IRM 8.17.2, General Settlement and Rule 155 Computations, provides general procedures for Appeals Tax Computation Specialists (TCS) and other technical Appeals employees who prepare settlement computations. This section covers instances where it is necessary to prepare settlement computations that include information or require the use of formats that differ from the normal formats used.

This section also details the information to include on the Form 5403 Instructions to APS Spreadsheet, referred to as the Form 5403 Worksheet throughout this IRM section. The Form 5403 Worksheet is available on the TCS Sharepoint site, accessed from a link on the TCS web site.

Appeals Processing Services (APS) is responsible for completing Form 5403, Appeals Closing Record. The Form 5403 Worksheet helps APS with some of the entries involving technical issues. Complete the Form 5403 Worksheet when a settlement computation is prepared.

Many of the forms, worksheets and spreadsheets discussed in this section are found on the Appeals Tax Computation Specialists (TCS) Sharepoint site. The TCS Sharepoint site is accessed through the "Spreadsheets/Sharepoint" link on the TCS web site.

Some of the forms, worksheets and spreadsheets discussed in this section are found on the RGS web site. The RGS web site spreadsheets are also accessible through a link on the Appeals TCS web site. (See the RGS page on the TCS web site for the link.)

The following table gives a brief listing of where the forms are found

The following subsections describe the use of the forms, worksheets and spreadsheets in the preparation of settlement computations.

The employee who prepares the settlement computations is responsible for completing the Form 5403 Worksheet at the time the computations are done. If a Counsel case is received by APS and no worksheet was previously completed in Appeals or a revised worksheet is needed, APS may prepare a Request for Audit Work, Form 3608, requesting that TCS complete the Form 5403 Worksheet.

Each worksheet has the capacity for three tax years but use additional worksheets if needed.

Attach completed worksheets to the inside left flap of the administrative file folder.

Show the following information on the Form 5403 Worksheet:

Form 5403 entries are used to update IDRS so the transcript of account reflects the correct information based on the Appeals computations. Always check a TXMODA, IMFOLR, or BMFOLR to see what amounts were posted for the various reference numbers. The transcript amounts for the reference numbers plus or minus the Form 5403 entries must equal the correct amount shown in the Appeals or Counsel computation, except when the corrected taxable income amount for a Form 1040 case is negative.

The Form 5403 Worksheet has a section for the Item 15 Reference Number information. If RGS is used for the computation, instead of entering the Item 15 Reference Number information on the Form 5403 Worksheet, the TCS or Appeals technical employee may print either the RGS Form 5403 or the RGS Form 5344 (if these forms have the correct Item 15 information) and attach one of them to the Form 5403 Worksheet.

Taxpayers may report a net operating loss or credit carryback loss as a tentative allowance on Form 1045 (individual) or Form 1139 (corporation). This is called a tentative allowance or tentative carryback.

Taxpayers may claim a net operating loss or unused credit carryback on an amended return using Form 1040X (individuals) or Form 1120X (corporation). This is called a claim for credit or refund.

Compliance usually secures Form 1045/1139 or Form 1040X/1120X and places it in the case file along with the return. If the form is not in the case file, the Appeals Officer should take steps to secure a copy so an analysis can be made to determine what year the carryback originated and the amount of the carryback allowed.

Prepare Form 2285, Restricted Interest Worksheet, when tentative allowances and other carryback claims are involved. See IRM 8.17.6, Interest Issues in Settlement Computations, for additional information.

Further discussions of tentative allowances (Form 1045/1139) and other carryback claims (Form 1040X/1120X) are found at IRM 8.17.4.12, Tentative Allowances and Other Carryback Claims In the Notice of Deficiency Statement.

See Exhibit 8.17.5-1 for an example of how Form 4605-A is used to show the adjustment to partnership ordinary income, long-term capital gains and losses, and contributions. Similar schedules might be necessary for such items as partnership IRC 1231 gains and losses, general business credit, etc. Form 886-S, Partners’ Share of Income, Deduction and Credits, Form 886-Z(C), Partners or S Corporation Shareholders Shares of Income (TEFRA cases), and Form 886-Z, TEFRA Partners' Shares of Income, are designed for use in distributing partnership income, deductions and credits.

Reconcile the "886-type" forms to the Schedule K-1’s. Make certain the percentage of profit column equals 100%. These forms serve as corrected Schedule K-1’s and are used by Campuses to make the investors’ calculations. Therefore, include all flow-through information shown on the Schedule K-1 on the "886-type" forms whether adjusted or not.

An alternative is to prepare the "886-type" form listing the adjusted issues only, and provide a statement at the bottom indicating all other issues remain the same as shown on the Schedule K-1 as filed.

