SECTION 2. EXAMINATION EARLY

REFERRAL PROCEDURES

.01 In general. Except as provided in section 2.03 of this revenue procedure, a

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tance. Taxpayers are encouraged to request the simultaneous Appeals/Competent Authority procedure described in section 8 of Rev. Proc. 96–13, 1996–1 C.B. 616, or a subsequent revenue procedure. If a taxpayer enters into a settlement with Appeals (including an Appeals settlement through the early referral process), and then requests Competent Authority assistance, the U.S. competent authority will endeavor only to obtain a correlative adjustment with the treaty country and will not take any actions that would otherwise amend the settlement. See section 7.05 of Rev. Proc. 96–13; or

(6) that is part of a whipsaw transaction. (The term “whipsaw” refers to thesituation produced when the government is subjected to conflicting claims of taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and differing characteristics of transactions will benefit one and hurt the other for tax purposes.)

.04 Initiating the early referral re- quest. A request for early referral must be submitted in writing by the taxpayer to the case/group manager. The case/group manager may suggest that a taxpayer make such a request.

.05 Statement of issues and position. The taxpayer’s early referral request must:

(1) identify the taxpayer (and, where applicable, all related persons involved in the issues) and the tax periods to which those issues relate;

(2) state each issue for which early referral is requested; and

(3) describe the taxpayer’s position with regard to the relevant early referral issues. This statement must contain a brief discussion of the material facts and an analysis of the facts and law as they apply to each early referral issue.

.06 Perjury Statement. The early referral request, and any supplemental submission (including additional documents), must include a declaration in the following form:

Under penalties of perjury, I de- clare that I have examined this re- quest [or submission], including accompanying documents, and to the best of my knowledge and be- lief, the facts presented are true, correct, and complete.

This declaration must be signed by any person currently authorized to sign the taxpayer’s federal income tax returns.

.07 Signatures. The early referral request must be signed by the taxpayer or the taxpayer’s authorized representative. It is preferred that Form 2848, Power of Attorney and Declaration of Representative, be used to designate an authorized representative, with regard to an early referral request under this revenue procedure.

.08 Notification of action. The case/ group manager will, where feasible, notify the taxpayer of the decision to accept or reject an issue in the early referral request within 14 days of receiving the request.

.09 Appeal of denial of early referral request. There is no formal taxpayer appeal if the early referral request is denied in whole or in part; however, the taxpayer can request a conference with the Internal Revenue Service supervisor of the case/group manager who denied the early referral request.

.10 Administrative appeal at a later time. If the case/group manager does not approve the early referral request with respect to any issue, the taxpayer retains the right to pursue the administrative appeal of any proposed deficiency related to that issue at a later time.

.11 Issuance of notice of proposed ad- justment or explanation of adjustment. The District will complete a Form 5701, Notice of Proposed Adjustment, or an equivalent form (the Notification Form) for each early referral issue approved pursuant to this revenue procedure. The District will send the Notification Form to the taxpayer generally within 30 days from the date the early referral request was accepted. The Notification Form will describe the issue and explain the District’s proposed adjustment. The issuance of the Notification Form for the early referral issue is not treated as the first letter of proposed deficiency for purposes of computing increased interest under § 6621(c), or for the award of administrative costs under § 7430(c).

.12 Taxpayer response to Notification Form. The taxpayer must respond in writing to each of the District’s proposed adjustments set forth in the Notification Form. The response must contain an ex

planation of the taxpayer’s position regarding the issues. The response shall be submitted to the case/group manager within 30 days (unless extended by the case/group manager) from the date that the proposed adjustment (the Notification Form) is sent to the taxpayer. The procedural requirements of sections 2.06 and 2.07 of this revenue procedure (perjury statement and signatures) also apply to the taxpayer’s response to the Notification Form. If a response is not received for any issue within the time provided, the taxpayer’s early referral request will be considered withdrawn regarding that particular issue without prejudice to the taxpayer’s right to an administrative appeal at a later date. See section 2.18 of this revenue procedure.

