4.8.10  Notice of Determination of Worker Classification

Manual Transmittal

July 31, 2012

Purpose

(1) This transmits revised IRM 4.8.10, Technical Services, Notice of Determination of Worker Classification.

Material Changes

(1) This transmittal reissues existing procedures which outline detailed instructions for the preparation, issuance and suspense of notice of determination of worker classification under IRC 7436.

(2) Modified IRM 4.8.10.7.5 to require the group to include a disk in the case file that includes the examiner's workpapers and report.

(3) Minor editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary.

Effect on Other Documents

IRM 4.8.10 dated 11/06/2009 is superseded.

Audience

Small Business/Self-Employed (SB/SE) Technical Services Employees

Effective Date

(07-31-2012)

Rodney M. Kobayashi
Director, Technical Services SE:S:E:TS
Small Business/Self-Employed

4.8.10.1  (07-31-2012)
Overview

  1. This section provides instructions for preparation of the Letter 3523, Notice of Determination of Worker Classification (NDWC). This section applies to both field and office cases.

  2. Many of the procedures for NDWC are identical or similar to those used to prepare statutory notices of deficiency contained in IRM 4.8.9, Statutory Notices of Deficiency.

  3. Some employment tax cases include both worker classification issues under IRC 7436, Proceedings for Determination of Employment Status, and other employment tax issues (non-worker classification issues). Therefore, basic information concerning the 30 day letter process is included to distinguish between the two types of cases.

  4. IRM 4.23.10, Report Writing Guide for Employment Tax Examinations, provides guidance for writing employment tax examination reports and should be consulted when specific questions arise concerning cases involving IRC 7436 issues.

  5. Under no circumstances should a change report of employment tax adjustments be incorporated into an audit report covering income tax adjustments.

4.8.10.2  (07-31-2012)
Purpose

  1. The Service provides taxpayers a notice of determination described in IRC 7436(b) by sending the NDWC by certified or registered mail.

  2. The NDWC gives taxpayers the opportunity and instructions to seek Tax Court review. It also includes a schedule listing the workers the Service has determined should be classified as employees. The NDWC shows each kind of tax with its proposed employment tax adjustment by taxable period.

4.8.10.3  (07-31-2012)
IRC 7436

  1. IRC 7436 provides that taxpayers may seek Tax Court review of certain employment tax determinations made in connection with an audit.

  2. IRC 7436 allows the Tax Court to review employment tax determinations involving:

    1. Classification of the taxpayer's workers as employees, or

    2. The taxpayer's entitlement to relief treatment under section 530 of the Revenue Act of 1978.

    3. The proper amount of employment tax under such determination.

  3. IRC 7436(a) requires that the determination(s) involve an actual controversy and that the determination(s) be made as part of an examination.

4.8.10.3.1  (07-31-2012)
Issues to Which IRC 7436 Applies

  1. IRC 7436(a) provides that for purposes of Subtitle C of the IRC, the Tax Court has jurisdiction to:

    1. Review the Service's determination that one or more individuals performing services for the taxpayer are employees.

    2. Review the Service's determination that the taxpayer is not entitled to treatment under section 530(a) of the Revenue Act of 1978 with respect to those individuals.

    3. Determine the proper amount of employment tax under the above determinations.

  2. The employment taxes imposed by Subtitle C of the Code are:

    1. Federal Insurance Contributions Act (FICA) taxes (IRC 3101 through IRC 3128),

    2. Railroad Retirement Tax Act (RRTA) taxes (IRC 3201 through IRC 3232),

    3. Federal Unemployment Tax Act (FUTA) taxes (IRC 3301 through IRC 3311),

    4. The collection of income tax at source on wages (IRC 3401 through IRC 3406).

  3. "Employment tax" under the statutory language includes the additions to tax, additional amounts, and penalties provided by Chapter 68 Subchapter A (but not B) of (IRC 6651 through IRC 6665). Thus, the Tax Court has jurisdiction to determine the proper amount of additions to tax, additional amounts, and penalties that relate to the employment tax imposed by Subtitle C with respect to determinations of worker classification and relief treatment under section 530 of the Revenue Act of 1978.

4.8.10.3.2  (07-31-2012)
Issues to Which IRC 7436 Does Not Apply

  1. IRC 7436(a) does not provide the Tax Court with jurisdiction to review any employment tax determinations other than the three listed in the statute as noted in IRM 4.8.10.3.1 (1) above.

  2. IRC 7436 also does not apply to employment status issues not arising under Subtitle C, such as the classification of individuals for purposes of pension plan coverage or the proper treatment of individual income tax deductions.

  3. Since IRC 7436(a) only confers jurisdiction on the Tax Court to review determinations that are made as part of an examination, other Service determinations of employment status (including those that are made in the context of private letter rulings, technical advice memoranda, or Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, that are not made as part of an examination are not subject to review by the Tax Court.

  4. It is important to ensure that workers who were issued Form W-2, Wage and Tax Statement, by the taxpayer for any period are not included in the notice of determination for the same periods. It is the position of the Service that Tax Court review is not available when there is no controversy regarding the classification of the workers, such as where the taxpayer treated the workers as employees by issuing Form W-2. See Notice 2002-5, IRB 2002–5.

4.8.10.4  (07-31-2012)
When Issued

  1. The Service will issue a Notice of Determination of Worker Classification (NDWC) only after the Service has determined both :

    • That the taxpayer is not entitled to relief treatment under section 530 of the Revenue Act of 1978 and

    • That one or more individuals performing services for the taxpayer are employees for purposes of any tax imposed by Subtitle C.

  2. The amount of employment tax under these determinations will also be determined and set forth in the NDWC.

  3. Usually, a 30 day letter is issued to a taxpayer before a NDWC can be issued. If the taxpayer does not respond to the 30 day letter, the NDWC will usually be issued within sixty days after the expiration of the 30 day period.

4.8.10.4.1  (07-31-2012)
30 Day Letters

  1. IRM 4.23.10 is the Report Writing Guide for Employment Taxes.

  2. Under IRM 4.23.10.8 (3), separate 30 day letters are issued when both IRC 7436 and non-IRC 7436 issues are present. Letter 950-C, Employment Tax 30 Day Letter-WC, will contain the IRC 7436 issues and Letter 950-D, Employment Tax 30 Day Letter, will contain the non-IRC 7436 issues.

