ECS and PSP partner to identify, select, and deliver returns to SB/SE Field Exam. Those returns can come from a variety of sources. This section addresses case building, classification, and delivery of the returns.

IRM 1.1.16.5.5.3, Exam Case Selection

IRM 1.2.1.2.36, Policy Statement 1-236, Fairness and Integrity in Enforcement Selection

IRM 1.2.1.5.7, Policy Statement 4-9, Highest Integrity Expected

IRM 1.2.1.5.10, Policy Statement 4-21, Selection of Returns for Examination

Director, Exam Case Selection is the executive responsible for providing policy guidance on the selection of cases and delivery of inventory for SB/SE Examination.

Program Manager, Field Case Selection is the program manager responsible for providing policy guidance on the selection of cases and delivery of inventory for SB/SE Field Exam.

The PSP Territory Manager is the territory manager responsible for the selection of cases and delivery of inventory within an SB/SE Field Exam area.

The following are resources that may be used to monitor the classification, storage, and delivery of inventory. This list is not all-inclusive.

SB/SE Examination case selection functions operate under a framework of internal controls designed to ensure that examinations are selected with fairness and integrity in accordance with laws, regulations, and IRS policies. Key controls include the following.

This is a list of acronyms and their definitions.

See IRM 4.1.1.1.6, Terms, for a list of common terms used in PSP and their definitions.

IRM 4.1.1, Planning, Monitoring, and Coordination

IRM 4.1.2, Workload Identification and Survey Procedures

Case building tools help determine whether a return should be selected for audit, what issues should be audited, and how the audit should be conducted.

Case building data provides taxpayer-specific research to identify possible compliance issues.

Case building data in conjunction with the return (original, CDE facsimile, or Modernized E-File (MeF) print) provides a broader working knowledge of the taxpayer's financial activities to allow for an informed decision to accept or examine specific items on the return.

Case building data can corroborate items on the return so they don't have to be raised with the taxpayer.

IDRS is an internal database accessed by various command codes, each of which provides specific information.

IDRS can provide the following data about the taxpayer and their account:

IDRS information should be compared to return information to determine if there are discrepancies, amended returns, or activity after the return was filed.

An IDRS Command Code Job Aid can be found at SERP IDRS Command Code Job Aid.

FinCEN provides an on-line database containing reports of cash transactions in excess of $10,000. Cash transactions include deposits, withdrawals, check cashing, wire transfers, sales and redemption of money orders, travelers’ checks or stored value, casino activity, payments for certain services, and information on foreign bank accounts. In addition, FinCEN reports cash and/or other monetary instruments in excess of $10,000 used as payment for certain goods.

FinCEN provides the following BSA forms:

FinCEN data can be used to generate leads for potential unreported income, money laundering transactions, and other tax avoidance schemes.

Consider FinCEN activity in relation to the overall financial status of the taxpayer. FinCEN "hits" along with Information Returns Processing (IRP) documents, CDE 3-year facsimiles, and taxpayer locator data will provide a better picture of the taxpayer’s financial situation. Compare the contents of these case building tools with the return.

Taxpayer locator services (e.g. Accurint) report information on an individual or business, providing a snapshot of the subject's identity by combining data from multiple sources.

At least one consumer reporting agency is scanned. The information found is used to search over 2 billion public records and generate a single report that may include the following information.

This information is useful to determine the taxpayer’s lifestyle or business history and aids in determining net worth.

Examples of public search data that could indicate audit potential include, but are not limited to:

The Return Preparer Database (RPD) is a repository of return preparers who prepare and sign 10 or more returns. It contains more than 500 data elements and can be used as an investigative tool when researching return preparers for compliance and misconduct issues.

Some of the data RPD can provide includes:

RPD information can be used to determine potential discrepancies in income reporting, level of employee/employer relationship, and potential IRC 6694 and IRC 6695 penalty application.

Questions regarding RPD case building material or any additional information regarding a return preparer can be directed to your area return preparer coordinator (RPC) at Exam Procedures Knowledge Base – PSP Return Preparer Coordinators (RPCs) – Area.

Field Exam uses colored file folders on cases to achieve national standards for processing and to help Centralized Case Processing (CCP) when closing cases.

