Investor lists are forwarded to OTSA using a standard spreadsheet. Contact Financial Services Program Analyst for a copy of the spreadsheet. A copy of all investor lists must also be sent to the Senior Program Analysts, Tax Shelters – Financial Services.

The list should include the following information:

OTSA incorporates the participant information in its database, identifies similar or related activity and coordinates examination activity among the various examination groups.

OTSA forwards investor information to the appropriate LMSB Industry Director(s) and other Operating Division officials, as necessary.

Examiners are responsible for ensuring that returns are controlled using the correct project code, and should correct the code as necessary. For trust cases, the project code is normally 233, but examiners should refer to Document 6036, Examination Division Reporting System Codes Booklet, for project codes.

To control the statute of limitations examiners should:

If it has not already been done, examiners request other years and related entities to bring the examination current as warranted.

The initial contact with the taxpayer is Letter 3407, Letter Requesting Copy of Trust Instrument under Regulation 1.6012, known as the "Return Perfection Letter" .

If PSP has not already done so, examiners should send Letter 3407 and required enclosures to the trustee as soon as possible.

The letter is addressed to the trust at the last known address, Attn: Trustee. The name of the trustee is not included, in case the trustee has changed. See IRM Exhibit 4.32.2-18, Sample Letter 3407. See IRC §6212, Notice of Deficiency.

Examiners should enclose a Form 56, Notice Concerning Fiduciary Relationship, for the convenience of the trustee, and should allow the trustee two weeks to provide the requested documents.

Form 56 or its equivalent is required to establish the fiduciary relationship.

If trust instruments are received in response to Letter 3407, examiners should analyze them for indications of an abusive promotion.

The primary focus of the analysis is to determine whether the grantor retained control over assets transferred to a trust. Examiners should be alert for indicators of an abusive trust and document those factors that are present. However, even if the factors are not present in the documents, they may be present in the operation of the trust; thus, analysis of the documents must be accompanied by investigation into the actual operation of the trust.

Examiners should document who created the trust, the date it was created, and the name(s) of the trustee(s) at the time it was created, along with establishing the successor trustee(s), if any.

Examiners should document the source of all property assigned to the trust or to related trusts.

Other provisions for examiners to address:

Examiners should copy the trust instrument if possible, and include the copies in the case file. If the trustee makes the documents available but does not permit them to be copied, examiners should quote the pertinent parts of the documents verbatim to support their determination and summons the trustee for a copy of the trust instrument. See IRM 24.5, Summons Handbook, for additional information on summonses.

If a trust instrument is not received, or if the trust documents do not identify the grantor, or if the economic reality of the transaction is in question (such as in abusive trust situations), examiners should initiate other methods to determine the true owner(s) of the trust.

To track the flow of funds, examiners should consider the following actions:

For trust cases, items which should be added to the time-line include transfers of assets between grantor and trusts, and any asset purchases, sales, refinancing, or other transactions that indicate the grantor’s continuing control over the assets. One such example is shown in IRM Exhibit 4.32.2-21, Example of a Time-Line.

Examiners should be alert to the possibility that TEFRA procedures may be required, and should initiate TEFRA procedures as soon as possible to link the returns.

TEFRA procedures are required if the trust is a partner in a partnership or a member of a limited liability company treated as a partnership, or if examiners determine that a trust is a partnership for tax purposes AND the examiner is going to examine the partnership return. See IRC §6231, Definitions and Special Rules, for definitions as to situations in which TEFRA procedures are required. See TEFRA Procedures at IRM 4.31.2, TEFRA Examinations - Field Office Procedures (IRM 4.31, Flow-Through Entity Handbook).

If a taxpayer is uncooperative, examiners should not wait until the initial interview to initiate the "linking" procedures required for TEFRA returns.

For abusive trusts, examiners should not change the Project Code to the standard TEFRA Project Code. Make sure that the Campus is notified of the need to maintain the original project code. If the campus is not notified, the Campus converts the project code to the standard TEFRA project code.