  3. Similarly, IRM 4.23.10.12 (2), Preparation of the Employment Tax Report, provides that if an examination involves both IRC 7436 and non-IRC 7436 issues, separate reports will be prepared. Form 4666, Summary of Employment Tax Examination, Form 4667, Examination Changes - Federal Unemployment Tax, and Form 4668, Employment Tax Examination Changes Report, will be noted "Form 2504-WC IRC 7436 issues" and "Form 2504 non-IRC 7436 issues" in the other information section near the bottom of the respective reports. This will prevent any confusion to the taxpayer as to the computation of tax for the separate issues.

  4. Reports consist of the following forms:

    1. Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment, for non-IRC 7436 issues or IRC 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases, for IRC 7436 issues,

    2. Form 4666, Summary of Employment Tax Examination,

    3. Form 4667, Examination Changes - Federal Unemployment Tax,

    4. Form 4668, Employment Tax Examination Changes Report, and

    5. Form 886-A, Explanation of Items, for explanation of adjustments or equivalent.

  5. If a taxpayer does not file a protest letter seeking review by Appeals, the proposed tax involving the IRC 7436 issues (worker reclassification/section 530 of the Revenue Act of 1978) will not be assessed. Instead, upon default of the 30 day period, a NDWC must be issued to the taxpayer. The NDWC suspends the statute of limitations only for the employment taxes dependent on the worker classification and section 530 of the Revenue Act of 1978 determinations. For purposes of suspending the period of limitations only, any applicable backup withholding with respect to workers included in the reclassification (that are ultimately determined not to be employees) may be considered dependent upon the worker classification issue. See IRM 4.23.10.9.1 (13)(b), General Overview of Section 7436 Procedures.

  6. If there are adjustments for both IRC 7436 issues and non-IRC 7436 issues and the taxpayer does not file a protest letter for the non-IRC 7436 issues, the group must process a partial assessment for the non-IRC 7436 tax and penalties before transferring the case to Technical Services for preparation of the NDWC on the IRC 7436 issues.

4.8.10.5  (07-31-2012)
Authority to Issue Notice of Deficiency of Worker Classification (NDWC)

  1. The Commissioner is authorized to issue a NDWC pursuant to IRC 7436(a).

  2. See Servicewide Delegation Order 4-26 in IRM 1.2.43.27, Delegation Order 4-26 (formerly DO-251), for the officials delegated by the Commissioner to sign and issue a NDWC.

  3. As it relates to Technical Services, the Technical Services Territory Manager (TSTM) is delegated to sign and issue a NDWC. The TSTM may further delegate this authority by memorandum to specific individuals within his/her functional area.

4.8.10.6  (07-31-2012)
Who Prepares Notice of Deficiency of Worker Classification (NDWC)

  1. Per IRM 4.23.10.9 (5), the group examiner prepares a list of reclassified workers (as defined in IRM 4.23.10.9.1 (5)). In addition, examiners will prepare a "working copy" draft of Table 2 to assist Technical Services in the preparation of Letter 3523, Notice of Determination of Worker Classification.

  2. Reviewers will review the case file, prepare the final NDWC and attachments, and sign the notice. Tax examiners issue the NDWC with attachments.

4.8.10.7  (07-31-2012)
Case Review Prior to Preparing Notice of Deficiency of Worker Classification (NDWC)

  1. All cases requiring a NDWC must have a limited review of the unagreed issues and procedural requirements. The case should be able to withstand the scrutiny of Appeals and potential litigation in Tax Court.

  2. The scope of the case review will be sufficient to ensure:

    • Correct technical conclusions,

    • Proper consideration and computation of penalties,

    • Accurate computation of the tax deficiency,

    • Proper completion of all procedural requirements,

    • Proper managerial involvement, and

    • Proper protection of taxpayer rights.

  3. Reviewers must determine if the case is sufficiently correct to support the IRC 7436 issues. When feasible, the reviewer should correct error(s) in the case instead of returning it to the examiner.

  4. If a case contains an error, Technical Services will revise the report, if possible, and prepare the NDWC package so that it best supports the examiner's intent. At the same time, it is the duty and responsibility of reviewers to ensure the taxpayer's rights are protected during all stages of the examination process.

  5. Reviewers should be aware of cycle time. IRM 4.8.2.6, Cycle Time, allows up to 45 days to review field cases and 15 days for office audit cases. Reviewers should document their time and activity on Form 9984, Examining Officer's Activity Record.

4.8.10.7.1  (07-31-2012)
Preliminary Administrative Items Needed for Case Review

  1. When the case is received, the contents of the file should be reviewed to ensure:

    • All returns are controlled on Audit Information Management System (AIMS) and Examination Records Control System (ERCS).

    • The returns reflected on ERCS are included in the case file and no other returns are included.

    • The case is in Status Code 25, Review Type 38, and Suspense Code 544.

    • The 30 day letter was sent to the taxpayer, if sufficient time remained on the statute(s).

    • The statute of limitations is correctly reflected on AIMS/ERCS.

    • Form 895, Notice of Statute Expiration, is properly completed, if required.

      Note:

      Reviewers must check the statute on Form 895 against the information data retrieval system (IDRS), the stamped received date, and mailing envelope. Do not rely on the statements on Form 895 or IDRS. Reviewers must check these items personally, to ensure the information is correctly reflected.


      If Form 895 is correct, the reviewer will initial it. If Form 895 is not correct, the reviewer will update the information, initial the change, prepare Form 5348, AIMS/ERCS Update, and submit Form 5348 with the case to the manager for approval.

4.8.10.7.2  (07-31-2012)
IDRS Prints

  1. Obtain current IDRS prints to verify the following information about the case:

    • AMDISA to verify the applicable years are on AIMS;

    • INOLES to verify the taxpayer's name(s) and address(es);

    • CFINK to determine if a valid power of attorney is on file;

    • BMFOLT to verify the amount of tax per return (or as previously adjusted), as well as to verify any possible duplicate return postings and pertinent freeze codes;

      Note:

      If returns were filed, the reviewer will check the TC 150 and all TC 30X/29X amounts to ensure that all applicable amounts are considered, not just the original tax as filed.

