IRS UPDATES CONDITIONS FOR REOPENING CLOSED CASES.

Rev. Proc. 94-68

SECTION 1. PURPOSE

The purpose of this revenue procedure is to amplify, update, and restate the conditions set forth in Rev. Proc. 85-13, 1985-1 C.B. 514, under which a case closed after examination in the office of a District Director of Internal Revenue may be reopened to make an adjustment unfavorable to the taxpayer. This revenue procedure also contains a list (not all inclusive) that describes (1) certain contacts by the Service with a taxpayer that do not constitute an examination, inspection, or reopening of an examination, and (2) certain types of cases in which reconsideration is not considered a reopening of the case.

SECTION 2. CHANGES

.01 Section 4.02(6)(d) is amended to reflect an increase under section 6405 of the Internal Revenue Code in the threshold amount of overpayment subject to Joint Committee review from $200,000 to $1,000,000.

.02 A new section 4.02(7) is added to clarify that certain contacts with Coordinated Examination Program ("CEP") taxpayers are not considered examinations or inspections of books of account for purposes of section 7605(b).

.03 A new section 4.02(8) is added to permit a second inspection of a CEP taxpayer's books of account with respect to a particular tax year under certain circumstances and conditions.

.04 A new section 4.02(9) is added to state that a contact by the Service with a taxpayer pursuant to an Advance Pricing Agreement ("APA") prefiling conference, or the evaluation and processing of an APA request, annual report, or renewal request under Rev. Proc. 91-22, 1991-1 C.B. 526, is not an examination, inspection, or reopening.

.05 A new section 4.02(10) is added to state that an adjustment to a taxpayer's income tax return arising from a discrepancy disclosed during Employee Plans and Exempt Organizations compliance activities does not constitute an examination, inspection, or reopening if the adjustment is not made in conjunction with an examination of the taxpayer's income tax return.

.06 A new section 4.02(11) is added to state that a contact with a taxpayer to evaluate the taxpayer's data processing and accounting systems in order to determine whether the taxpayer may limit its retention of machine-sensible records, for purposes of Rev. Proc. 91-59, 1991-2 C.B. 841, is not an examination, inspection, or reopening.

SECTION 3. SCOPE

This procedure pertains to all cases, regardless of type of tax, in which the prior audit and conference action, if any, did not extend beyond the jurisdiction of the office of the District Director. It does not apply to cases previously closed after consideration by Appeals Offices or District Counsels.

SECTION 4. DEFINITIONS

.01 Closed Case:

(1) A case agreed at the district level is considered closed when the taxpayer is notified in writing, after district conference, if any, of adjustments to tax liability or acceptance of the taxpayer's return without change.

(2) An unagreed income, estate, or gift tax case is considered closed when the period for filing a petition with the United States Tax Court specified in the statutory notice of deficiency issued by the District Director expires and no petition was filed.

(3) An unagreed excise or employment tax case is considered closed when the period for filing a protest and requesting consideration by the Appeals Office specified in the preliminary letter expires and no protest or request for Appeals consideration is filed.

.02 Examinations, Inspections, and Reopenings:

(1) A contact with a taxpayer to correct mathematical or clerical errors is not an examination, inspection, or reopening.

(2) A contact with a taxpayer to verify or adjust a discrepancy between the taxpayer's tax return and an information return is not an examination, inspection, or reopening. For this purpose, an information return includes a return and an amended return filed by a partnership, fiduciary, or small business corporation.

(3) A contact to verify a discrepancy disclosed by an information return matching program may include inspection of the taxpayer's books of account, to the extent necessary to resolve the discrepancy, without being considered an examination, inspection, or reopening within the meaning of section 7605(b). A contact to verify an item of income shown on an information return to a tax return is not a verification of a discrepancy where such item of income is not required to be shown as a specific line item on a tax return. For example, insurance companies making payments to a doctor of $600 or more during a calendar year must furnish a Form 1099-MISC to the doctor. The doctor is only required to include that income with other gross receipts on Schedule C, Form 1040. If the doctor reported gross receipts of a larger amount than the total amount of income shown on Form 1099-MISC, there would not be a discrepancy between the information returns and the income tax return.