When cases are built by area Planning and Special Programs (PSPs) or at the campus, the following file folder colors are used to identify specific types of cases.

If a case falls into more than one of the above listed categories, place the folders in the color order listed above from outermost folder to innermost.

Classifiers must use their skills, technical expertise, local knowledge, and experience to select returns and identify issues. Therefore, classification should be conducted by examiners who have received appropriate tax law training and are experienced with the type of return and activity code being classified. Examiners with specialized expertise may be used to classify business returns.

Where appropriate, returns should be classified by examiners with subject matter expertise. However, if a subject matter expert classifies a return, they may not subsequently assist with the examination.

Tax returns must be selected and classified for audit by employees who will not be assigned to examine the return.

The primary objective of case selection is to promote the highest degree of voluntary compliance on the part of taxpayers while making the most efficient use of finite examination staffing and other resources. Classifiers must exercise their professional judgment – not personal opinions – when making return selection decisions.

During the classification process, the classifier will determine the preliminary scope of the audit for all returns.

Classifiers must:

The classifier must first review the entire return to:

The classifier must consider financial status on all returns. SB/SE taxpayers are responsible for two-thirds of the tax gap and two-thirds of that amount is attributable to unreported income. Consider family size and personal living expenses in relationship to the income stated on the return. If it appears the taxpayer does not have sufficient income for the lifestyle indicated on the return, financial status is a potential issue.

Review all returns received for classification for international issues. Refer to IRM 4.1.9, International Features. If international issues are present, the classifier should discuss with the reviewer or individual overseeing the classification to determine how to send a referral to an international examiner and how to proceed with the classification. See IRM 4.46.3, LB&I Examination Process, Planning the Examination.

To help identify the most non-compliant taxpayers, classifiers may use all data available during classification including, but not limited to:

For all returns, the classifier will assign an examiner type (TCO-09 (or below), TCO-11, or RA) based on the complexity of the return and the degree of accounting and auditing skills required to conduct a quality audit. See IRM 4.1.5.3.2.6, Grading Returns, for additional information.

For each area classification detail (whether electronic or at the campus), the PSP territory manager (TM) (or designee) has primary responsibility for:

For each national or centralized classification detail, the headquarters representative is responsible for:

The goal of the classification guidelines is to achieve greater efficiency in the classification and examination processes. Select specific issues and do not select "all" expenses. "Other" expenses should only be selected when identifying the line with that name or when the expense details aren’t available (e.g. classification from a CDE print or transcript when large expenses aren’t transcribed). When appropriate, the classifier should make a remark/comment explaining to the examiner that the classified issue is the non-transcribed expenses.

The classifier should review IRM 4.1.5.3.4.1, Potentially Productive Issues on an Individual Business Return, to identify questionable business schedules during the classification process.

Classify the appropriate income or expenses when a Schedule C, E, or F doesn’t appear to be a legitimate business. Notate the "Remarks" with "Is this a legitimate business?" .

IRC 183 Activities not engaged in for profit (hobby loss) – When a Schedule C, E, or F does not appear to be an activity engaged in for profit, the examination should focus on whether the taxpayer has a profit motive. Classify Section 183 via "Other Issue" selection and explain in the "General Comments" . Review additional years using the 3-year CDE return, MeF, or IDRS prior to selecting Section 183 as an issue.

Questionable Preparer – Classify the appropriate income or expenses when there is a questionable preparer known to inflate expenses, understate income, or include fictitious schedules. Notate the "Remarks" section with "questionable preparer" .

Corporate returns are identified by three categories; DIF, non-DIF, and automatics. Returns which do not meet automatic criteria, are scored under the DIF system. Returns which meet automatic criteria, regardless of size, are not computer scored. Automatic criteria are contained in IRM 3.11.16.10.1, Audit Codes.

Screening procedures for DIF-scored 1120 returns are essentially the same as for other DIF returns.

The corporate DIF system includes returns in activity codes 203 through 217. All other corporate returns are non-DIF.

Classification of the corporation return must include the balance sheet and Schedule M items. Substantial change in accounts receivable, reserve for bad debts, loans to or from stockholders, accounts payable, treasury stock, capital stock, or retained earnings would indicate an audit of these items may be warranted. In addition, such potential issues such as "thin corporation" , IRC 531, substantial changes in accruals, and decreases in assets which are not accounted for on Schedule D of the return may be identified from an inspection of the balance sheet.