    • BMFOLA to identify any previous adjustments that may have been made to the return and to verify the amount and source of the adjustments;

    • BMFOLR to verify the amount of taxable wages per return;

    • BMFOLU to compare the totals per Form 941, Employer's Quarterly Federal Tax Return, and/or Form 944, Employer's ANNUAL Federal Tax Return, to Form W-2 filed;

    • PMFOL to verify whether Form 1099-MISC, Miscellaneous Income, and Form W-2 were filed; and

    • Information Return Processing (IRP) Transcript, if available, for the TIN of the key taxpayer (individual, corporate, etc.) to verify address information.

4.8.10.7.3  (07-31-2012)
Correct Technical Conclusions

  1. Technical review of the issues will be made to determine whether the applicable law, regulations, and rulings have been correctly applied.

  2. The review of the case will include:

    1. The determination that one or more individuals performing services for the taxpayer are employees (IRM 4.23.5.3, Independent Contractor or Employee).

    2. The determination that the taxpayer is not entitled to treatment under section 530(a) of the Revenue Act of 1978 with respect to those individuals and the reasons the taxpayer does not qualify for relief (IRM 4.23.5.2, Section 530 of the Revenue Act of 1978).

    3. The determination of the proper amount of employment tax under the above determinations, including the proper use of IRC 3509 rates (IRM 4.23.8, Determining Employment Tax Liability).

  3. Reviewers will review the case file to ensure the position presented is supported in the workpapers. The case file should include facts, supported by documentary evidence where possible, of:

    1. The categories of workers,

    2. Their basic job duties, and

    3. An analysis of the behavioral control, financial control, and the relationship of the worker and the firm. (See IRM 4.23.5, Technical Guidelines for Employment Tax Issues).

  4. The case file should illustrate the basic job duties of the reclassified workers, and identify the behavioral and financial control factors present in the case. Any agreements between the parties, such as work contracts, should also be included in the file, if available.

  5. Documents that should routinely be part of the administrative file include:

    1. A copy of information returns (e.g., Form 1099-MISC, Form 1096, Annual Summary and Transmittal of U.S. Information Returns, Form W-2, Form W-3, Transmittal of Wage and Tax Statements) issued by the taxpayer to the class(es) of workers at issue (at a minimum, transcripts should be in the file reflecting whether Form 1099-MISC and Form W-2 were filed).

    2. A copy of prior period Form W-2s issued to categories of reclassified workers (or to named reclassified workers), if available.

    3. A copy of filed employment tax returns

    4. A copy of income tax returns (especially where the employment tax examination was a result of an income tax examination).

      Note:

      This is not applicable to Large Business and International (LB&I) examination case files.

    5. A copy of relevant materials from the income tax examination file if the case resulted from an income tax referral.

      Note:

      This is not applicable to LB&I examination case files.

    6. A copy of applicable pages of the general ledgers.

    7. A copy of service agreements (e.g., "independent contractor agreements" ).

    8. A copy of lease agreements with workers.

    9. A copy of any evidence of payments to the workers.

    10. A copy of interview notes.

    11. A copy of relevant client contracts.

  6. Since income tax case files often are separated from employment tax cases, it is imperative that all documents and information in the income tax file that are relevant to the employment tax case be duplicated and placed in the employment tax file.

4.8.10.7.4  (07-31-2012)
Proper Consideration and Computation of Penalties

  1. All appropriate penalties should be asserted and computed correctly.

  2. The penalty lead sheet should comment on the assertion or non-assertion of applicable penalties, including reasonable cause situations.

  3. The case file should include a copy of the group manager's written approval for the assertion of any penalty other than failure to file (FTF) and failure to pay (FTP). If the case file does not contain the written approval, the reviewer will secure such written approval prior to issuing the NDWC.

  4. A complete discussion regarding penalties for employment tax cases can be found in IRM 4.23.9, Employment Tax Penalty and Fraud Procedures.

4.8.10.7.5  (07-31-2012)
Accurate Computation of Tax Deficiency - Reduced and Full Rates

  1. Employment tax examiners have specialized software to prepare the reports for employment tax examinations. In many cases, this software is not available to reviewers. Therefore, if errors are found in the employment tax reports, the reviewer may need to coordinate with the examiner to secure revised reports.

  2. If the reviewer needs to secure revised reports from the examiner, the reviewer may want to request the electronic files (Excel, Word, Adobe, etc.) used by the examiner to generate the reports. However, a disk with the examiner's workpapers and report should be included with the case file. This will allow the reviewer to make any minor corrections, such as minimal rounding corrections, that may be necessary to ensure all reports reconcile.

  3. The reviewer should ensure the report reflects the correct amount of adjustments, which agree with the leadsheet and supporting workpapers. For more details on determining the correct amount of employment tax liability, refer to IRM 4.23.8.

  4. In worker classification cases, reduced rates for income tax withholding and employee Federal Insurance Contributions Act (FICA) tax are the general rule. IRC 3509(a) and (b), Determination of Employer's Liability for Certain Employment Taxes. Full rates are appropriate only where the case file supports a finding that the taxpayer intentionally disregarded the requirement to deduct and withhold income taxes and employee FICA, the employer withheld income tax but not FICA tax, or if the case involves certain statutory employees. If the notice of determination calculates employment taxes using full income tax withholding and employee FICA taxes, the case file must contain a clear analysis supporting a finding of intentional disregard, or the other basis for not applying IRC 3509.

4.8.10.7.6  (07-31-2012)
Proper Completion of All Procedural Requirements

  1. Reviewers should ensure procedural items are properly completed by the examiner:

    1. Form 5344, Examination Closing Record, must be properly completed and attached to the appropriate returns. See IRM 4.8.10.7.6.1 below for additional details on Form 5344.

    2. Form 3198, Special Handling Notice for Examination Case Processing, is properly attached to the case folder and appropriately marked as an employment tax case.

    3. Form 9984, Examining Officer's Activity Record, is properly completed and documents all activity, including actions taken by the reviewer.

    4. A 30 day letter was issued and suspended at the group level to allow the taxpayer time to file an adequate protest, if sufficient time remained on the statute of limitations.

    5. For non-filer cases, the file includes Form 13496, IRC section 6020(b) Certification, and appropriate attachments for each substitute for return (SFR) period. If the reviewer makes any changes to the report, the reviewer must complete a new IRC 6020(b) package and sign a new Form 13496.

