The Engineering Citator, Document 5262, contains annotations (short summaries of cases and rulings) and citations of precedents and published tax law developments pertinent to administering Internal Revenue Code provisions involving engineering matters.

Copies of the Citator and supplements are distributed to Service personnel most concerned with engineering issues.

A wide range of tax literature is available to Service personnel. Monthly publications such as The Journal of Taxation, Taxation for Accountants, and Taxation for Lawyers, published by Warren, Gorham & Lamont.

Numerous books presenting detailed analyses of tax laws and issues are available and provide excellent sources of information. One of the better known is Federal Income Taxation of Corporations and Shareholders by Bittker and Eustice, published by Warren, Gorham & Lamont, which has been cited by the Supreme Court.

A number of tax services are available from commercial publishers that provide explanations and annotations on a variety of tax issues. For example, CCH Incorporated’s Standard Federal Tax Reporter, Bureau of National Affairs’ Tax Management Portfolios , and Research Institute of America’s American Federal Tax Reports.

There are numerous sources of information available through on-line research. IRS has electronic access to thousands of data bases. See IRM 4.10.7.2.15.1 for more detail.

Electronic tax research using computers, compact discs, and on-line tax services is also available. Information can be accessed quickly and all references to a given topic, obtained by searching, by specific words or word groups. Most of the documents discussed above are available from commercial vendors on compact disc or online.

Evidence is something which tends to prove a fact or point in question. Evidence is distinguished from proof, in that proof is the result or effect of evidence.

The Internal Revenue Code requires all taxpayers to keep adequate records. There are times, due to unusual circumstances, when records do not exist. In such cases, oral testimony may be the only evidence available. Therefore, oral statements made by taxpayers to examiners represent direct evidence which must be thoroughly considered. Although self-serving, uncontradicted statements which are not improbable or unreasonable should not be disregarded. The degree of reliability placed on a taxpayer’s oral statements must be based on the credibility of the taxpayer and surrounding circumstantial evidence (IRM 4.10.7.3.10 below). The following general guidelines should also be considered:

In some instances a summary of a conversation or statement made by a taxpayer or witness should be prepared as documentation of the oral testimony and the taxpayer (or third party) should be requested to sign the document. It should always be signed by the examiner or examiners party to the interview. If the taxpayer or third party does not sign the documentation, then it is considered a report of the interview. This summary document should always contain:

Sometimes a more formal written statement is needed when documentation is not available and oral testimony will significantly affect the outcome of the case. In these cases examiners should assume that the case may eventually be resolved through litigation and should use formal written statements such as affidavits to record taxpayer or third party statements. An affidavit is an attested statement and has great validity when properly prepared and voluntarily given. Affidavits should be completed using Form 2311. Affidavits may be used:

If oral testimony is accepted or where oral testimony is not allowed, the workpapers should reflect a full development of the facts, oral statements, corroborating evidence and conclusions, including an explanation of the factors supporting the conclusion. "Per oral testimony" or "as reasonable" are insufficient unless the amounts are both de minimis and reasonable.

One of the basic rules of evidence is that witnesses (either taxpayers or third parties) can testify only about facts of which they have first hand knowledge. In other words, witnesses must be able to say the facts to which they testify are true.

Some issues are so difficult that the ordinary person needs assistance from someone more familiar with the subject to understand and resolve the matter at hand. An expert opinion is made by someone with the education and experience to qualify as an expert. Thus, expert testimony is needed.

Hearsay is what a witness says another person was heard to say. It is a secondary source of information and generally the reliability and trustworthiness of the evidence rests upon the veracity and reliability of a person giving testimony.

A common example of hearsay evidence is testimony of taxpayers’ representatives. It should therefore be recorded in the workpapers by examiners. Hearsay often leads to primary sources of information.

A statement that is harmful to the person making the statement is considered an "admission against interest" . When an admission is made voluntarily and with deliberation, it represents substantial evidence that the fact admitted is probably true.

An opinion is a belief not based on absolute certainty, or a judgment or evaluation of what seems to be true. Opinions are statements of personal feelings.

An opinion is not conclusive evidence of a fact. But opinions may be the only evidence available. Before accepting an opinion as evidence, the examiner should solicit other documentary evidence.

Opinions emphasize connotative meaning, that is, how someone feels about something; how they value it.