Examiners should prepare a Form 4564, Information Document Request, (IDR) for classified issues. A standardized IDR for abusive trusts is available at IRM Exhibit 4.32.2-22, Sample Form 4564 for Trusts. Examiners should revise the standardized IDR as appropriate, if both abusive and non-abusive issues are on the tax return. In the event that trustees fail to respond to the standardized IDR or if the trustees' response is incomplete, examiners should summons the trustees for the requested documents. See IRM 24.5, Summons Handbook, for additional information of summonses.

Examiners should schedule an appointment with the fiduciary using normal pre-contact procedures. See IRM 4.10.2.6, Pre-Contact Planning of Examination Activities. Generally examiners send Letter 2205, Initial Contact Letter, to the trust, Attn: Trustee, with required enclosures. The actual name of the trustee is not included, in case the trustee has changed. However, if it is necessary to use a different letter, examiners obtain the approval of the group manager.

If a Form 2848, Power of Attorney and Declaration of Representative, is received examiners compare the taxpayer’s signature on the return. For Trust cases compare the signature to the Form 56 to ensure that the trustee has properly appointed the representative. If it is necessary to perfect the Form 2848, the examiner should return the form to the representative using a letter such as that shown at IRM Exhibit 4.32.2-23, Letter to Perfect Form 2848.

If the appointment has been scheduled by telephone, examiners should use Letter 3253, Taxpayer Appointment Confirmation Letter, to confirm the appointment with the taxpayer, or Letter 3254, Representative Appointment Confirmation Letter, to confirm the appointment with a representative. Form 4564, Information Document Request , should accompany this letter.

Examiners should prepare a questionnaire for the initial interview. A standardized questionnaire is available at IRM Exhibit 4.32.2-24, Standard Questionnaire for Abusive Trust Examinations, but examiners should revise the questionnaire based on the facts as developed during the pre-contact stage.

Explain that trusts do not normally operate businesses and ask the taxpayer to explain the reasons for using a trust to operate the business.

Examiners should question taxpayers about frequent travel to the Caribbean or other areas that contain many offshore financial centers. Ask the taxpayer about any dealings with promoters of trust arrangements. See IRM Exhibit 4.32.2-24, Standard Questionnaire for Abusive Trust Examinations, for preplanning guidance and sample interview questions related to all abusive trusts.

This section contains procedures for closing abusive trust cases.

In a CRT the grantor is generally allowed an income tax charitable deduction for the present value of the remainder interest (determined under IRC §7520, Valuation Tables). At the end of a specified number of years or at the death of named individuals, the remainder interest in the trust must be transferred to a qualified charity, or must be retained by the trust and used strictly for charitable purposes.

There are 2 main types of CRTs:

A CRT is a trust that has characteristics of both a charitable entity and a taxable (i.e., non-charitable) entity.

A CRT must file Form 5227, Split-Interest Trust Information Return, which is an information return, and may also file Form 1041-A, U. S. Information Return Trust Accumulation of Charitable Amounts .

A CRT must file Form 5227, Split-Interest Trust Information Return, annually. It is also required to file Form 1041–A, U.S. Information Return Trust Accumulation of Charitable Amounts, annually, unless all net income is distributed to beneficiaries.

The entity affects both TE/GE and Compliance, so it may become necessary to make a referral to TE/GE to have the entity examined.

The examination of CRTs is limited to the issues and procedures relating to the income tax deduction claimed for a charitable contribution to a CRT, and the flow-through income that must be reported by the income beneficiaries of a CRT. The requirements for a valid CRT are specified in IRC §664.

When examining whether the charitable remainder trust's income beneficiaries have properly reported the flow-through income from the trust, agents should look for evidence that the CRT has been used to convert appreciated assets into cash while income beneficiaries avoid tax on the distributions attributable to the disposition of the assets. Suspect transactions may utilize prepaid forward contracts or loans to obtain cash for distributions. One or more partnerships may be inserted in the transaction. Treas. Reg. § 1.643(a)-8 should be applied in appropriate cases. Agents should consult with Area Counsel in these cases.