    6. For cases involving both IRC 7436 and non-IRC 7436 issues in which the taxpayer did not file a protest for the non-IRC 7436 issues, a partial assessment was processed by the examiner prior to forwarding the case for NDWC for the IRC 7436 issues.

  2. Ensure classification settlement program (IRM 4.23.6, Classification Settlement Program (CSP)), was offered. In most worker classification cases, an offer under the classification settlement program (CSP) should be made. All worker classification cases must:

    • Comment on CSP (including a statement in the workpapers that CSP was considered)

    • Comment on whether or not an offer was made

    • Comment on what type of offer was made, if any, and why

    See IRM 4.23.6.11 (1).

  3. If a taxpayer is eligible, CSP offers should be made prior to issuing a notice of determination. If a CSP was not offered, the reviewer should contact the examiner to determine the reason why. If appropriate, the examiner should be requested to contact the taxpayer and offer the CSP.

4.8.10.7.6.1  (07-31-2012)
Form 5344

  1. Currently, the Audit Information Management System (AIMS) website and the IRM indicate certain fields on Form 5344 are not required to be completed by examiners. However, these directions are intended for income tax examiners. Report Generation Software (RGS) is a program used for income tax that will populate certain fields on closing documents, making the completion of certain fields on the Form 5344 unnecessary for income tax examiners. Due to the difference in report writing availability, there are different expectations for employment tax examiners.

  2. The following fields on Form 5344 will be completed by the employment tax examiner when closing a case:

    1. P7 - 18 - TIN (self-explanatory)

    2. P21 - 22 - MFT (self-explanatory)

    3. P24 - 29 - Tax Period (self-explanatory)

    4. P31 - 34 and NAME - Name Control and Name must match what is on the INOLE and ERCS Control

    5. P38 - 40 - Block Number
      * If closing off an Original or SFR - entry will be 00X
      * If closing off a BRTVU, TRDBV, or ELF return - entry will be 30X

    6. Item 02 - Penalty Reason Code
      * Needed when abating penalties or when not asserting penalties that are otherwise applicable (e.g., reasonable cause, etc.)

    7. Item 07 - Hold Code
      * Enter a "2" when the statute for refund is barred

    8. Item 11 - Interest Free Date
      * If the taxpayer qualifies for interest free, then this block must be completed with the date the agreement was received
      * There must be a corresponding TC 308 in Item 12

    9. Item 12 - Tax Penalty and Interest Adjustment
      * TC 300: Taxes not subject to Interest Free, Form 4668 (941) Line 13, Form 4667 (940) Line 8
      * TC 308: Taxes that are subject to Interest Free, must have corresponding date in Item 11, Form 4668 Line 13, will never apply to Form 4667 (940)
      * TC 160: IRC 6651 Failure to File Penalty (a) (1) ONLY - The amounts from the Form 4668 / Form 4667 will include both FTF and FTP. The examiner MUST separate the amounts and enter only the FTF portion of the penalty. Form 5318, Penalties for Failure to File Tax Return and Pay Tax, may be used to accomplish this. Form 4668 (941) Line 14, Form 4667 (940) Line 9.
      * TC 180: IRC 6656 Penalty, Form 4668 (941) Line 15, Form 4667 (940) Line 9
      * TC 270: Enter only when FTP is NOT being assessed, will always be zero

    10. Item 13 - Disposal Code
      * DC 01 - No change with adjustment, delinquent returns accepted as filed, claims disallowed in full
      * DC 02 - No change
      * DC 03 - Agreed prior to issuance of 30 day letter
      * DC 04 - Agreed after issuance of 30 day letter
      * DC 07 - Cases being closed to Appeals
      * DC 08 - Unagreed cases not going to Appeals

    11. Item 15 - Credit and Tax Computation Adjustments
      * Do not complete for cases going to Appeals
      * Do not complete for no change cases
      * TC 111 Form 4668 (941) Line 11
      * TC 112 Form 4668 (941) Line 10

      Note:

      The total of the TC 111 and TC 112 entries must equal the TC 300 or TC 308 entry in Item 12 to the penny.


      * TC 004 Form 4668 (941) Line 1
      * TC 073 Form 4668 (941) Line 1
      * TC 079 if necessary will always be "0"
      * TC 680 Accuracy Penalty, if any
      * This entry for the 940 will depend on the two letter state abbreviation

      Note:

      TXX (XX = two letter state code) Form 4667 Line 8 - this amount must equal the TC 300 amount in Item 12 to the penny.
      WXX (XX = two letter state code) Form 4667 Line 2

    12. Item 16 - Appeals Office Code
      * Complete only for cases going to Appeals.
      * Code will be unique depending on where the cases are sent for Appeals hearings.

    13. Item 18 - Unagreed amount Appealed/Petitions - dollars only
      * Complete only for cases going to Appeals.
      * Amount should be the unagreed portion of tax and credits, less any prepayments.

    14. Item 28 - Examiner's Time
      * This must equal the amount of time reflected on ERCS for each return.

    15. Item 30 - Examination Technique Code
      * 1 = Office Examination
      * 2 = Correspondence Examination
      * 3 = Field Examination
      * 6 = No Reply
      * 7 = Defaulted/Undeliverable

    16. Item 31 - Examiner's Grade (self-explanatory)

    17. Item 32 - Grade of Case
      * Examiner will generally use their grade
      * This entry must be validated by the manager and changed if appropriate.
      * "R" will be entered at the end of the number for any quarter that is not the Key case. If an older revision of Form 5344 is used, circle the "R" when appropriate.

    18. Item 33 - Examiner Name (self-explanatory)

    19. Item 37 - Delinquent Return - Applies only if the secured delinquent return is processed under Delinquent Return procedures directly to the campus
      * Enter "T" for the key quarter
      * Enter "R" for any subsequent quarter(s)

    20. Item 39 - Disclosure Code
      * Used for agreed cases when a copy of the return is disclosed to the state.
      * This code is unique to the examiner's state.

    21. Item 405 - 408 - Related Return Information
      * This should be the information from the key case return. For the key case, there should be a "P" in Item 408. The related quarters should have an "S" entered.
      * If there is an "S" in this entry, there should be an "R" after grade of case in Item 32.