Opinions cannot be proven or verified. The only criterion for testing an opinion is whether it is acceptable or not, believed or not believed.

There are three primary types of opinions:

Observations are statements, judgements, or inferences of fact based on something observed. It is the act of recognizing and noting a fact or occurrence.

Documents are another form of evidence. Documentary evidence is generally regarded as having great probative (providing proof or evidence) value. Writings made contemporaneously with the happening of an event generally reflect the actual facts and show what was in the minds of the parties to the event.

While documentary evidence has great value, it should not be relied on to the exclusion of other facts. Facts can also be established by oral testimony and there will be occasions when courts will give greater weight to oral testimony than to conflicting documentary evidence.

Circumstantial evidence is evidence from which more than one logical conclusion can be reached. To be useful, both the credibility of the evidence and the reasonableness of the conclusion should be evaluated.

The best evidence rule requires that, when possible, original evidence be used. Therefore, examiners should always ask to the see original documents when there is reason to believe such documents are available.

Secondary evidence is used when original evidence is unavailable. Examples of acceptable secondary evidence are copies of original documents made by an examiner. In the absence of original documents, copies made by the examiner become the best evidence available.

The fact in dispute can, in some cases, be proved by showing other facts from which the fact can be inferred. In other words, as a matter of logic, an inference can be made from facts to decide a disputed fact.

An inference is a logical conclusion based on facts. Things beyond the range of what can be observed are inferences.

A determination of taxpayer credibility is most often required in connection with evaluating oral evidence presented by taxpayers (see IRM 4.10.7.3.2, Oral Testimony).

It is the responsibility of examiners to establish the taxpayer’s or third party’s credibility as part of the evaluation of oral evidence. Corroborative or contradictory details will have an important bearing on determining the reasonableness and probability of the statements.

If the statements of taxpayers, in the judgment of examiners, suggest some degree of unreliability, the decision to accept some, all or none of the oral statements as credible evidence should take this into account. However, unless taxpayers’ statements are found to be wholly unreliable, they must be given some weight in the conclusion reached.

When deductions (such as exemptions for dependents) are based on a substantial number of small expenditures all of which cannot be substantiated by documentary evidence, examiner judgement will be used to reach a reasonable determination. This is provided there is basis for allowance under the law and regulations.

These instructions are not intended to relieve taxpayers of the burden of proof, nor to sanction their failure to comply with the recordkeeping requirements of the law and regulations. Rather, they are intended to give examiners flexibility in the evaluation of incomplete evidence that is often encountered in everyday administration of the tax laws.

Examiners will exercise sound judgment to make reasonable determinations. The examiner must be sure that there is a basis for each allowance. This involves consideration of the following elements, which will vary according to the nature of the items involved and the circumstances of the case:

Close approximations of items, not fully supported by documentary proof, can frequently be established through reliable secondary sources and collateral evidence. For example, in questionable exemption cases, the fact that taxpayers cannot furnish documentary evidence in support of some of the amounts contributed need not be fatal to allowance of the exemption. Taxpayers may be able to demonstrate the total cost of support with reasonable certainty and satisfy examiners, for example, by third-party affidavits, that only nominal amounts were contributed by others.

Due consideration should be given to:

The practice of disallowing amounts claimed because there is no documentary evidence available, which will establish the precise amounts beyond any reasonable doubt (even though it is clear that the taxpayer did incur some expense) ignores commonly recognized business practice, as well as the fact that proof may be established by credible oral testimony. However, an arbitrarily computed portion of deductions in this situation will not be allowed merely for the purpose of expediting the closing of the case.

For instance, if a taxpayer cannot precisely document amounts spent for expenses while away from home on business, examiners may establish that reasonable amounts were spent for such items if taxpayers can clearly establish the following:

The extent of the allowance in (7) above should be governed by the principles stated in (4), (5) and (6) above. Allowances should be consistent with an appraisal of the facts and conservative to ensure that taxpayers do not profit from failure to keep required records of all elements of travel expenses.

The Law Enforcement Manual (LEM) contains tolerances to be observed for deficiencies and various types of penalties. Consult the applicable section as needed.

