Tax Law Center Blog

The Internal Revenue Manual (IRM) is essentially the IRS employee handbook on how to carry out all administrative and procedural matters, such as how to audit specific tax returns, collect taxes, process returns, or assess penalties. The IRM may be the most important tool provided to IRS employees as it contains vital information to help them do their jobs. The IRM itself is not the law, and the procedures set forth in it are not mandatory or binding on the IRS.

Understanding how IRS personnel are instructed to perform certain procedures can be valuable to taxpayers. For example, gaining insight into how the IRS will audit a specific area on a return (such as the techniques they use or the items they request) can help a CPA prepare for an audit, address IRS inquiries, or prepare tax returns. Additionally, and perhaps most importantly, certain items in the IRM are not available anywhere else.

Knowledge of the IRS’ own guidelines can make all the difference in resolving your IRS problem.  The IRM is broken down into multiple chapters, including sections on IRS audits, IRS collections, IRS appeals and criminal investigations.

The IRS recently internally changed the IRM for the IRS’ revised “streamlined” procedures for individuals who unintentionally fail to report foreign-source income or foreign assets, generally, foreign bank accounts. In part, the revised procedures address concerns of taxpayers and their professional advisers that the traditional offshore voluntary disclosure programs (OVDPs) often resulted in unduly harsh penalties for inadvertent conduct. Under the revised procedures, in addition to avoiding criminal prosecution, qualifying taxpayers enjoy significantly reduced penalties, and in the case of certain nonresidents, penalties may be excused entirely.

However, to take advantage of these new procedures, individuals must demonstrate to the satisfaction of the IRS that their conduct was not “willful.” At the heart of the streamlined procedures, taxpayers must certify that their failure to report foreign financial assets and pay all tax due was not the result of willful conduct (click here for further details). A taxpayer must complete and execute a certification form, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.

The new IRM appears below, which describes the internal processing of the certification form and amended returns. The IRM may assist a taxpayer to avoid possible audit flags in the processing of streamline filings.

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IRM PROCEDURAL UPDATE
DATE: 05/09/2016
NUMBER: WI-21-0516-0879
SUBJECT: BMF International Accounts Management
AFFECTED IRM(s)/SUBSECTION(s): 21.8.2
CHANGE(s):

IRM 21.8.2.18.2.1 Updated Streamlined Filing Compliance procedures per
LB&I.
1. Filers from within the United States will submit a package to a specific
mailbox in Submission Processing in Austin. The filing package will contain
complete and accurate amended returns for each of the most recent 3 years
for which the U.S. tax return due date (or properly applied for extended due
date) has passed together with any required information returns (e.g., Forms
3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information
returns would normally not be submitted had the taxpayer filed a complete
and accurate original return. Taxpayers may NOT file delinquent original
returns under these procedures.
NOTE: Filers are instructed to write, “Streamlined Domestic Offshore” in red
at the top of the first page of each amended return.
2. In addition to the amended returns, domestic streamline filers must also
submit a statement on the Certification by U.S. Person Residing in the United
States for Streamlined Domestic Offshore Procedures attesting:
o The taxpayer or taxpayers are eligible for the SDO procedures
o The tax years and amounts owed for each year including interest.
o All required FBARs have now been filed
o The failure to report all income, pay all tax, and submit all required
information returns, including FBARs, resulted from non-willful conduct
o The miscellaneous offshore penalty amount is accurate.
3. LB&I will review the submissions for statute considerations. LB&I will
complete the “AM Streamline Coversheet” and attach it to the package
notating their statute recommendations regarding open statutes and statute
extensions.
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4. Amended returns will be scanned into CIS for Accounts Management
processing and assigned to a designated IDRS number for subsequent
assignment to CSR’s.
5. One CSR must work all related cases.
6. Accounts Management will be responsible for reviewing the packages to
ensure the necessary certifications are attached and complete. If they are
incomplete AM will correspond with the taxpayer to perfect the submissions.
7. Use the table below to determine if the required certification is complete:
NOTE: If the taxpayer completes the certification for only one or two tax
years, and submits the same number of amended returns, do not question
whether additional years should have been submitted. As long as the tax
years listed on the certification are filed, accept that the number is correct.

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8. Accounts Management will perform the following actions prior to adjusting
   accounts under the SDO:
   o Review the account for a -Z freeze. If there is a -Z freeze on the
   account, contact CI to determine whether an amended return filed
   using the Streamlined Foreign Domestic Compliance Procedures can
   be processed. Follow CI’s direction. See -Z freeze instructions at IRM
   21.5.6.4.52 -Z Freeze.
   o Review each tax year for statute consideration. Refer to Statutes for
   clearance or assessment when necessary. See IRM 25.6 Statute of
   Limitations.
   o Review Command Code AMDIS for examination involvement. Follow
   the table below if any of the affected accounts are found on Command
   Code AMDIS.

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9. To complete adjustments amended returns filed under the SDO:
   1. Input a Transaction Code (TC) 971 Action Code (AC) 178, using the
   amended return received date as the transaction date, to each
   affected tax year. TC 971 AC 178 denotes Streamlined Filing
   Compliance. The xClaim tool has been programmed to allow AC
   178.
   2. Ensure the payments are allocated correctly among the affected tax
   years (including the MFT 13 civil penalty module) according to the
   calculations made on the taxpayer certification. If not, follow normal
   credit transfer procedures using appropriate credit freeze codes to
   ensure no erroneous refunds occur.
   3. Use all normal adjustment procedures, including the use of IAT tools,
   when making the tax assessment to each tax year, with the following
   exception: Restrict the failure to file and failure to pay penalties on
   each tax year by inputting TC 160 and TC 270 for zero dollars.
   NOTE: If any payments were transferred, use appropriate posting
   delay codes on the adjustment(s) to ensure the adjustment does not
   post before the payments are posted correctly.
   4. Assess the 5 percent miscellaneous penalty on MFT 13 on the most
   recent tax year for which an amended Form 1041 was submitted.
   Assess the penalty based on the taxpayer’s calculation. Input TC
   240 with blocking series 52 and penalty reason code 708.
   5. Allow the adjustment notices to generate. Do not correspond with
   the taxpayer(s) because they are advised on IRS.gov that they may
   receive a balance due notice or a refund if the tax or interest is not
   calculated correctly.
   EXCEPTION: If the miscellaneous penalty is more than $60,000 and
   fully paid, use hold code 3 on the MFT 13 adjustment.