    22. Item 411 - Payment Code (self-explanatory)

    23. Item 412 - Installment Agreement Code (self-explanatory)

    24. Item 418 - 3121(q) Amount
      * Enter for TIP examinations

4.8.10.7.7  (07-31-2012)
Proper Protection of the Taxpayer's Rights

  1. Reviewers must ensure the taxpayer's rights have been protected by considering:

    1. Power of attorney (POA) requirements,

    2. Confidential privileges - Accountant/client privilege,

    3. Notification of Appeal rights,

    4. Consideration of collectibility,

    5. Confidentiality of taxpayer information/privacy requirements,

    6. Unauthorized access (UNAX) requirements, and

    7. Third-party contact requirements.

  2. Reviewers must also ensure that the case is transferred to Appeals if a protest was received. If a taxpayer files a timely protest, the case should be sent to Appeals before a notice of determination is issued.

4.8.10.8  (07-31-2012)
Preparing NDWC

  1. The notice of determination of worker classification (NDWC) is a legal determination that is presumptively correct.

  2. The issuance of a NDWC is the beginning of potential litigation. Tax Court Rule 34(b)(8) requires that the petition should include a copy of the NDWC plus the accompanying statements material to the issues being petitioned. Thus, if a case goes to the Tax Court, the explanatory paragraphs become a part of the basic pleadings for the Commissioner. They set the pattern upon which the Government's case may be tried and therefore, care must be exercised in the preparation of the explanations for the determination of the asserted liability.

  3. The NDWC consists of:

    1. A letter explaining the purpose of the notice; the tax period(s) involved; the names of the reclassified workers; the amount of employment tax, additions to tax and/or penalties; and the taxpayer's options, as well as how to exercise the options.

    2. A waiver to allow the taxpayer to agree to the additional tax liability and applicable penalties, if asserted.

    3. A summary of the employment tax examination (Form 4666).

    4. A computation statement (i.e., report) for Federal Unemployment Tax (Form 4667).

    5. A computation statement (i.e., report) for other employment tax changes (Form 4668).

    6. A brief summary of the Service's position in the case (explanation of adjustments).

      Note:

      This summary should not be Form 886-A. See IRM 4.8.10.8.6 (2).

    7. Any schedules with explanations of the proposed assessment.

    8. Pub 3953, Questions and Answers About Tax Court Proceedings for Determination of Employment Status Under IRC section 7436.

  4. Reviewers must be sure to use the correct forms thatare listed on the Letter 3523 as enclosures. It is important to provide the correct forms when issuing the notices of determination, since the waivers are distinct for worker classification cases (e.g., Form 2504-WC rather than Form 2504).

  5. Non-IRC 7436 issues should not be included in the NDWC. If the examination includes both IRC 7436 and non-IRC 7436 issues, the case file should include separate reports for each. If separate reports are not included (e.g., if the file includes one report that includes both IRC 7436 and non-IRC 7436 issues), the case should be returned to the examiner to follow the guidelines contained in IRM 4.23.10.8, 30–Day Letters.

4.8.10.8.1  (07-31-2012)
Taxpayer Name

  1. The taxpayer's name and address appear throughout the notice of determination. It is extremely important that the taxpayer is correctly identified.

    Caution:

    Even minor typographical errors in the name or address may affect the validity of a notice of determination.

  2. For corporations, use the name of the corporation as shown on the corporate seal. If unavailable, use the name shown on the tax return. In corporate reorganizations, include both the current and the former name. Similarly, if the corporation changed its name since filing the return, identify the corporation on the letter, schedules and attachments as "ABC Corporation, formerly known as XYZ Corporation."

  3. For sole proprietorships, use the "doing business as" name, if applicable, as well as the individual's name.

    Example:

    John Doe, Doing Business As Doe's Construction

  4. For disregarded entities (e.g., single member LLC filing on Schedule C), use the business name.

    Example:

    Doe's Construction, LLC

  5. When in doubt, use the IDRS command code BMFOLE and/or NAMEE(S) for the business TIN for verification.

4.8.10.8.2  (07-31-2012)
Taxpayer Address

  1. The mailing address for the NDWC should be the taxpayer's last known address.

4.8.10.8.2.1  (07-31-2012)
Last Known Address

  1. Rev. Proc. 2010–16, IRB 2010-19 defines "last known address" as the address on the most recently filed and properly processed tax return unless the taxpayer has clearly and concisely notified the Service of a change of address. The Service may also update the taxpayer's address of record with a new address obtained from the United States Postal Service's (USPS) National Change of Address database (NCOA database) in accordance with Treas. Reg. 301.6212-2. The NCOA database is sent to the IRS on a weekly basis at which time master file is updated with any changes.

  2. If there is any doubt as to what the last known address is, additional duplicate original notices of determination should be sent to each known address.

4.8.10.8.2.2  (07-31-2012)
Clear and Concise Notification

  1. A statement signed by the taxpayer informing the Service to change the address of record is considered clear and concise notification. The statement must also contain the taxpayer's full name, signature, old address, and social security number and/or employer identification number.

  2. Form 8822, Change of Address, may be used to make the change.

  3. Correspondence sent by the Service that solicits or requires a response from the taxpayer that is returned to the Service by the taxpayer with corrected taxpayer address information constitutes clear and concise notification of a change of address (even if the taxpayer's signature is not on the correspondence).

  4. Standing alone, the following situations will not constitute clear and concise notification of a new address and, therefore, should not result in a change to a taxpayer's address of record. A new address reflected on:

    1. The letterhead of taxpayer correspondence,

    2. The return envelope,

    3. The taxpayer's remittance form, or

    4. Post Office notice (other than by means of United States Postal Service's National Change of Address database).

      Note:

      Although the address of record should not be updated as a result of these new addresses, duplicate original notices should be sent to these addresses.

4.8.10.8.2.3  (07-31-2012)
Elements of a New Address

  1. The following are elements of a new, complete address:

    • Number and street (or post office (P.O.) box number)

    • Apartment or suite number, if applicable

    • City or town, state and zip code

  2. There should be no abbreviations in the taxpayer's address, except for the two-letter state code. However, if the last known address reflected on the last filed and properly processed tax return contains abbreviations, then that address (with abbreviations) may be used. If notices are sent to foreign countries, the name of the country should not be abbreviated.

