In cases of practitioner misconduct, such as when a practitioner fails to exercise due diligence or causes unreasonable delay in the prompt disposition of a matter before the IRS, a referral should be made to OPR.

  3. Referrals of appraisers and practitioners to OPR shall include:

    1. The Estate Tax Group Manager's Approval.

    2. Form 8484 or a written report in any other format. A written report must contain all information required by the Form 8484 and its instructions. Form 8484 will be revised to eliminate the IRC section 6701(a) penalty as a jurisdictional prerequisite for appraisers; nonetheless, use the most current form available.

    3. A referral and supporting documents can be submitted to OPR by email or can be mailed to the OPR Washington DC office.

  4. Additional referral procedures are found at IRM 4.11.55.4 and IRM 5.1.1.7.6.2

4.25.1.1.11  (10-25-2011)
Procedures at Conclusion of Examination

  1. Discuss findings with the taxpayer and/or authorized representative.

  2. Prepare the applicable Examination Report forms for issuance to the taxpayer and authorized representatives. Generally, the Examination Report shall include the following:

    1. Form 1273, Report of Estate Tax Examination Changes, compares the correct tax with the tax previously assessed and indicates the net deficiency or overassessment. The first column is entitled "Shown on Return." Form 1273 contains a summary of the adjustment in tax and a computation of the estate tax. The figures to be entered here are the last assessed amounts, which may differ from those shown on the return. When the amount last assessed differs from the amount shown on the return, change the heading in the first column to read "Tax Assessed." The second column is entitled "As Corrected " .

      Note:

      Review IDRS transcript of account to ensure that the correct assessed tax is reflected on all reports. The IDRS transcript should be current and in any case no older than 15 days.

    2. Form 3233, Report of Gift Tax Examination, is used for gift tax audits.

    3. Form 6180, Adjustment to Taxable Estate, is used to summarize the net change on each schedule of the Form 706.

    4. Form 886–A, Explanation of Items, is used in estate or gift tax reports to explain in detail each adjustment shown in the columns entitled "Shown on Return" and "As Corrected." Each schedule should be titled and treated individually in alphabetical order. A full and adequate description of each adjustment should be included on Form 886–A.

    5. Exhibits, computations and other material needed to explain changes to the taxpayer should be attached when appropriate. For example, computations used in determining the value of an item should be attached to the report.

    6. When an Engineering, Economist or Other Expert report has been prepared and the findings accepted, the copy designated "Taxpayer's Copy" should be attached as an exhibit to the Form 1273 or Form 3233. If the examiner previously submitted the report to the taxpayer, an additional copy of the appraisal does not need to be attached to the report. This should be documented on the Form 9984.

    7. Additional information regarding the completion of a partially agreed case report is included in IRM 4.25.1.1.16.

  3. Report writing procedures are set forth at IRM 4.10.8.

  4. Form 890, Estate Tax Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment, is used to document that the taxpayer agrees to the proposed adjustments and is waiving the statutory restrictions upon assessment and collection of the deficiency in tax. The execution of this form permits the Service to assess the deficiency, schedule the overassessment, or adjust the unified credit immediately. It also stops the running of interest from the 31st day after the date of receipt until notice and demand for payment is made. Form 890 does not constitute a final closing agreement. It does not preclude reopening of the examination by the taxpayer or by the Service.

  5. Form 890 is used for fully and partially agreed cases. It should reflect the exact amount of the deficiency, overassessment, unified credit, and/or penalty agreed to. Form 890 should be date stamped when received.

    Note:

    Form 890-T is used for agreed transferee liability cases. See IRM section 4.25.1.4.3

  6. If the amounts shown on the signed Form 890 are incorrect due to an error in computation, and the error would result in an incorrect billing or refund, the report will be written for the corrected amount and a statement will be made on the report explaining the change. If the correction is in favor of the taxpayer, it is not necessary to obtain a new waiver. If the correction is against the taxpayer, a supplemental waiver for the difference between the corrected amount and the amended amount will be secured. The supplemental waiver will be clearly marked as such and stapled on top of the original waiver.

  7. Do not alter the amounts on a signed waiver. A waiver executed in blank should not be solicited.

  8. Examiners may verify interest computations regarding IRC section 6166 with the Cincinnati Campus. To request a review or verification of a computation, contact the Campus Processing Unit for your territory by fax or E-mail. The contact information for each territory is available on the E&G Web Site. E-mail with taxpayer data must be sent using the secure messaging feature. The subject line of the secure message should not include any taxpayer information. Responses will be provided within one week. Information needed to verify interest calculations includes:

    • Copy of audit report with tentative interest computation, if seeking a verification of its accuracy;

    • Copy of audit report without interest computation if seeking computation of interest;

    • Name of taxpayer;

    • Date of death, if applicable;

    • Date return filed;

    • Social security number of taxpayer; and

    • Specifics of case needed to calculate interest.

