4.23.4  Workpapers — Employment Tax Examinations

Manual Transmittal

September 04, 2014

Purpose

(1) This transmits a revision to the Table of Contents and text for IRM 4.23.4, Employment Tax, Workpapers - Employment Tax Examinations.

Background

IRM 4.23.4, Employment Tax, Workpapers - Employment Tax Examinations has been extensively revised to reflect new organizational changes as well as to better reflect the purpose of completing appropriate workpapers in employment tax examinations. The chapter provides instructions for examinations using ETLS - Employment Tax Lead Sheets (formerly reengineering workpapers) , LB&I team audit procedures, and those using the Issue Management System (IMS). Due to the amount of changes and re-organization that was necessary to provide clarity, many sections have been completely re-written, some have been deleted entirely, and others have simply been re-arranged so that the flow is more structured to working an employment tax audit.

Other functions and operating divisions should consult specific procedures designed for their own use, if applicable.

Material Changes

(1) This section has been extensively revised to reflect changes in workpaper requirements.

(2) IRM 4.23.4.1. Revised in entirety. Changes made to reflect new SB/SE Employment tax structure, workpaper requirements, and provide an overview of the importance of workpapers in all case files.

(3) IRM 4.23.4.2. Revised in entirety. Changes made to provide clarity on the importance and purpose of workpapers in all case files.

(4) IRM 4.23.4.3. Revised in entirety. Renamed Workpaper Preparation: General. Provides a general overview of workpapers applicable in all employment tax case files.

(5) IRM 4.23.4.3.1. New subsection, Workpaper Preparation: Other Resources. Provides links to resources for examiners to use in preparation of workpapers. Consolidated cites previously included in other sections of the previous revision of IRM 4.23.4.

(6) IRM 4.23.4.4. Renamed Guide for Examiners Using ETLS - Employment Tax Lead Sheets. Extensively revised to give specific instructions to examiners using the ETLS workpapers in their examinations.

(7) IRM 4.23.4.5. New subsection, Guide for Examiners Using Issue Management Systems (IMS). Provides an overview of the IMS system. NOTE: Previous IRM 4.23.4.5 has been deleted and replaced with this new section. The information contained in the old section has been moved to other sections or deleted entirely, as appropriate.

(8) IRM 4.23.4.6. New subsection, Procedures for Employment Tax Examiners Working on LB&I team audits – General. This section provides an overview of workpapers used by employment tax specialists working on LB&I team audits.

(9) IRM 4.23.4.6.1. New subsection, Mandatory Workpapers. Section added to give an overview of the mandatory workpapers used when conducting examinations of LB&I taxpayers.

(10) IRM 4.23.4.6.2. New subsection, Pre-Examination Analysis and Audit Plan. Based on former IRM 4.23.4.6.1.

(11) IRM 4.23.4.6.3. New subsection, Risk Analysis. Based on former IRM 4.23.4.6.2.

(12) IRM 4.23.4.6.4. New subsection, Requests for Additional Time. Based on former IRM 4.23.4.6.3.

(13) IRM 4.23.4.6.5. Formerly IRM 4.23.4.6.4. This subsection has been updated and renumbered to reflect changes in organizational structure and procedures. Also adds clarification to the processes used during the examination of LB&I taxpayers.

(14) IRM 4.23.4.6.5(7). Added that the IDR procedures established by LB&I will be followed by the employment tax specialist unless otherwise agreed to by the LB&I team coordinator.

(15) IRM 4.23.4.6.6. Formerly IRM 4.23.4.6.5. Completely revised to better reflect the Form 5701 requirements in LB&I team audits.

(16) IRM 4.23.4.6.6(1) Removed reference to IMS. Added former IRM 4.23.4.6.5(3).

(17) IRM 4.23.4.6.6(2). Formerly included in IRM 4.23.4.6.5(2).

(18) IRM 4.23.4.6.6(3). Formerly (2). Removed reference to Tier 1 issues.

(19) IRM 4.23.4.6.7. Formerly IRM 4.23.4.6.6.

(20) IRM 4.23.4.6.8. Formerly IRM 4.23.4.6.7. Revised (1) and provided link to SAIN codes in (2). All other paragraphs deleted.

(21) IRM 4.23.4.6.9. Formerly IRM 4.23.4.6.8. Reworded and added Form 5346 requirement.

(22) IRM 4.23.4.6.10. Formerly IRM 4.23.4.6.9.