4.8.10.8.2.4  (07-31-2012)
New Addresses Secured by Telephone or Interview

  1. Address changes to perfect an error in the existing address may only be made based on the taxpayer's oral statement (e.g., telephone or walk-in contact). These changes must be provided to the Service employee who initiated the contact after receipt of an account or adjustment request from the taxpayer.

  2. Authentication of the caller's identity using the criteria in IRM 21.1.3.2.3, Required Taxpayer Authentication, and IRM 21.1.3.2.4, Additional Taxpayer Authentication, is required before making changes to the taxpayer's address of record.

  3. Any request solely for an address change, other than for perfection or in connection with an open account or adjustment request, must be in writing.

4.8.10.8.2.5  (07-31-2012)
Establishing the "Last Known Address"

  1. The following steps should be taken to determine the taxpayer's "last known address:"

    1. Search IDRS for the most recently filed tax return and other information using appropriate CFOL and IDRS command codes including INOLES, SPARQ, IRPTRO, BMFOLE, ENMODA.

    2. Search under both the business TIN and the individual SSN, if applicable.

    3. Search the administrative file for "clear and concise" notification since the date of the last filed return.

    4. Scrutinize the power of attorney for a different address. Compare the signed dates found on the power of attorney to those found on the most current filed return.

    5. If there is any indication of an alternative address, send a duplicate original notice to that address.

4.8.10.8.2.6  (07-31-2012)
Power of Attorney

  1. If a power of attorney address is the taxpayer's last known address, the NDWC should be addressed as follows:

    Doe's Construction
    In care of Power of Attorney's Name
    Power of Attorney Address

    Note:

    This subsection does not refer to the copy of the NDWC that is sent to the Power of Attorney. See IRM 4.8.10.11.1, Power of Attorney.

4.8.10.8.3  (07-31-2012)
NDWC Letter

  1. Letter 3523 is the notice of determination letter used in employment tax cases involving IRC 7436 issues. The most current version of the letter should be used.

  2. As noted in IRM 4.8.10.6 above, IRM 4.23.10.9 requires the group examiner to prepare and include a list of reclassified workers for use in Table 1 of Letter 3523. Additionally, the examiners will prepare a draft copy of Table 2 to assist reviewers in preparation of Letter 3523. The reviewer will prepare the final Letter 3523 based on the information for both tables included by the examiner.

  3. The reviewer should not date the NDWC letter. The date will be added when the NDWC is issued.

  4. The NDWC must include the name, telephone number, and the unique identifying number of the person to contact.

    Note:

    This person must clearly identify himself/herself using his/her name and employee identification number when answering a specific taxpayer inquiry.

  5. The "Last Day to File a Petition With the United States Tax Court" date should not be inserted by the reviewer. This date will be added when the NDWC is issued.

  6. The notice of determination must advise taxpayers of their right to contact the local office of the Taxpayer Advocate and must provide the location and telephone number of the appropriate office. Section 12 of Pub 3953, Questions and Answers About Tax Court Proceedings for Determination of Employment Status Under IRC Section 7436, fulfills this purpose.

4.8.10.8.3.1  (07-31-2012)
Listing of Reclassified Workers - Table 1

  1. Reclassified workers should be named, if known, in Table 1 of the notice, with the appropriate periods identified. The workers should be readily identified on a listing completed by the examiner. If there is confusion among similarly named individuals, examiners should provide the job description of the workers and make sure they explain what steps were taken to obtain the names and, if they are unavailable, the reason they are unavailable. Examples of identifying information include the shift worked, the specific job performed, etc. The use of social security numbers for identification of workers is not allowed on the NDWC.

  2. The table will indicate with a mark (e.g., a check mark or an "X" ) the quarters each worker is being reclassified. Dollar amounts are not to be listed in Table 1.

  3. If the names of the specific workers are not known, the workers should be named by category in Table 1 of the notice.

    Example:

    If workers were paid in cash and no name-specific payment log is available, Table 1 might include three worker categories, such as roofers, roofing assistants, and crew leaders. The same notice of determination may also include a named worker, such as the corporate president/sole shareholder. However, the notice should not include worker social security numbers.

  4. Table 1 of the notice must be as specific as the case facts allow.

  5. A notice of determination cannot be issued with a Table 1 category of worker listed as, for example, "workers paid in cash" or "workers pursuant to information maintained by the taxpayer" for numerous reasons, such as application of rates under IRC 3509, application of section 530 of the Revenue Act of 1978 (section 530), and establishing basic case development before the court.

  6. If there are more workers than can fit in Table 1, an attachment may be used to reproduce Table 1. The attachment should be clearly identified at the top as "Attachment to the Letter." Table 1 on page 2 of Letter 3523 should reference the attachment by inserting "See Attachment to the Letter."

  7. It is important to ensure that workers who were issued Form W-2, Wage and Tax Statement, by the taxpayer are not included in the NDWC for the same periods. It is the position of the Service that Tax Court review is not available when there is no controversy regarding the classification of the workers, such as where the taxpayer treated the workers as employees by issuing Form W-2. See Notice 2002-5, IRB 2002-3.

  8. Include corporate officers, when appropriate. Refer to IRM 4.23.5.6.3, Corporate Officers. Often, employment tax examinations include multiple classes of workers, as well as additional non-worker classification employment tax issues (e.g., wage and tax adjustments related to fringe benefits provided to employees). If the file indicates the taxpayer did not issue Form W-2 to the employees for the periods contained in the notice, and did not otherwise treat the workers as employees for federal tax purposes, any employment tax adjustments associated with officer compensation must be made using the notice process, rather than the traditional employment tax assessment process.

4.8.10.8.3.2  (07-31-2012)
Amount of Underpayment and Penalties for Reclassified Workers - Table 2

  1. Table 2 of Letter 3523, must include the Service's determination of the proper amount of employment tax, additions to tax, and/or penalties that arise from treating the workers listed in Table 1 as employees. Examiners will include a "working copy" draft of Table 2 information in the case file for reviewers to use in preparation of the NDWC.

  2. The information about the proposed employment tax assessment must be moved from the reports (Form 4667 and/or Form 4668) to Table 2 of the notice of determination.