(4) A contact with an investor to verify the accuracy of, or the need for, a Tax Shelter Registration number is not an examination within the meaning of section 7605(b). To the extent that the contact is to determine the need for a Tax Shelter Registration number, the information sought would be limited to obtaining the name and address of the promoter.

(5) The adjustment of an unallowable item, or an adjustment resulting from other types of service center correction programs, is not considered to be an examination. Therefore, a subsequent examination does not constitute a reopening of a case closed after examination.

(6) Reconsideration of a case is not considered a reopening and, therefore, requires no approval or issuance of a form letter (DO/IO/SC) for:

(a) cases involving section 1311;

(b) cases involving the year of deduction of a net operating loss carryback or similar type of carryback under other provisions of the Code;

(c) cases in which there have been involuntary conversions and the taxpayer has not recomputed his/her tax liability when he/she did not replace property within the time provided by section 1033; or

(d) cases involving an overpayment in excess of $1,000,000, subject to review by the Joint Committee on Taxation under section 6405.

(7) A contact with a CEP taxpayer requesting the written statements provided for in Rev. Proc. 94-69, or notifying a taxpayer that it no longer qualifies for the Coordinated Examination Program, is not considered an examination. Therefore, any subsequent examination does not constitute a reopening.

(8) In the case of a CEP taxpayer, the Service may inspect the taxpayer's books of account with respect to tax periods not currently under examination in order to verify the accuracy of adjustments to an item or items for those periods (a) in which the taxpayer made an "accelerated issue resolution" request, or (b) in accordance with an "accelerated issue resolution" agreement between the Service and the taxpayer. See Rev. Proc. 94-67. An inspection made pursuant to this paragraph relating to any tax period will not be considered an inspection or an examination and will not preclude a subsequent inspection or examination of that tax period under section 7605(b) provided the taxpayer so agrees in writing prior to the inspection made pursuant to this paragraph.

(9) A contact by the Service with a taxpayer pursuant to an APA prefiling conference, or the evaluation and processing of an APA request, annual report, or renewal request under Rev. Proc. 91-22, 1991-1 C.B. 526, is not an examination, inspection, or reopening.

(10) An adjustment to a taxpayer's income tax return arising from a discrepancy disclosed during Employee Plans and Exempt Organizations compliance activities as described in IRM 7(10)12, "Returns Within the Jurisdiction of Examination Division", does not constitute an examination, inspection, or reopening if the adjustment is not made in conjunction with an examination of the taxpayer's income tax return. A contact to verify a discrepancy between the income tax return and the books and records of an employee plan or an exempt organization may include inspection of the taxpayer's income tax records to the extent necessary to verify the accuracy of the discrepancy without being considered an examination, inspection, or reopening within the meaning of section 7605.

(11) A contact with a taxpayer to evaluate the taxpayer's data processing and accounting systems in order to determine whether the taxpayer may limit its retention of machine-sensible records, for purposes of Rev. Proc. 91-59, 1991-2 C.B. 841, is not an examination, inspection, or reopening.

SECTION 5. POLICY

.01 The Internal Revenue Service will not reopen any case closed after examination by a district office or service center to make an adjustment unfavorable to the taxpayer unless:

(1) there is evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of a material fact;

(2) the prior closing involved a clearly defined substantial error based on an established Service position existing at the time of the previous examination; or

(3) other circumstances exist that indicate failure to reopen would be a serious administrative omission.

.02 All reopenings must be approved by the Chief, Examination Division (District Director in Streamlined Districts), or Chief, Compliance Division, for cases under his/her jurisdiction. If an additional inspection of the taxpayer's books of account is necessary, the notice to the taxpayer required by section 7605(b) must be signed by the Chief, Examination Division (District Director in Streamlined Districts), or Chief, Compliance Division, for cases under his/her jurisdiction.

SECTION 6. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 85-13, 1985-1, C.B. 514, is superseded.

SECTION 7. EFFECTIVE DATE

This revenue procedure is effective October 31, 1994.

SECTION 8. DRAFTING INFORMATION

The principal author of this revenue procedure is Gerald A. Consalvi of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Consalvi on (202) 622-4940 (not a toll-free call).