Effect on Other Documents

This material supersedes IRM 4.23.4, dated September 16, 2011.

Audience

This section contains instructions and guidelines for all LB&I, TE/GE, and SB/SE employees dealing with employment tax issues.

Effective Date

(09-04-2014)

John H. Imhoff, Jr.
Director, Specialty Programs
Small Business/Self-Employed Division

4.23.4.1  (09-04-2014)
Overview

  1. This section covers workpapers generally used in employment tax examinations. However, other functions and operating divisions should consult specific procedures designed for their own use, if applicable.

  2. Unless instructed otherwise, SB/SE Employment Tax (ET) examiners will use the ETLS - Employment Tax Lead Sheets described in IRM 4.23.4.4, Guide for Examiners Using ETLS - Employment Tax Lead Sheets, developed specifically for employment tax cases.

  3. SB/SE Employment Tax examiners working on LB&I team audits will follow workpaper preparation, specific audit techniques, and case closing procedures unique to these type of audits. See IRM 4.23.4.6, Procedures for Employment Tax Examiners working on LB&I team audits – General.

  4. All examiners trained in the use of the Issue Management Systems (IMS) are encouraged to use that system for all case management, regardless of the type case being worked. Use of IMS is required for all LB&I team audits. See IRM 4.23.4.5, Guide for Examiners Using Issue Management Systems (IMS).

  5. The examination workpapers and reports provide the basis for the decisions reached by the employment tax examiner. Only on the basis of the material in the workpapers can a reviewer determine if the examination was complete and correct. The workpapers must show explanations, analyses, and conclusions reached and should be sufficiently complete so, generally, no additional comments will be needed in the transmittal letter.

  6. Workpapers must clearly and concisely state the issue, facts, audit steps, law, taxpayer's position, and conclusion for each issue examined. In addition, workpapers must document if the following actions and/or audit steps were taken:

    • Interviews of appropriate parties were conducted,

    • All required employment tax and information returns were accurately and timely filed,

    • The examiner reconciled Form(s) W-2 to payroll, and

    • All required Form(s) 1099s were correctly filed (e.g., no worker reclassification issue exists and backup withholding is not warranted).

      Note:

      If any of the above actions and/or audit steps were not taken, the examiner will document as to why not.

  7. IRM 4.10.9, Workpapers, also provides further guidance on workpaper preparation.

4.23.4.2  (09-04-2014)
Purpose of Workpapers

  1. Workpapers are key in the support of all IRS positions taken when making adjustments. Proper preparation of workpapers will allow for:

    1. Support of the IRS position for any appealed or litigated case,

    2. Documentation of action(s) taken,

    3. Preparation of necessary reports,

    4. Managerial, technical or other review,

    5. Authorized review by other governmental agencies, and

    6. Subsequent examiners to be able to determine the audit trail and scope of prior examination.

  2. Workpapers are required in every examination case. Workpapers should include all the evidence gathered by the examiner to show the work performed, audit techniques followed, tax law relied on, and conclusions reached. Supporting workpapers must be prepared when necessary to fully document all issues and conclusions. These supporting workpapers must be attached to the appropriate leadsheet.

  3. As workpapers are used in the preparation of the audit report, examiners must ensure that the information contained in the workpapers is consistent with and fully support the final conclusions reached. The workpapers will be relied upon to support the issues in appealed or litigated cases. The workpapers can be provided to a subsequent reviewer or the taxpayer when requested under the Freedom of Information Act (FOIA) process.

4.23.4.3  (09-04-2014)
Workpaper Preparation: General

  1. Use of the ETLS - Employment Tax Lead Sheets, will help the examiner meet all workpaper requirements. Use of stand-alone workpapers, while not prohibited, does not relieve the examiner from meeting all of the requirements.

  2. Properly prepared workpapers must provide adequate documentation to support conclusions. Without sufficient documentation, it is not possible for reviewers to be assured that the scope of the examination or the basis for any adjustments made is accurate. Examiners should always cite legal authority such as Internal Revenue Code, applicable regulations, court cases, revenue ruling and/or revenue procedures to support the conclusions reached.

  3. Workpapers must be neat, legible, clear, and concise. The legibility of examination workpapers and reports is an important aspect of the overall quality of the examination. The easier it is to read workpapers and reports, the easier it is to understand them.

  4. Each of the workpapers must be clearly headed, showing the name of the taxpayer, taxpayer's identification number (TIN), tax period examined, date workpapers were prepared, name or initials of the examiner, and the issues or items being examined.