  3. The amounts must be organized by type of employment tax rather than by type of return and listed separately for each quarter:

    • Old age, survivor, and disability insurance

    • Hospital insurance

    • Income tax withholding

    • FUTA

  4. The total FUTA tax will be reported in the December 31 tax period.

  5. For substitute for return cases, the failure to file penalty (FTF) under IRC 6651(a)(1) and the failure to pay penalty (FTP) under IRC 6651(a)(2) are applicable. Each of the penalties must be separately stated on Table 2 of Letter 3523, rather than aggregated and shown as one combined amount. If the FTP has not reached the maximum (i.e., less than 50 months), an attachment to the letter must be completed with an explanation that the penalty will continue to accrue until paid. This statement should be similar to that included with regular statutory notices of deficiency. See IRM 4.8.9.16.2.5, Substitute for Return IRC Section 6651(g), for penalty explanations used with notices of deficiency.

  6. A copy of Form 4666, Form 4667, and Form 4668 must be attached to the notice of determination to explain which rates were used in calculating the employment taxes.

4.8.10.8.4  (07-31-2012)
Waiver Preparation

  1. Form 2504-WC, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment in Worker Classification Cases, must be included as an attachment to the notice of determination to provide taxpayers with an opportunity to agree to the proposed employment tax adjustment administratively.

  2. Form 2504-WC, contains the statement that allows taxpayers to waive restrictions on assessments under IRC 7436(d) and IRC 6213(a).

  3. Form 2504-WC should contain the following:

    • Name, address, and EIN of the taxpayer exactly as they appear on the Letter 3523.

    • Summary of the employment tax liability carried over from Form 4666.

    • Entries for Form 940, Form 941, and Form 945 are placed on separate lines. Only entries for additional tax and penalties are shown.

  4. The "Kind of Tax" and "Internal Revenue Code Section" are completed as follows:

    1. Form 940 - FUTA IRC 3301

    2. Form 941 - FICA and IT Withholding IRC 3101, IRC 3111, and IRC 3402

4.8.10.8.5  (07-31-2012)
Computation Statements

  1. The amount of wages paid to reclassified employees and the corresponding employment taxes should be clearly and consistently stated.

  2. The NDWC includes three computation statements (i.e., reports):

    1. Form 4666, Summary of Employment Tax Examination,

    2. Form 4667, Examination Changes - Federal Unemployment Tax, and

    3. Form 4668, Employment Tax Examination Changes Report.

  3. Generally, all three reports will be included with the NDWC. These reports are prepared by the examiner and included in the case file before the case closes from the group. If no changes are needed, it is not necessary to prepare new reports.

4.8.10.8.5.1  (07-31-2012)
Preparation Instructions for Form 4666, Summary of Employment Tax Examination

  1. Date of Report - enter the date the report is completed.

  2. Type of Report - check the applicable box.

  3. Unagreed or Agreed - check the applicable box.

  4. Calendar Year (Column a) - for annual returns, list calendar years examined. For quarterly returns, list only the year if all its quarters result in a change. When a combination of change and no-change occurs in one year's examination, show the year followed by the quarters, grouping the changes on one line and the no-changes on another line.

  5. Return Form Number (Column b) - self-explanatory, except if a claim is involved, write "CLAIM" after the return form number.

  6. Delinquent Tax, Increase(Decrease) in Tax (Column c) - enter the total amounts on line 13 of Form 4668 and/or on line 8 of Form 4667.

  7. Penalty (Column d) - enter the applicable code sections and the total amount of penalties from lines 14, 15 and 16 of Form 4668 and/or line 9 of Form 4667.

  8. Total (Column d) - enter the sum of Columns c and d for each line.

  9. Other Information - enter: "This does not constitute an income tax examination." Also, enter such items as statements regarding revised or corrected reports, delinquency, information regarding penalties, explanation of adjustments, etc. If the examination included both IRC 7436 issues and non-IRC 7436 issues, indicate whether this report relates to a Form 2504-WCIRC 7436 Issue.

4.8.10.8.5.2  (07-31-2012)
Preparation Instructions Form 4667, Examination Changes - Federal Unemployment Tax

  1. Date of Report - enter the date the report is completed.

  2. Type of Report - check the applicable box.

  3. Agreed or Unagreed - check the applicable box.

  4. Line 4 - enter applicable rate from Form 940.

  5. Line 9 - enter IRC section number if other than IRC 6651 or IRC 6656.

  6. Line 10 - use a separate column for each state and experience rate period.

  7. Line 11 - use a separate column for each state and experience rate period and enter calendar year if the taxpayer does not have an experience rate or where the experience rate is constant throughout the year.

  8. Line 12 - enter the experience rate as determined by the state. If the experience rate exceeds 5.4%, enter 5.4%.

  9. Line 13 - enter taxable FUTA wages as corrected in the examination. This should be the same as line 3.

  10. Line 14 - enter the amount of wages subject to state tax that has been reported to the state. This will include the amount reported on the original return to the state plus any additional wages subsequently reported for which the taxpayer has received a statement from the state acknowledging the additional wages reported. The taxpayer should be given 30 days to obtain such statement from the state. If the taxpayer's experience rate is 0%, enter the wages that would have been subject to state unemployment tax if the 0% rate had not been granted.

  11. Line 15 - enter 5.4%. Line 24 will be the same percentage.

  12. Line 19 - Use the Worksheet for Credit Computation found in the instructions to the Form 940 to correctly compute the allowable credits if some of the taxable FUTA wages were excluded from state unemployment tax OR if any state unemployment tax was paid late.

  13. Line 18 - enter contributions timely paid.

  14. Line 21 - for any state to which the credit reduction is applicable, enter the rate from Form 940 for the year under examination.

  15. Other Information - include such items as statements regarding revised or corrected reports, delinquency, explanation of adjustments, information regarding penalties, etc. If the examination included both IRC 7436 issues and non-IRC 7436 issues, indicate whether this report relates to a Form 2504-WCIRC 7436 Issue.

4.8.10.8.5.3  (07-31-2012)
Specific Item and Line Instructions for Completing Form 4668, Employment Tax Examination Changes Report

  1. Return form number - enter 941, 943, 944, 945, or Schedule H.

  2. Name and address of employer - self explanatory.

  3. Employer identification number - self explanatory.

  4. Calendar year - self explanatory.

  5. Total tax plus penalty or (decrease) in tax - enter the total amount of lines 13 through 16.

  6. Last quarter of this examination - enter the last quarter of the latest calendar year being examined.

    Note:

    If multiple years are being examined, the same entry would appear on each Form 4668.

