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What Occurs During a Compliance Check

What To Expect in a Compliance Check

What occurs in a Compliance Check?

A compliance check will generally include the review of the following filed tax returns and information returns:

  • Form 941, and associated Forms 941c and 843
  • Form 945
  • Forms W-2, W-3, and correction Forms W-2c and W-3c
  • Forms W-4
  • Form W-9
  • Forms 1099, 1096
  • Forms 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons)
  • Other forms as applicable

The FSLG Specialist will:

  • Verify that all appropriate returns were filed timely.  If not, discuss filing deadlines and associated penalties.  Secure delinquent returns, if appropriate, and submit for processing.
  • Verify that all deposits were made timely.  If they were not, discuss deposit requirements and failure to deposit penalties.
Scheduling Opening Interview Generally, an FSLG Specialist will contact the government entity by telephone to schedule an appointment to conduct a compliance check interview. During this call, the Specialist will discuss with the taxpayer the difference between a compliance check and an examination. The Specialist will request information and/or documents from the taxpayer that are needed to perform the compliance check. Letter 3575, FSLG Compliance Check Opening Letter, will be issued to the taxpayer along with Publication 1 (Your Rights as a Taxpayer), Notice 609 (Privacy Act Notice), Publication 3114 (Compliance Checks) and Form 4564, Information Document Request.
Information Document Request An IDR is issued to a taxpayer to request information and/or documents the Specialist needs to review to perform the compliance check.  An IDR sent with the Letter 3575, FSLG Compliance Check Opening Letter, will list the specific information and documents the taxpayer should have available at the initial appointment.  Another IDR may be issued to the taxpayer following the initial interview to request information and documents needed to support issues that were discussed during the initial interview but not available at that time.  Additional IDRs may be sent to the taxpayer until all compliance issues are resolved.  IDRs will always have a deadline for information to be received. If the organization believes it needs more time to gather and provide the information, it should contact the FSLG Specialist to discuss a more reasonable date.  The compliance check process can be completed in a professional and timely manner when the IRS and Taxpayer/POA work cooperatively together.
Additional items that will be reviewed during compliance check

Internal controls and evaluation procedures the taxpayer used for:

a. Determining whether a vendor is an individual or corporation
b. Tracking vendors’ TINs
c. Tracking payments to vendors
d. Determining whether or not to file information returns.

This will help determine whether or not the taxpayer has a process in place to file all of the required Forms 1099.

Filed information returns for indications that the amounts and information reported are complete and correct:

  • Check Forms W-2 to see if withholding appears appropriate
  • Check Forms W-2 for missing information (TIN, name, etc.)
  • Check for duplicate filings (Forms 1099 & W-2 to same payee) that may indicate fringe benefits are reported on 1099 or that a part of the wages is incorrectly characterized as non-employee compensation or rent
  • Analyze whether the total number of Forms 1099 and amount paid is in line with the size and type of the entity (payer), i.e. should there be more or less?

The Specialist will provide employee/independent contractor information to the taxpayer, but will not ask questions related to this issue or make any determination related to the organization’s worker classifications.

The Specialist will ask whether the organization has employee pension plans.  If there is a 403(b) and/or 457 plan, Specialists will consider basic eligibility rules, review Forms W-2 for excessive contributions, etc.

Sample Interview Questions

The following are a sample of questions that might be asked during the opening interview:

  1. Who is the responsible person for payroll records, signing checks, preparing and filing Forms 941, W-2, 1099, accounts payable, etc.
  2. Describe type of employees and duties (number of employees).
  3. What procedures are in place for identifying 1099 recipients?  Are completed Forms W-9 requested from each vendor?
  4. Approximately how many vendors are in accounts payable?
  5. Is there a retirement plan? What type and when was it put in place?
  6. Were the employees ever under a Section 218 agreement?
  7. How many employees in the year in question were hired previous to 3/31/1986 and have been in continuous employment since then?
  8. How many employees are non-resident aliens?  How do you track their current alien status?
  9. Are any vehicles provided for use by your employees? (yes/no)  Do they take them home? (yes/no)  If yes, how do they account for their personal use?
  10. Is there employment reimbursement for travel?  (yes/no)  How is it accounted for?
Possible Outcomes

Based upon the information gathered, the FSLG Specialist will determine whether or not to begin an examination.

The FSLG Specialist will recommend no examination when:

a. The examiner is able to determine the taxpayer is currently in compliance;
b. The examiner is able to bring the taxpayer into compliance without examining the books and records, for example, by securing delinquent tax or information returns, or
c. The potential deficiency involved does not justify the time and cost of an examination.

If no examination is warranted, the Specialist will prepare and issue Letter 3576, FSLG Compliance Check Closing Letter.  The compliance check closing letter allows the Specialist to outline the findings and make corrective recommendations.  The recommendations are to encourage future compliance and to provide documentation that certain issues were discussed. 

If an examination is warranted, the FSLG Specialist will notify the taxpayer that the entity is currently under audit and inform the taxpayer of the rights provided under audit.  In addition, the following will generally be provided: Letter 3850, Employment Tax Examination Opening Letter, Pub 3498, The Examination Process, and Form 4564, Information Document Request, etc.

Page Last Reviewed or Updated: 29-Apr-2014