  9. The Classification Sheet or a copy of the classification folder that contains classification data for the case must be included in the closed file.

  10. Case file assembly procedures are located at IRM 4.4.1-12. Interim guidance pertaining to case closing procedures specific to estate and gift tax examinations are forthcoming.

4.25.1.1.12  (10-25-2011)
Procedures at Conclusion of Examination-No-Change with Adjustment Closings

  1. No-change with adjustment cases include changes to Applicable Credit Amounts, marital deductions, charitable deductions, and other corrections that do not impact tax liability on the examined return. Also included are offsetting adjustments that do not result in a change in tax liability. See IRM 4.4.1–16.

  2. No-change with adjustment cases should be closed using Disposal Code 01 with zero entered for the dollar amount entry for "Tax, Penalty and Interest Adjustments on" Form 5344, Examination Closing Record. Such cases should be closed using Disposal Code 01 rather than 02 even if no Form 890 (waiver) is secured. Disposal Code 03 should not be used for no change with adjustment cases.

  3. In gift tax examinations where the unified credit is utilized, line 422 on Form 5344 must include a dollar entry.

  4. A no-change with adjustment case report requires Form 1273 and Form 886-A , for all schedules where changes were made from the amounts and items originally reported.

  5. Refer to the closing procedures below at IRM 4.25.1.1.14.

4.25.1.1.13  (10-25-2011)
Procedures at Conclusion of Examination-No-Change with No Adjustment Closings

  1. No change with no adjustment cases should be closed using Disposal Code 02 with zero entered for the dollar entry for "Tax, Penalty and Interest Adjustments on" Form 5344.

  2. A report must be issued and must include the following language: “NO-CHANGE-SUBJECT TO CHIEF, ESTATE AND GIFT TAX APPROVAL”.

4.25.1.1.14  (10-25-2011)
Procedures at Conclusion of Examination-Agreed Cases

  1. If case is "agreed" , the examiner shall:

    1. Prepare draft Form 1273, Report of Estate Tax Examination Changes and Form 886–A, Explanation of Items, for all changed items. The report shall explain all changes made during the course of the examination. Form 1273 contains a summary of the adjustments and a computation of the estate tax. See IRM 4.25.1.1.13 for additional language that must be included in all cases closed as a "No Change with No Adjustment."

    2. Form 3233, Report of Gift Tax Examination, is used for gift tax audits in place of Form 1273.

    3. Prepare and secure Form 890.

    4. Compute the interest on agreed and paid deficiencies for estate or gift cases. Interest should be calculated to give the taxpayer sufficient time to review the report and submit the payment.

    5. Solicit payment for deficiencies. Include language in the cover letter that interest calculations made by the Examiner are tentative and a final calculation could result in an amount of interest that is more or less than the interest amount calculated by the Examiner.

      Note:

      Examiners should update interest rates on a quarterly basis to ensure accuracy in calculations.

    6. Provide Taxpayer with a copy of Publication 3498, The Examination Process. See IRM 4.10.8.1.2.

    7. Close case following time frames set forth in IRM 4.10.8.1.4.

  2. In the case of a "No Change With Adjustment" , follow the relevant steps listed above and those included in IRM 4.25.1.1.12 .

4.25.1.1.15  (10-25-2011)
Procedures at Conclusion of Examination-Unagreed Cases

  1. In estate and gift tax examinations, if the taxpayer does not agree to the proposed adjustments, the case is “unagreed”. The examiner in conjunction with the manager should then examine the statute date to determine if a Statutory Notice of Deficiency/90-Day Letter or a 30-Day Letter should be issued.

  2. The examiner shall:

    1. Solicit and consider a formal statement of the taxpayer’s position on each unagreed issue before concluding the examination, and

    2. Explain the procedure for administrative appeal as well as the option to pay any deficiency and file a claim for refund if the taxpayer or taxpayer’s representative is not knowledgeable regarding these procedures.

    3. Prepare draft Form 1273, Report of Estate Tax Examination Changes and Form 886–A, Explanation of Items, for all changed items. The report shall explain all changes made during the course of the examination. Form 1273 contains a summary of the adjustment in tax and a computation of the estate tax. The same documentation included in an agreed case should be included in an unagreed case. However, the Appeals Officer relies heavily upon the law, facts and evidence set forth in the examiner's report. Thus, the unagreed case report should be comprehensively detailed and supported by the law, facts, and evidence.