  7. Examination discussed with - self explanatory.

  8. Agreed or unagreed - check the applicable box.

  9. Line 1 - Enter the combined employer/employee social security and medicare rates (IRC 3101 and IRC 3111) in Column a and the amount of the wages adjustment in Columns b through e.

  10. Line 2 - Enter the applicable social security and medicare rates under IRC 3509(a) in Column a and the amount of wage adjustment in Columns b through e.

  11. Line 3 - Enter the applicable social security and medicare rates under IRC 3509(b) in Column a and the amount of wage adjustment in Columns b through e.

  12. Line 4 - Enter the applicable social security and medicare rates (IRC 3101 and IRC 3111, if applicable) in Column a and the amount of the adjustment in Columns b through e.

  13. Line 5 - Enter the applicable income tax withholding rate in Column a and the amount of the wage adjustment in Columns b through e.

  14. Line 6 - Enter the applicable income tax withholding rate(s) under IRC 3509 in Column a and the amount of the wage adjustment in Columns b through e.

  15. Line 7 - Enter the applicable rate in Column a and the amount of the payments subject to backup withholding in Columns b through e.

  16. Line 8 - Use for any adjustment that does not affect an employee's social security or medicare wages.

  17. Line 9 - Use for any adjustment that does not affect an employee's income tax withholding wages.

    1. Enter any income tax withholding computed by the taxpayer for the examiner under IRC 3402(b) or IRC 3402(c) on unreported supplemental wages. (This can be abated under IRC 3402(d)).

    2. Enter any income tax withholding actually deducted and withheld but not reported to the Service. (This is not subject to IRC 3402(d)).

  18. Line 10 - Compute the social security and medicare taxes for lines 1, 2, 3, or 4 and adjustment for any amounts on line 8.

  19. Line 11 - Compute the income tax withholding for lines 5 or 6, and adjust for any amounts on line 9.

  20. Line 12 - Compute the backup withholding for line 7.

  21. Line 13 - Enter the total of lines 10, 11 and 12.

  22. Line 14 - Enter the amount of penalty under IRC 6651.

  23. Line 15 - Enter the amount of penalty under IRC 6656.

  24. Line 16 - Enter IRC section number in space provided for any other penalty and the amount of the penalty in Columns b through e.

  25. Line 17 - Enter the maximum amount of tax subject to the provisions of IRC 3402(d). If not applicable enter "None" . The tax from line 6 (IRC 3509) and any portion of line 9 that is not subject to IRC 3402(d) cannot be abated.

    Note:

    The amount subject to IRC 3402(d) abatement listed in Line 17 INCLUDES amounts allowed by the examiner as part of the examination when using the two-step process described in IRM 4.23.10.16.2, Examination Procedures for IRC 3402(d) Relief. If the examiner does not use the two-step assessment process and instead nets the tax due, line 17 should reflect the remaining amount of tax available for abatement.

  26. Enter the calendar year and the number of employees in the spaces provided in the statement regarding filing Form W-2c. Complete the mailing address.

    Note:

    The following notation, "Wage Statements Secured by Examiner," should be made in the block regarding the filing of Form W-2 / Form W-2c and in the other instructions section of the attached Form 3198, Special Handling Notice. If the examination included both IRC 7436 issues and non-IRC 7436 issues, indicate whether this report relates to a Form 2504-WCIRC 7436 issue.

4.8.10.8.6  (07-31-2012)
Explanation of Adjustments

  1. As noted previously, the Tax Court has jurisdiction to:

    1. Review the Service's determination that one or more individuals performing services for the taxpayer are employees,

    2. Review the Service's determination that the taxpayer is not entitled to treatment under section 530(a) of the Revenue Act of 1978 with respect to those individuals, and

    3. Determine the proper amount of employment tax under the above determinations.

  2. The 30 day letter should contain an explanation of the worker classification issue and the consideration of section 530(a) relief. The Form 886-A or equivalent used for the explanation with the 30 day letter should not be included with the notice.

  3. The notice of determination should contain a brief summary of the Service's position in the case, including the consideration of section 530 of the Revenue Act of 1978, the substantive issue of worker classification, and whether IRC 3509 or regular rates were used.

    Example:

    It is determined that the workers included in Table 1 are employees of [name of business] for the tax periods [list tax periods]. It is also determined that section 530 of the Revenue Act of 1978 does not apply since Forms 1099-MISC were not filed. It is further determined that the rates listed in IRC 3101, IRC 3111, and IRC 3402 are applicable since it has been determined that there was intentional disregard for the requirement to deduct and withhold taxes.

4.8.10.8.7  (07-31-2012)
"Duplicate Original" Notices Defined

  1. "Duplicate original" notices, a term used through this text, means an originally signed Letter 3523, Notice of Determination of Worker Classification, that is sent by certified or registered mail. The "duplicate" notice may reflect a different address for the taxpayer than the original notice.

  2. The Letter 3523 and Form 2504-WC (waiver) must show the same name and address and thus, both of these will be originally prepared for each duplicate original. All other forms and attachments may be copies.

4.8.10.9  (07-31-2012)
Before Issuing the Notice of Deficiency Worker Classification (NDWC)

  1. To ensure the accuracy of notices of determination, a final check of the NDWC will be conducted once the NDWC is prepared but before it is issued to ensure it is legally sufficient.

  2. This double check of the NDWC is limited to:

    1. The accuracy of the taxpayer's name, taxpayer identification number (TIN), and address on the letter and the waiver.

    2. The proper consideration of the taxpayer's last known address, including the use of multiple addresses, if appropriate.

    3. The identification of workers in Table 1.

    4. The exclusion of workers who were issued Form W-2 for the same periods.

    5. The inclusion of adjustments for compensation paid to corporate officers, as appropriate.

    6. The reconciliation of wage and tax adjustments throughout the notice.

    7. The documentation of the analysis supporting intentional disregard if the employment taxes are computed using the full rates.

    8. The documentation of whether an offer was made under the classification settlement program, what type of offer was made, if any, and why.

    9. The discussion of section 530 of the Revenue Act of 1978, detailing the reasons why the taxpayer does not qualify for relief.

    10. The explanation of items does not include the Form 886-A used in the 30 day letter.

    11. The use of the correct forms related to worker classification issues.


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