The definition of "significant" or " material" depends on an examiner’s evaluation of a return as a whole and the items that comprise the return. There are several factors, however, that examiners must consider when determining whether an item is significant. These factors include:

Generally, automatic adjustments (obvious errors or omissions on the return) in excess of tolerances are to be considered significant items.

The impact on compliance within a segment of the population, sector of the economy, or similarly situated taxpayers will be considered when making a decision whether or not to raise an issue.

Once an examination has begun and a decision is made to limit the scope of an examination on account of collectibility, examiners will complete the examination at the earliest possible opportunity.

In making the determination, the following should be considered:

The steps taken to determine whether to limit the scope of the examination are to be documented in the case file.

The scope of the examination may be limited on an employment tax examination. However, examiners should avoid taking any action that would give the taxpayer a safe haven. As an alternative, examiners should limit the number of returns examined. This approach minimizes the potential tax liability, while avoiding the likelihood of giving the taxpayer a safe haven.

When permission has been given to limit the scope of the examination due to collectibility, the following adjustments should be included in the audit report:

Judgment should be exercised when identifying which issues are to be considered "developed." The following areas should be considered in making the decision:

Once a determination to limit the scope has been made and approved, the determined tax liability will always be assessed.

In examinations conducted by examiners using field techniques, timing issues should be dealt with at the planning level. Generally, planning an examination to include short-term timing issues is not an effective use of resources. However, unplanned timing issues which are uncovered or arise as a correlative adjustment during an examination of non-timing issues should be made if cost effective to do so.

The pre-contact and/or examination plan should preclude the inclusion of timing issues, except those with long term, flagrant short term, indefinite, or permanent deferral features.

Coordinated Issues may be proposed by LMSB Technical Advisors to ensure that key issues within particular industry or issue areas are raised, developed and resolved on a consistent basis. The purpose of Coordinated Issues is to provide examiners with guidance on significant national issues that are not being resolved consistently. Coordinated issues establish uniform positions within industry or issue areas. Examiners cannot deviate from such positions without the concurrence of the responsible LMSB Industry/Issue Team. See IRM 4.40.1.1.1.8 for more information on Industry/Issue teams.

Visit the LMSB Intranet web site for a listing of coordinated issues.

For more information on Coordinated Issues, see IRM 4.40.3.

The term whipsaw refers to situations where the government is subjected to conflicting claims by taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and correct reporting of the transaction may benefit one and adversely impact the other for tax purposes.

A potential whipsaw situation could be present in almost any transaction; however, experience has shown the following issues to generate the majority of whipsaw cases:

When whipsaw issues require ( i.e. material tax consequence), an examination of both parties, examiners will secure the name, address, and the tax identification number (TIN) of the related party. A transcript will be requested to determine the related party's examination status.

The primary objective of requiring support examinations of these returns is to assure consistent treatment of related taxpayers or taxpayers involved in the same transaction.

This section focuses on techniques for conducting closing conferences, presenting examination findings, explaining proposed adjustments, and soliciting agreements. Each situation is unique and techniques vary widely, but there are basic procedures which should always be followed. See IRM 4.10.8 for report writing requirements.

Generally, substantive issues should be proposed and discussed with taxpayer and/or his representative in a face to face meeting. In some circumstances, a telephone conference or call may suffice, but this would be the exception.

Generally, a report will not be mailed to the taxpayer prior to discussing findings and proposed issues with the taxpayer and/or his representative. Exceptions to this rule would be for the following:

A revised report may be mailed to the taxpayer rather than presented in a face to face meeting.

To facilitate discussion at closing conferences, the examiner may provide the taxpayer with a listing and brief description of items to be discussed.

The examiner should choose the order in which issues will be presented at the closing conference. The order can be modified during the conference. While there is no "right" order or order which is best for all occasions, it is generally easier to resolve factual issues or issues involving an established application of law. These issues should be discussed first. Less certain issues should be discussed last.

Closing conferences vary in the degree of formality, but generally the following areas are covered:

This section provides additional information for the processing of office examination cases. See IRM 4.10.7.5.1 for general information.

If the taxpayer says he has additional information to consider at the end of the initial meeting, this should not delay the issuance of a report. The taxpayer should be informed that the report will be revised or voided if adequate additional information is provided. The general rule is to issue a report at the conclusion of the initial appointment. The additional information the taxpayer wants considered can be mailed or faxed in for consideration. The examiner and taxpayer should agree on a mutually acceptable date (generally 15 days) for submission of additional information to be considered.