    4. Use Form 3233, Report of Gift Tax Examination, for gift tax audits in place of Form 1273.

    5. Indicate fully the unagreed issues involved.

    6. Set forth the Government's Position clearly detailing the facts, the law, the regulations, case law, rulings, authorities, reasoning, and any other pertinent data. Furthermore, the taxpayer's position should be set forth in similar detail.

    7. In the case of business interest valuation, the examiner should cite such factors as price earnings ratios, book and adjusted book value, comparable sales, earning history, industry averages, capitalization rates, and case law.

    8. Timely submit the unagreed case. IRC section 6501(c) provides that the statute of limitations for assessment of estate tax cannot be extended.

    9. Per Appeals IRM 8.20.5.2.1 ,180 days must be remaining on the statute upon receipt of the case by Appeals. Therefore, an unagreed estate tax case should be submitted timely so that a 30 day letter can be issued, the taxpayer may have adequate time to prepare a protest, and the case can be transmitted to the appropriate Appeals office with at least 180 days remaining on the statute of limitations.

    10. Provide Taxpayer with the appropriate Publications and Notices, which are set forth at IRM 4.10.8.1.2.

    11. If the case is submitted to the examiner's manager for closing without sufficient time remaining on the statute to permit an Appeals Conference before the issuance of a statutory notice, the taxpayer should be so advised and the fact noted on the Form 9984, Examining Officer's Activity Record.

    12. Raise all relevant significant issues. If more than one section of the Code is applicable, all sections should be cited. This is because the further the case proceeds on appeal, the more difficult it may become for the Government to raise new or alternative issues.

    13. Prepare Form 890.

    14. Label the rebuttal "Rebuttal to Protest" and sent to the taxpayer as an attachment to a cover letter. The taxpayer need not be given an opportunity to respond to the rebuttal before sending the case to Appeals. If the Appeals Officer believes that further involvement of Estate & Gift is needed, Appeals will initiate the contact in accordance with the ex parte guidelines. IRM 4.25.1.5.13.

    15. IRM 4.10.8.11.6 discusses Unagreed Case Procedures: Preliminary (30-Day) Letters. If an agreement is received after the issuance of a 30-Day letter, the case should be closed using Disposal Code 04. IRM 4.4.1-16

  3. If there are less than 210 days remaining on the statute of limitations on the day that the taxpayer communicates disagreement with the proposed adjustments, the examiner should prepare a Statutory Notice of Deficiency/90 Day Letter in accordance with the current procedures set forth in IRM 4.8.9.

  4. If there are more than 210 days remaining on the statute of limitations on the day that the taxpayer communicates disagreement with the proposed adjustments, the manager should consider all the facts and circumstances involved with the return, including but not limited to the following factors to determine whether a Statutory Notice of Deficiency/90-Day Letter or a 30-Day Letter should be issued.

    • The time necessary for the examiner to issue the 30-Day Letter, receive the taxpayer’s response and then consider that response.

    • The likelihood that the taxpayer will request an extension of the initial 30 day response period.

    • A minimum of 30 days for processing the case file to Appeals after review of the response.

    • A minimum of 10 days to account for the time necessary to process the case file from the date of closing by the examiner or Paraprofessional to the date the case file is reviewed and closed by the Group Manager.

    • The nature of the disputed issues.

    • The complexity of the facts involved.

    • The applicable legal authorities.

    • The proximity of the statute of limitations and the availability of an extension, if applicable.

  5. In unagreed cases involving an examination of a Form 709 where an increase in value of a gift proposed by the IRS does not generate a gift tax deficiency, examiners should issue a preliminary determination letter using Letter 950-IRC 7477(Letter 950-G). Proceed with the procedures for unagreed cases.

4.25.1.1.16  (10-25-2011)
Procedures at Conclusion of Examination-Partially Agreed Cases

  1. If the taxpayer does not agree to all of the proposed adjustments, but will agree to some of the proposed adjustments, the case is "Partially Agreed." Examiners are encouraged to secure, in unagreed cases, partial agreements.

    1. The report must specifically show which adjustments are agreed and which are unagreed. The agreed change in tax must be stated separately from the unagreed change in the tax liability.