All Schedule M items should be scrutinized to determine the difference between income shown on the books and taxable income shown on the tax return.

The following general items must also be considered during classification:

Significant issues identified on manually classified Form 1120 returns will be reflected on Form 10264, Revenue Agent – Classification Checksheet.

Form 1120-S, U.S. Income Tax Return for an S Corporation, returns are identified by three categories; DIF, non-DIF, and automatics. Returns which do not meet automatic criteria, are scored under the DIF system. Returns which meet automatic criteria, regardless of size, are not computer scored. Automatic criteria are contained in IRM 3.11.217.13.1, Audit Codes.

Screening procedures for DIF-scored 1120-S returns are essentially the same as for other DIF returns.

Significant issues identified on 1120-S returns will be reflected on Form 10264, Revenue Agent – Classification Checksheet.

Partnership returns are identified by three categories; DIF, non-DIF, and automatics. Returns which do not meet automatic criteria, are scored under the DIF system. Returns which meet automatic criteria, regardless of size, are not computer scored. Automatic criteria are contained in IRM 3.11.15.19.1, Audit Codes.

Screening procedures for DIF-scored partnership returns are essentially the same as for other DIF returns.

Significant issues identified on partnership returns will be reflected on Form 10264, Revenue Agent – Classification Checksheet.

Be cognizant of potential employment tax issues when classifying income tax returns.

Known or probable areas of non-compliance are listed in IRM 4.23.3, Employment Tax – Examination Programs and Examination Planning Procedures.

Be cognizant of potential excise tax liabilities when screening income tax returns. Be alert for:

Excise classification procedures can be found in IRM 4.24.18.12, Classification.

Screening of fiduciary returns requires consideration of issues specific to fiduciary returns in addition to income tax issues. Quality classification requires consideration of the following items.

Distributions to beneficiaries should be considered including the following.

Capital transactions should be considered including:

Expenses and deductions:

Area Office work physically located in the campus are stored in employee group codes (EGCs) in the 10XX and 20XX series with returns separated based on type and status.

For a current EGC listing with definitions, see the Employee Group Code (EGC) Contacts file at Exam Systems Knowledge Base – AIMS Assignee Code (AAC) Contact Listings.

Returns awaiting classification in status 06 are stored in EGCs separated by paper filings and MeF.

As selected returns are received by CF&S from centralized classification, the AIMS status will be updated to status 08 and the case updated to the appropriate EGC based on the direction provided by the PSP contact.

If selected returns are maintained at the campus, the selected returns will be placed inside a file folder and filed in AIMS serial number sequence.

The PSP TM (or designee) has sole authority to approve the survey of inventory stored at the campus. Returns should be surveyed as they become out-of-cycle or more frequently, if needed. The PSP TM (or designee) will send written authorization to CF&S instructing the surveys. CF&S will pull the indicated returns, stamp them with a survey stamp, and package them for closing. CF&S will apply disposal code 35 to close the returns off AIMS. See IRM 4.1.2.9, Procedures for Surveying Inventory in PSP, for more information.

The PSP and CDE EGCs are in the 1850 to 1999 and 2850 to 2999 ranges with returns separated based on type as shown in the following table:

For a current EGC listing with definitions, see the Employee Group Code (EGC) Contacts file at Exam Systems Knowledge Base – AIMS Assignee Code (AAC) Contact Listings.

Returns awaiting classification are in a CDE workload set or status 06.

CDE returns selected for examination are moved to virtual inventory which causes the establishment of the case on AIMS in status 08.

Non-CDE returns selected for examination during classification are updated to status 08 through ERCS or AIMS.

Periodically, there will be requests for returns assigned to an area office in status 08 EGC 2050, which indicates the return is part of the Centralized Scheduling Database (CSDB). These requests may come from exam personnel in the area or from functions other than exam, such as Criminal Investigation.

Area personnel should be instructed to contact a PSP TM (or designee) if they need a return which is currently assigned to CF&S. In addition, area personnel should be instructed never to update a record from status 08 EGC 2050 even if they are working from a copy.