If the examiner do not issue a report at the conclusion of the initial appointment, the examiner and the taxpayer should agree on a mutually acceptable date (generally 15 days) for submission of additional information needed. The examiners will advise the taxpayer that if the additional information is not received, or is inadequate, an examination report will be issued based on the information currently available.

A focused IDR, using Form 4564, Information Document Request, should be issued to request additional information..

The examiner should explain to taxpayer that they are entitle to a managerial conference if they do not agree with the examination findings. The examiner should advise that a managerial conference is optional and has no impact on the taxpayer's right to request an appeals hearing.

When the communication process between the examiner and the taxpayer is working well, the examiner will know at the end of field work which issues are agreed and which are unagreed.

If the desired level of communication and cooperation is not achieved, once the examination is completed, examiners will explain the basis of the proposed adjustments to taxpayer and/or his representative. The examiner should solicit agreement to the issues and attempt to secure agreement to the proposed tax liability. Examiners should be prepared to cite the law, regulations, rulings, and court decisions on which their conclusions are based and provide the taxpayer with copies of workpapers explaining the proposed adjustments.

In the examination of large, complex tax returns, numerous issues will likely be proposed. Adjustments need to be fully developed before they are presented to taxpayers for review. If adjustments are not adequately developed, the review process may take longer. Records should be maintained of proposed adjustments and every effort taken to secure taxpayers’ responses in a timely manner.

Form 5701 may be used to present proposed adjustments to taxpayers. Form 5701 is a three part form designed to provide written record of proposed adjustments. It is distributed as follows:

Use of Form 5701 is not mandatory. Any method which provides a record of what was presented to taxpayers may be used.

The issuance of Form 5701 is recorded on the Issue Control Sheet, Form 5700. Form 5700 is a log which provides a record of outstanding Forms 5701, along with their current status.

Preparation of Form 5701 must be tailored to the peculiarities of the issue, the taxpayer, and the expected agreed or unagreed status of the proposed adjustment. Form 5701 may serve as a cover sheet for a Form 886A, Explanation of Items. This facilitates incorporation of an explanation of the issue into the Revenue Agent’s Report.

The suggested format for preparation of an issue proposal is as follows:

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) changed examination and administrative procedures for partnership examinations. The Sub-Chapter 5 Revision Act of 1982 made similar revisions to S corporations. Under the 1982 Acts, examinations, appeals, and judicial proceedings are, in general, conducted at the entity level. Closing conferences and issue proposals relating to TEFRA entities must by law follow rigid guidelines. Refer to the Tax Shelter/TEFRA Handbook for a complete discussion of TEFRA examinations and procedures.

Payment for agreed deficiency cases should be solicited and secured at the closing conference whenever possible. Taxpayers should be informed of the following benefits of making a current payment:

If taxpayers state they cannot pay, ability to pay should be determined. The interview should include the following dialogue:

If taxpayers indicate that they will not be able to full pay at the conclusion of the examination or upon receipt of first notice, examiners have the additional responsibility to discuss installment agreement provisions.

If taxpayers state a willingness to pay, but do not meet the installment agreement criteria, examiners, through their group manager, will involve Collection.

Case files must be documented to reflect the taxpayers’ responses and actions taken to verify the taxpayers’ statements, if appropriate.

IRC section 7491(a)(1) shifts the burden of proof in a court proceeding from the taxpayer to the Service if the taxpayer produces credible evidence regarding the factual issues relevant to determining tax liability and also satisfies the criteria below.

IRC section 7491(b) places the burden of proof on the Service in any court proceeding when the Service reconstructs any item of the taxpayer’s income using solely statistical information. See IRM 4.10.4.6.1.3 for more detailed discussion on the use of Bureau of Labor Statistical (BLS) data.

IRC section 7491(c) states that the Service now has the burden of production in a court proceeding when the issue is a penalty, an addition to tax, or an additional amount imposed by the Internal Revenue Code. In any court proceeding, the IRS must first present evidence that imposition of the amount is appropriate. Only then must the taxpayer assume the burden of persuasion to raise appropriate defenses, such as reasonable cause, to the imposition of the penalty. IRC section 7491(c) applies only to individuals.