Subchapter S adjustments to income are patterned along the lines of partnership adjustments. Use Form 4605-A for these adjustments. Also use distribution schedule Form 886-X.

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the Subchapter S Revision Act of 1982 established unified procedures for examining certain partnerships and S corporations. As a result of this act, a separate set of procedures was established addressing the preparation of settlement computations for TEFRA partnerships and S Corporations.

The Appeals Officer or Counsel Attorney should indicate whether the case is TEFRA.

See IRM 8.19, Appeals Flow-through Entity Handbook for additional information.

Form 886-W, Distribution of Beneficiaries’ Share of Income and Credit, is a distribution schedule of beneficiaries’ shares of income, credits, etc. Use either Form 4605-A or pattern a schedule to fit the needs of the case, when adjusting fiduciary income.

The net worth method of proving taxable income is based upon the theory that increases or decreases in a taxpayer’s net worth during a taxable period, adjusted for nontaxable expenditures and nontaxable income, must result from taxable income. This system verifies profit and loss statement through the balance sheet approach.

A net worth computation consists of balance sheets for beginning and ending of each year involved, including reserves for depreciation and amortization. Asset values are listed at cost or at the taxpayer’s basis. The accounting method required by law or elected by the taxpayer is followed in the balance sheet. If a taxpayer reports and is permitted by law to report on the cash basis, items such as business accounts receivable and business accounts payable are not entered. On the other hand, if the accrual method applies, all assets and liabilities are entered. If a taxpayer is permitted and has elected to report on the installment basis, the element of unrealized gross profit is set up in the liability section of the balance sheet.

When returns are filed on a fiscal year basis, conform the balance sheet dates to the same dates as the return.

After net worth schedules or balance sheets are made for all years, determine the increase or decrease in net worth for each year. Adjust this increase or decrease by adding all nondeductible items and deducting all non-taxable items. The resulting figure is either adjusted gross income or taxable income, depending on whether or not allowable itemized (standard) deductions and deduction for exemptions are allowed in adjustments to net worth increase.

IRM 4.10.4.6.7 provides additional details in addition to an example of the net worth computation. A formula for computing income using the Net Worth Method can be found at IRM 4.10.4.6.7.3. An example of the Net Worth Method can be found at IRM Exhibit 9.5.9-1.

The source and application of funds method is a variation of the net worth method and is simply the comparison of all known expenditures with all known receipts. Excess of expenditures, when reported adjusted gross income or net income is included among the sources, represents understated income. In this method enter only increases and decreases in assets and liabilities along with other non-deductible and non-taxable receipts. IRM 4.10.4.6.3 provides a detailed explanation of this method. See IRM Exhibit 4.10.4-10 for an example.

This method is based upon the assumption that outlays disclosed on the return were actually made; however, only two types of expenditures, check or cash, paid for these outlays. If cash paid them, then the source of that cash must be due to receipts if not accounted for from other funds.. IRM 4.10.4.6.4 provides a detailed explanation of this method. The basic formula for computing the understatement of taxable income is outlined in IRM 4.10.4.6.4.6. See IRM Exhibit 4.10.4-9 for an example.

Devise a schedule to fit the needs of the issue or adjustment. For example, a schedule appropriate for installment sales under IRC 453(b) is totally inapplicable to a timber transaction under IRC 631. The tax return format of capital gains and losses, Schedule D, is an excellent guide for applying the law in effect for a given year.

The computation of the adjusted depreciation may be shown under the explanations of adjustment, or on a schedule or exhibit such as Form 1914. However, there are situations in which a depreciation computation might not be needed. Some examples would be:

Excel Form 1914 spreadsheets available:

IRC 172 provides that net operating losses may be carried back to prior years and forward to future years as deductions.

If needed, explain adjustments to a net operating loss deduction in the settlement computation. Examples of when a computation may not be needed include:

See IRM 4.11.11, Net Operating Loss References, for a list of net operating loss references and resources.

Sometimes complicated computations of limitations on contributions and contributions carryovers are needed.

Schedules patterned along the line of schedules in the return may be used whenever appropriate for individuals and for corporations. See Exhibit 8.17.5-2 (Computation of Corporation Contribution Deduction and Carryovers) for details.

A charitable contributions limitation worksheet for Form 1040 is found on the RGS web site.

Certain computations are common to both corporate and individual taxpayers. See Exhibit 8.17.5-3. for an example of a computation of tax when the taxpayer restores an amount held under claim of right (IRC 1341). Special computations may be necessary for income tax paid to a foreign country or U.S. possession ( IRC 27 and IRC 901).