.13 Early referral file sent to Ap- peals. Once the taxpayer has responded to the Notification Form, the District will send the early referral file to Appeals. Appeals will then take jurisdiction over the issues accepted for early referral. All other issues in the case remain in the District’s jurisdiction. The early referral file should include copies of:

(1) applicable portions of tax returns and workpapers;

(2) the approved early referral request;

(3) the Notification Form; (4) the taxpayer’s written response to the Notification Form;

(5) the District’s response to the taxpayer’s position, if any; and

(6) an estimate of the potential tax effect of the proposed adjustment.

.14 Resolving the early referral is- sues. The taxpayer’s written response to the Notification Form generally serves the same purpose as an Appeals protest. Established Appeals procedures, including those governing submissions and taxpayer conferences, apply to early referral issues. See section 601.106 et seq. of the Statement of Procedural Rules.

.15 Agreement reached. If an agreement is reached with respect to an early referral issue generally, a Form 906, Closing Agreement on Final Determination Covering Specific Matters, is prepared. See § 7121 and also Rev. Proc. 68–16, 1968–1 C.B. 770, which describes the preparation of closing agreements. The closing agreement is used to compute the

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corrected tax as a partial agreement prior to or concurrently with the resolution of any other issues in the case. If an early referral issue results in a refund or credit requiring a report described in § 6405 that must be submitted to the Joint Committee on Taxation, the report must include a copy of the proposed closing agreement signed by or for the taxpayer, but not signed by or on behalf of the Commissioner. The Service will not sign the proposed agreement until after review by the Joint Committee.

.16 Agreement not reached. If early referral negotiations are unsuccessful and an agreement is not reached with respect to an early referral issue:

(1) Taxpayers may then request mediation for the issue, provided the early referral issue meets the requirements for mediation. See Announcement 98–99, 1998–46 I.R.B. 34, or any subsequent procedure. If mediation is not requested, Appeals will close the early referral file and return jurisdiction over the issue to the District. Appeals will send a copy of the Appeals Case Memorandum for the issue to the case/ group manager.

(2) Appeals will not reconsider an unagreed early referral issue if the entire case is later protested to Appeals, unless there has been a substantial change in the circumstances regarding the early referral issue.

.17 Effect of conclusion of examina- tion.

(1) If the District concludes its examination of any issues not referred as part of the early referral process, it will issue a preliminary notice of deficiency (“30 day letter”) with respect to unagreed issues. The letter will include any issues referred under the early referral process that are still pending in Appeals at the time the examination is concluded. The issuance of the 30 day letter generally will constitute the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review for purposes of the increased underpayment rate of interest for large corporations as provided in § 6621(c), or for the award of administrative costs under § 7430(c).

(2) If the only unagreed issues present in the case at the time the examination is concluded are issues that were considered by Appeals under the early referral process and returned to the Dis

trict unagreed, no 30-day letter will be issued. Instead a statutory notice of deficiency (“90-day letter”) will be issued. If a 90-day letter is issued instead of the 30day letter, the 90-day letter will constitute the first letter of proposed deficiency for purposes of §§ 6621(c) and 7430(c).

.18 Appeals consideration after 30- day letter. If Appeals takes jurisdiction of the remaining issues in the case following the issuance of a 30-day letter, all issues including all early referral issues that have not yet been settled by Appeals will be considered under established Appeals procedures. The only exception is previously considered early referral issues described in section 2.16(2) of this revenue procedure. These issues will not be reconsidered.

.19 Withdrawal from the early refer- ral process. If the taxpayer withdraws an early referral request with respect to one or more of the early referral issues after Appeals has taken jurisdiction over the issues, such withdrawal will be treated in the same manner as if no agreement of those early referral issues was reached. See section 2.16 of this revenue procedure. The withdrawal request must be communicated in writing to the Appeals Officer assigned the early referral.