Specific returns requested by an area examination function must be deleted from the CSDB. CF&S will update the return on AIMS to the requesting status and EGC and forward it to the area.

Requests for returns from area functions other than exam are handled differently. The returns are assigned on AIMS to a specific area. The returns will be deleted from the CSDB and forwarded to exam in an area office for coordination with the requesting function. A copy will be provided to the requester until the original return is received in the area office.

Employee returns require special processing depending on what system was used to classify the return.

Problems identified with returns received from CF&S should be brought to the immediate attention of the CF&S manager by either the PSP TM or the group manager.

It is important for the area PSP TM to have frequent discussions with CF&S management to keep abreast of the return orders and other issues.

Centralized storage related return(s) are two or more returns for the same taxpayer where one or more of the taxpayer's returns are being maintained in centralized storage (status 08), while another return is open in an exam status 10 or 12.

For returns located in the area office, CF&S will pull the centralized storage return, update AIMS to status 10 for the same EGC as the return(s) located in the area, and mail the return to that group for association.

For returns located in correspondence examination (EGC 5XXX), no action will be taken.

Multiple Returns: Multiple returns occur when two or more returns for the same taxpayer are concurrently maintained in centralized storage (status 08). CF&S will match the primary return to the multiple return, cross reference the folders, and file both returns in the file by the respective AIMS serial number.

EGC 2066 will be used to store certain office examination returns with errors. Area PSP staff should review EGC 2066 inventory to ensure these returns are properly addressed. There should be a minimal number of these returns.

The ROADS group delivery form (GDF) determines the projected inventory needs within each POD within each EGC.

The GDF calculates the projected inventory needs to cover a period of time, normally 1 or 2 months. The inventory needs are calculated as follows.

The return classification coordinator (also known as spigot or DIF coordinator) prepares the GDF during the ordering cycle which typically occurs on a monthly basis. Once the GDF is prepared, it is distributed to the exam group managers (GMs) (typically via e-mail). The GMs have a period of time to provide any adjustments to the calculation before the inventory needs are fulfilled. Additionally, TMs receive summary information via e-mail.

The ROADS delivery model (DM) determines the cases to deliver to the exam groups. The cases selected satisfy the inventory needs determined in the ROADS GDF.

The DM selects returns from status 08 optimizing the area’s delivery to the exam plan’s return mix. The necessary returns to support the exam plan mix are determined at the purpose group or workstream level. Additionally, for DIF inventory, the optimal mix is broken down to the activity code level. For each mix within the exam plan, the calculation of optimal returns is calculated by first finding the planned starts from the exam plan for the fiscal year to date through the cycle when the delivered returns will be started. Then, subtracting the sum of the fiscal year to date primary starts and the current status 10 inventory from the planned starts.

The Field Case Selection (FCS) senior program analyst prepares the DM after any adjustments are received from the GDF. Once the DM is used to determine the cases to be assigned to the exam groups, the return classification coordinator (also known as spigot or DIF coordinator) sends digital communications to respective coordinators or systems providing the required information to deliver the identified inventory to the exam group. Subsequently, the DM creates e-mails to notify the exam group of the inventory they should expect to receive as well as communicating the originating coordinator, office, and/or system (e.g. CDE) which will deliver the cases.

Returns are assigned from central storage and CF&S as outlined in IRM 4.1.5.4.1, Inventory Stored at the Campus.

Field exam cases are generally assigned to the receiving group in status 10 from central storage. Office exam cases are generally assigned to the receiving group from CF&S in status 10 as "pre-contact" cases.

All tax return information must be transferred via a Form 3210, Document Transmittal. The Form 3210 should be used to transfer returns outside of PSP or when a return is transferred from one coordinator’s EGC to another coordinator’s EGC. The sender must retain a copy of the Form 3210 for group control to monitor the transmittal. If acknowledgement is not received within 10 days, immediate follow-up should be made by phone, secured e-mail, or mail. The Form 3210 requirement applies to all tax returns and associated information despite the source, including but not limited to, the following:

If Form 3210 is generated by ERCS, the control copy must be monitored in ERCS until the Form 3210 is acknowledged by the recipient. Once acknowledged, the Form 3210 is retained on ERCS for one year.