A life insurance company files their return on a Form 1120-L. There are special tax rules for life insurance companies and special limitations on losses when a life company files a consolidated return with a non-life company. The rules that govern the taxation of life insurance companies are located in IRC sections 801 through 818. Some of the general provisions that apply to all insurance companies are contained in IRC sections 841 through 848.

Worksheets to use when computing life insurance company taxable income are available on the Appeals TCS Sharepoint site.

Most of the tax forms and instructions are available at the Electronic Publishing Catalog web site.

Refundable credits are different from non-refundable credits:

See the following IRM sections for additional information about refundable credits:

The following IRM sections discuss the procedures to follow for refundable credit adjustments made to income tax returns:

IRC 32 provides for a refundable earned income credit (EIC) to eligible taxpayers. The computation of the credit is affected by changes made to adjusted gross income and earned income so a recomputation of this credit is generally necessary.

Per IRC 6211(b)(4), include any adjustment to the earned income credit under IRC 32 in the statutory deficiency. Adjustments to the earned income credit became part of the deficiency as defined in IRC 6211 for deficiencies determined after November 10, 1988.

On Master File accounts the earned income credit is entered separately.

Form 5278 or Form 4549/4549-A is used to show adjustments to the earned income credit

Also, enter any earned income credit adjustment on the Form 5403 Worksheet, or on the RGS Form 5403/Form 5344 attached to the Form 5403 Worksheet:

Form 3610 is not required when there is an adjustment to earned income credit.

If Form 3610 is prepared and there is an adjustment to earned income credit, then:

The following exhibits contain Form 3610 formats that can be used to explain the earned income credit adjustment in settlement computations.

IRC 24(d) provides for a refundable additional child tax credit in addition to the non-refundable general child tax credit provided in section 24. IRC 24(d) applies for tax years beginning after December 31, 1997.

When the law was originally passed allowing refundable additional child tax credit under IRC 24(d), the definition of a deficiency per IRC 6211 was not changed to include the refundable additional child tax credit as part of the deficiency.

On December 21, 2000, IRC 6211(b)(4) was amended to retroactively add IRC 24(d). Since the change in the law was made retroactive, the additional child tax credit must be shown as part of the statutory deficiency for all years where IRC 24(d) applies.

On Master File accounts refundable additional child tax credits are shown separately on the transcript:

Form 5278 or Form 4549/4549-A is used to show any adjustment to the additional child tax credit.

Also, enter any additional child tax credit adjustment on the Form 5403 Worksheet, or on the RGS Form 5403/Form 5344 attached to the Form 5403 Worksheet:

Form 3610 is not required when there is an adjustment to the additional child tax credit.

If Form 3610 is prepared and there is an adjustment to the additional child tax credit, then:

Per IRC 6211(b)(4), include any adjustment to the credit for federal tax paid on fuels under IRC 34 in the statutory deficiency.

Form 5278 or Form 4549/4549-A is used to show any adjustment to the credit for federal tax paid on fuels (fuel tax credit) for settlement computations.

Also, enter any fuel tax credit adjustment on the Form 5403 Worksheet, or on the RGS Form 5403/Form 5344 attached to the Form 5403 Worksheet:

Form 3610 is not required when there is an adjustment to the fuel tax credit..

If Form 3610 is prepared and there is an adjustment to the fuel tax credit, then:

Pre-refund cases (also called frozen refund cases) are those selected for examination prior to scheduling refunds claimed on returns. The IRS identifies issues that may indicate a taxpayer is not truly entitled to the refund amount claimed. The entire refund is generally held pending assurance of entitlement. The refund is released when the taxpayer provides information indicating he/she is entitled to the refund. To determine the status of refunds, however, secure a transcript of account before a case is closed. (See IRM 8.17.3, Preparing a Statement of Account.)

Examples of pre-refund examinations include earned income credit cases, CID initiated freeze codes, and unallowable tax holds.

The general procedure for settlement computations for frozen refund cases is the same as other individual income tax cases except that special language is needed either on Form 3610 or on the tax computation form. See discussion in paragraphs (4) and (5).

If Form 3610 is prepared, either of the formats discussed in paragraphs (a) or (b) can be used:

The Form 3610 formats discussed in paragraph (4) are not needed if language is included on the tax computation schedule instead:

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the tax rates were reduced. In order to provide taxpayers with the benefits of the new 10% bracket more quickly, advance payments were issued in 2001 based on the tax year 2000 return information. If a taxpayer did not receive the maximum credit for their filing status, the taxpayer was entitled to an additional credit on their 2001 income tax return.

