LMSB inspection of corporate officers' returns: IRM procedure vs. actual practice.

• Author: Brennan, James E.
• Position: Large and mid-size business, Internal Revenue Manual

When the IRS's Large and Mid-size Business (LMSB) Division issues an initial information document request (IDR) to a corporate taxpayer, one topic that corporate officers are often concerned about is the inspection of their individual income tax returns. The corporation's accountant or representative is likely to be involved in discussions of this "compliance check" aspect of the corporate examination. A corporate officer may have questions such as:

* Can they do this?

* Does this mean I will be audited personally?

* What is the downside if we don't cooperate?

* Why don't they simply inspect the original return that I filed?

* I want to appear cooperative; what do I have to hide?

These are all very realistic and common questions.

A good place to begin the search for answers is Internal Revenue Manual (IRM) Section 4.46.3.6.7 (rev. 3/1/06). The manual instructs IRS examiners to verify that the corporate officers, key executives, and highly Compensated employees have filed the required personal income tax returns. The Service should internally requisition the return it wants to inspect. Other internal IRS guidance (Corporate Executive Compliance FAQs) suggests that only if the return is not available to the requesting agent internally should a letter (Form 3996) be sent to the corporate officer requesting a copy for inspection purposes. In no event should a request for an officer's return be made via the corporate taxpayer.

This latter directive is likely being followed by most LMSB agents, but it is interesting to note the frequency with which certain agents use Form 3996 initially without trying to obtain the document internally. If the IRS performs its inspection internally, the procedure will be invisible to the corporate officer unless a decision to examine the return is made. It may be that the decision to examine is not very common.

Although an inspection is not an...