    2. The examiner will prepare two reports. The first report (the agreed report) will show the agreed changes "As Corrected" on Form 1273, working from these figures returned by the taxpayer as "Shown on Return." The second report will show the unagreed changes "As Corrected" on Form 1273 working from the figures agreed upon in your first report reflected in "Shown on an Examination Report dated _____."

    3. In partially agreed cases, two Forms 5344 (Examination Closing Record) shall be completed and put in a single case folder with Form 3198 attached to the outside jacket.

    4. The first Form 5344 will be completed for the agreed portion only. The examiner will write "partial agreement" in the top center margin of the Form 5344 in order that the Centralized Case Processing (CCP) will process only the agreed tax.

    5. The second Form 5344 will be completed for the unagreed portion. The examiner will also show the total of the agreed and the unagreed tax in item 15.

    6. Explain the procedure for administrative appeal as well as the option to pay any deficiency and file a claim for refund if the taxpayer or taxpayer’s representative is not knowledgeable regarding these procedures.

    7. Provide the taxpayer with appropriate Publications and Notices.

4.25.1.2  (07-31-2009)
Specialty Programs National Quality Review Program

  1. The purpose of this section is to provide an overview of the Specialty Programs National Quality Review Program. This program consists of EQRS (Embedded Quality Review System) and NQRS (National Quality Review System).

  2. EQRS and NQRS are web-based systems for the collection of information. Reviews are conducted by rating case actions against quality attributes that are linked to employee CJEs. Quality attributes are defined the same for both National Quality (NQ) Reviewers and Embedded Quality (EQ), which is used by managers.

  3. Specialty Programs National Quality Review Program is comprised of NQRS, the non-evaluative quality review portion, and EQRS, the evaluative quality review. EQRS is used by managers who monitor an employee's action on a work product. Thus, EQRS evaluates the employee and NQRS reviews the entire process.

  4. National Quality (NQ) Reviewers review a statistically valid sample of unagreed, closed agreed and no change estate and gift tax cases using the quality attributes.

  5. Quality data will be used by management to assess program performance.

  6. Management will also use quality data to identify system changes, training and educational needs, and to identify opportunities to improve work processes.

4.25.1.2.1  (07-31-2009)
Office of Policy Manager Responsibilities

  1. An Attorney Advisor on the Policy Manager's staff shall be assigned responsibilities for the E&G Embedded Quality Program.

  2. At the direction of the Policy Manager, such Attorney Advisor's responsibilities include:

    1. Establishing and providing guidance to meet program objectives,

    2. Ensuring consistent application of the quality attributes,

    3. Recommending updates to the quality attributes and process measures, and

    4. Maintaining instructional guides.

  3. The Attorney Advisor's activities shall also include providing management with accurate information regarding case quality.

4.25.1.2.2  (07-31-2009)
Territory Manager and Field Office Manager Responsibilities

  1. Territory Manager responsibilities include:

    1. Conducting analysis of the territory's NQRS and EQRS results and identifying opportunities for improvement, and

    2. Conducting quality improvement initiatives to impact NQRS and EQRS results.

  2. Field Office Manager responsibilities include:

    1. Conducting quality reviews on case work and inputting the results into the EQRS system,

    2. Assist Territory Managers in conducting analysis of the territory's NQRS and EQRS results and identifying opportunities for improvement, and

    3. Conducting quality improvement initiatives to impact NQRS and EQRS results.

4.25.1.2.3  (07-31-2009)
Quality Attributes

  1. The quality attributes are concise statements of the E&G Tax Program's expectations for quality examinations and are guidelines to assist examiners in fulfilling their professional responsibilities. Exhibit 4.25.1-2. The quality attributes provide objective criteria to evaluate case quality.

  2. Quality attributes are used to define quality in the NQ/EQ review. The attributes are categorized into the following groups:

    1. Planning,

    2. Investigative/Audit Techniques,

    3. Timeliness,

    4. Customer Relations/Professionalism, and

    5. Documentation/Reports.

4.25.1.2.4  (07-31-2009)
The Estate and Gift Tax Examination Job Aid

  1. The Job Aid includes complete instructions, definitions, and examples of how cases should be evaluated. Refer to the Job Aid on the Estate and Gift Tax portion of the Embedded Quality Web Site, http://sbse.web.irs.gov/EQ/functionalguidance/specialty/spestategift.htm .

4.25.1.2.5  (07-31-2009)
Completion of Data Collection Instrument (DCI)

  1. The DCI is used as a guide for the review process, to capture statistical data to be incorporated into the NQRS and EQRS databases.