A NECT is a trust that does not qualify for tax-exempt status and therefore is required to pay tax on its taxable income. While a NECT is not tax-exempt, contributions to a NECT may be deductible.

A NECT is officially under the jurisdiction of TE/GE.

A NECT is required to file Form 990-PF, Return of Private Foundation, or Form 990, Return of Organization Exempt From Income Tax, depending on whether it is more properly described as a private foundation or as a public charity under IRC §509(a).

A NECT is also required to file a Form 1041, unless it has no taxable income. Rev. Proc. 83-32, 1983-1 CB 723, Tax Forms and Instructions . When a Form 1041 is required, it will be under the jurisdiction of SB/SE. In situations where a Form 1041 is not required, (i.e. when there is no taxable income) SB/SE examiners do not examine the Form 990 or 990-PF that may have been filed by the entity. TE/GE are responsible for the examination of these returns, and SB/SE examiners should make the appropriate referral.

A NECT is a "conduit" , in which all income received is funneled through to charity, therefore contributions to it are allowed as deductions. In valid circumstances, these entities are most frequently encountered in situations where a trust has been created, but has not yet applied for tax-exempt status.

The following pre-audit procedures relate to an examination of a Form 1041:

After a perfection Letter 3407, has been issued and the requested information received, examiners need to determine if the issues warrant an examination. Many questions and issues can be resolved without the need of an examination simply by reviewing the trust agreement or the will.

The following sections relate to the examination of charitable trusts.

For countries with which the United States has treaties or tax information exchange agreements, examiners generally may request information that is either in the other country's possession or obtainable under the laws of the particular country. Examiners may not request information that would disclose any trade or business secret. All requests for foreign information are made through the Office of Director, International (LMSB), who is the U.S. Competent Authority for tax treaties and TIEAs.

The competent authorities of the treaty countries exercise discretion and judgment on both requesting and furnishing information. In general, the competent authority of one country will not request information from a treaty partner unless:

All requests for assistance in obtaining foreign information, testimony or documents must be made through the U.S. Competent Authority, and should:

IRM 4.61.2.5, Formal Document Request, and IRM Exhibit 4.61.2–1, Obtaining Information, Books and Records of U.S. & Foreign Entities, contain details on these procedures.

IRC §6105 limits the disclosure of information received by the IRS from a foreign government and generally prohibits the disclosure of "tax convention information." Because of the treaty secrecy provision tax treaty information may not ordinarily be disclosed to state tax agencies, and other Federal, state, or local governmental agencies. In considering the release of information received from treaty partners, examiners should consult their Disclosure Officers and IRM 11.3.25, Disclosure to Foreign Countries Pursuant to Tax Treaties, and IRC §6103(k)(4) and IRC §6105.

Within the Office of Director, International (LMSB), who is the US Competent Authority for tax treaties and TIEAs, are the IRS Tax Attachs located in embassies abroad and Revenue Service Representatives (RSRs) located in certain cities in the U.S., who have been delegated authority to request and receive information from our tax treaty and TIEA partners. Each of the Tax Attachs/RSRs is responsible for geographical areas, usually consisting of several countries. These individuals can assist you with your information requests and can provide answers regarding general information gathering procedures in a particular country.

Tax Attachs/RSRs can also give assistance in obtaining public records, arranging for voluntary witness interviews and other kinds of assistance as may be allowed under the laws of treaty and non-treaty jurisdictions. For a current listing of Tax Attachs and RSR assignments and a list of the countries covered, refer to the LMSB intranet website under: International/Director International/Oversees Operations. Also, refer to IRM 4.60.1, Exchange of Information, for procedures for exchange of information with foreign countries in general.

See IRM 4.32.2.3.7(4), Joint International Tax Shelter Information Centre (JITSIC)for designation of JITSIC members to act as Competent Authorities.