The credit was based on the filing status and tax of tax year 2000. The cumulative credit amounts between 2000 and 2001 cannot exceed the following:

The following are terms for the different types of credits discussed in this subsection:

The Jobs and Growth Tax Reconciliation Act of 2003 raised the child tax credit from $600 to $1,000 per child starting with tax year 2003 income tax returns. The Act further directed the Treasury to provide the difference, up to $400 per child based on the children claimed on the 2002 tax year return, as an advance payment to each eligible taxpayer during the summer of 2003.

The calculation of the advance on child tax credit was based on original return data from posted 2002 tax year returns.

Eligible taxpayers received the advance on child tax credit checks in 2003. The advance on child tax credit posted to eligible taxpayers' 2002 tax year account with a TC 766 and a Credit Reference Number of 338. Any advance on child tax credit remaining on the account (for example, due to undeliverable refunds) was reversed in cycle 200352 with a TC 767.

Do not confuse the advance on child tax credit posted to the 2002 tax year account (TC 766, Credit Reference Number of 338) with the 2002 tax year additional child tax credit (TC 766 with a Credit Reference Number of 336).

Also, do not confuse the advance on child tax credit posted to the 2002 tax year account with the ITR posted to the 2000 tax year account which also posted with a TC 766 and a Credit Reference Number of 338. The advance on child tax credit is completely different than the ITR posted to the 2000 tax modules.

See the TCS Sharepoint site for information pertaining to TC 766 and CRN for advance on child tax credits.

Joint return filers:

Computations involving 2002 income tax returns:

Computations involving 2003 income tax returns:

IRC 6013 provides for filing joint returns. This subsection discusses the procedures for converting separate returns to joint returns in non-docketed cases.

When collection of income tax is in jeopardy, the Area or Field Operations Director terminates a taxpayer’s taxable period, and has an assessment made for tax and penalty determined to be due, under the conditions found in Policy Statement P-4-89 and the procedures in IRM 4.15, Jeopardy/Termination Assessments.

At the end of the usual annual accounting period, the taxpayer is responsible for filing a return for his or her annual accounting period.

Upon filing the full year return, the Area or Field Operations Director’s office determines the correct liability and, where appropriate, issues a preliminary notice or notice of deficiency. The statutory deficiency is the difference between the liability determined and the liability entered on the full-year return. If the taxpayer does not file a full-year return, follow the "substitute for return" procedures. The statutory deficiency is not reduced by the assessment under IRC 6851. The taxpayer may protest the notice to Appeals. In some cases, it is possible for Appeals to receive the case prior to issuance of the notice of deficiency. In these cases, Appeals issues the notice of deficiency.

In preparing settlement computations, use the format similar to jeopardy assessment cases, except change "jeopardy assessment" to "termination assessment under IRC 6851."

See IRC 7429(a) and Termination Assessments in IRM 8.7.1 for additional information.

See IRM 8.17.4.23, Notice of Deficiency Involving Termination Assessment under IRC 6851 (Termination of Taxable Period), for notice of deficiency procedures.

Jeopardy assessments of income, estate and gift taxes are covered in IRC 6861, and jeopardy assessments on all other taxes are covered in IRC 6862.

Generally settlement computations for cases involving jeopardy assessments follow the pattern of a regular settlement computation, except for the changes noted below.

It may be necessary to prepare a statement of account. See IRM 8.17.3, Preparing Statement of Accounts.

Appeals procedures are covered in IRM 8.7.6, Appeals Bankruptcy Cases.

If a settlement computation is needed in a case where an assessment was made under bankruptcy/receivership proceedings, follow the format of jeopardy assessment cases.

If it is determined an overpayment or deficiency in a case is barred by statute, special annotations are made to Form 3610.

The same procedures apply to barred overpayments and barred deficiencies whether the case is non-docketed or docketed.

) If the total overpayment or deficiency is barred, asterisk (*) the amount and add a footnote to the Form 3610. The following is an example of the footnote for a barred overpayment case:

"Overpayment barred by statute of limitations. "

If only part of the overpayment or deficiency is barred, asterisk (*) the total amount and add a short summary of the barred amount to the bottom of the Form 3610. The following is an example of the summary for a barred overpayment case:

It is the responsibility of the local Appeals office to provide tax recomputation assistance for settlements and judgments in refund litigation cases when it is requested by Counsel.

Since refunds involve payment of interest by the Government, these recomputations must be furnished without undue delay.

Show breakdowns of the tax, penalties, deficiency interest and accrued interest by periods to enable the Campus to properly handle the overpayments and process the refunds.

Compute accrued (statutory) interest and show it in an accrued interest column of Form 3610 if requested by the attorney.

Forms needed to prepare recomputations are the same as those used for regular settlement computations - Form 3610, Form 5278, etc.

See Exhibit 8.17.5-10 for an example of a suggested format for a settlement computation prepared for a refund litigation case.