  2. The DCI provides the principal documentation for the reviewer's case evaluation and conclusions.

  3. One DCI will be completed for each case selected for review.

  4. The DCI includes the following sections:

    1. Header information: identification of specific dates and completion of specific procedures relating to the examination phases.

    2. Evaluation of the quality attributes: each attribute is rated yes, no, or not applicable .

  5. The reviewers will prepare narratives for each attribute rated no. Narratives should be clear, concise and specific as to why the attribute was not passed. Narratives may also be made if an attribute is rated yes .

4.25.1.2.6  (07-31-2009)
National Quality Review System (NQRS) Reports

  1. NQRS includes standard reports designed to assist in the analysis of the data collected through case reviews.

  2. Ad hoc reports are also available in NQRS to allow a variety of queries to be made in order to analyze the data.

  3. Reports are available at the National and Territory levels. The data are statistically valid to the National level.

4.25.1.2.7  (07-31-2009)
Management Use of National Quality Review System (NQRS) Data

  1. NQRS data will be used to assess program performance, and will not be used to evaluate individual employee performance.

  2. The fundamental purpose of NQRS is the gathering of data and identifying trends for management's use regarding SB/SE examination case quality. The emphasis is on providing management with information and analysis to determine root causes of quality concerns.

  3. No attempt should be made to identify an examiner or otherwise associate specific NQRS case results with an individual case.

  4. The case re-opening return criteria outlines the conditions under which cases will be returned to a group for additional work. See case return criteria IRM 4.8.2.8.

4.25.1.3  (07-31-2009)
Estate Tax Credits and Deductions

  1. This section provides information on estate tax credits and deductions.

4.25.1.3.1  (07-31-2009)
Estate Tax Credits and Deductions

  1. Evidence of actual payment of state death taxes need not be secured when the Territory Manager is satisfied that local enforcement procedures for the collection of state death taxes are adequate. Procedures followed in the territories, incident to the verification of payment, may vary depending upon whether:

    1. The state had a pick-up tax equal to the federal credit, when there was a federal credit available..

    2. A separate inheritance tax is determined without regard to the federal tax, or other death duty.

    3. The territory has an effective program for exchange of information with the state taxing authority.

  2. If the Territory Manager is not satisfied with local collection procedures, or where there is information from the state taxing authority that indicates the full amount of the state death taxes will not be paid, he/she should establish procedures for verifying all deductions claimed in the state.

    1. Request payment/assessment evidence if not furnished by the taxpayer within six months after return is filed;

    2. On examined returns, do not allow the deduction without evidence it has been paid or certainty it will be paid..

  3. The state death tax credit was repealed in the case of decedents dying after December 31, 2004, and replaced with a deduction allowable under IRC section 2058 for state estate and inheritance tax paid, effective for decedents dying after December 31, 2004.

    1. For dates of death on or before December 31, 2004, the maximum credit for state death taxes should be computed and tentatively allowed unless precluded by an imminent statute of limitations date. If complete evidence has been submitted, the amount allowable is indicated in the "As Corrected" column, Line 13.

    2. If evidence substantiating the credit is incomplete, the total credit figure is entered in the block entitled "As Corrected." The portion of the credit which has not been substantiated is entered in the blank entitled "Tentatively allowed credit." Where this box is used, enter same date shown on Form 890.

4.25.1.3.2  (07-31-2009)
Personal Representative Commissions and Attorney Fees

  1. Before allowing deductions for commissions to personal representatives or fees to attorneys:

    1. Verify the amount of commissions or fees paid. As appropriate, obtain executed Form 4421, Declaration Executor’s Commissions and Attorney’s Fees, from the personal representative or the executor.

  2. Prepare Form 5346, Examination Information Report:

    1. Include a description of income and the year received.

    2. Attach copy of Form 4421 to Form 5346 and send to the Cincinnati Campus. These documents should be submitted separate from the closed file folder.

4.25.1.3.3  (07-31-2009)
Charitable Gifts and Bequests

  1. You must determine that a charitable deduction will be used for a charitable, public or religious purpose.

  2. To determine if an organization is tax exempt check:

    • Publication 78,Cumulative List of Organizations,

    • Appropriate records of exempt organization rulings maintained by the National Office,

    • A copy of the Tax Exemption Letter, and/or

    • Online Version of Publication 78.

  3. Include a copy of the documentation of exempt status in the file and note exemption on Form 9984 and appropriate lead sheet.

    Note:

    A bequest to an organization that is exempt for income tax purposes may not qualify for an estate or gift tax charitable deduction.

  4. The amount passing to charity must be ascertained after analyzing the testamentary document and considering payment of debts, taxes, and expenses.


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