  5. Workpapers must be indexed, numbered, and securely fastened together. Index workpapers as they are prepared. If the issue cannot be fully explained on the specific leadsheet, supporting workpapers must be prepared, indexed and attached behind the appropriate leadsheet. Supporting workpapers may be required to provide detailed explanations, analysis, schedules, and/or computations. For example, supporting workpapers would be used to schedule out wage adjustments applicable to each employee.

  6. The volume of supporting workpapers prepared during examinations will vary depending on the size of the entity and the number and type of issues developed. While there is no fixed requirements to include specific schedules or analysis in the supporting workpapers, examiners must include enough information to support the summary and conclusion reached and documented on the leadsheet. Any notes taken during interviews conducted must be included in the case file as added support of the final case resolution.

  7. The workpapers should not include superfluous documentation, copies of irrelevant data, or the examiners personal opinions relating to the taxpayer or the business. For example, copies of CPA workpapers or reports should not be included in the workpapers where they do not contribute to the development of an issue. Examiners should never make personal comments about a taxpayer. Remember, taxpayers always have the right to request any and all workpapers included in the case file under FOIA. To be meaningful, the workpapers should reflect what was actually accomplished during the examination.

  8. The case file should include a well-documented, contemporaneous case history sheet. For SB/SE ET and TE/GE:ITG examiners using the standardized leadsheets, Form 9984, Examining Officer’s Activity Record, is used for this purpose and numbered as Workpaper 100. For SB/SE employment tax examiners using IMS, the Examining Officer’s Activity Record should be used for this purpose. The case history is used to document:

    • A summary of contacts made during the examination,

    • All actions taken by the examiner, taxpayers and/or reviewers (e.g., manager),

    • Time spent on the case,

    • All discussions held with the manager and decisions reached,

    • The date and method for delivery of publications, e.g.,
      - Pub 1, Your Rights as a Taxpayer,
      - Notice 609, Privacy Act Notice,
      - Pub 1976, Do You Qualify for Relief Under Section 530?, and, when necessary,
      - Pub 5022, Fast Track Settlement - A Process for Prompt Resolution of Small Business Self Employed Tax Issues,

    • Any extended period of inactivity, such as leave or extended details. For all SB/SE employment tax examiners, a comment is required if there is no activity on a case for a period of 45 days. The comment should fully explain the reasons for the delays.

      Note:

      See IRM 4.23.3.7.6, Initial Contact with Taxpayers, and IRM 4.23.3.7.5, Scheduling the Appointment, for additional requirements.

  9. If the case was initiated by a referral, examiners must include a printed copy of the Specialist Referral System (SRS) Referral Form in the workpapers.

  10. Employment tax examiners have different workpapers available depending on the type of examination being worked and the type of training received:

    1. Examiners not using IMS will use the ETLS - Employment Tax Lead Sheets. See IRM 4.23.4.4, Guide for Examiners Using ETLS - Employment Tax Lead Sheets, for specific information.

    2. Examiners trained in the use of IMS will use the workpapers available within that system or, if working a team audit, examiners will follow workpaper procedures explained in IRM 4.46.6.4, Workpaper Considerations. See IRM 4.23.4.5, Guide for Examiners Using Issue Management Systems (IMS), for specific information and guidance.

4.23.4.3.1  (09-04-2014)
Workpaper Preparation: Other Resources

  1. The LB&I web page Audit Tools contains links to many job aids that the employment tax specialist may find useful. They can be found at: http://lmsb.irs.gov/reference/audit_tools/index.asp.

  2. Additional information is available at: http://mysbse.web.irs.gov/Specialty/et/examreturns/default.aspx

4.23.4.4  (09-04-2014)
Guide for Examiners Using ETLS - Employment Tax Lead Sheets

  1. The ETLS - Employment Tax Lead Sheet templates are available at: http://mysbse.web.irs.gov/Specialty/et/initiate/work/setting/default.aspx.

  2. Form 4318–ET, Employment Tax Examination Workpapers - Index, is the examination workpapers cover sheet used in all employment tax cases, except for those following LB&I team audit procedures. It is used for pre-planning the examination and serves as an index to the audit workpapers. When needed, Continuation Sheet for Form 4318-ET, will be used. TE/GE examiners may use Form 5773, EP/EO Workpaper Summary Continuation Sheet, in place of Form 4318–ET.

  3. The sections of Form 4318-ET are arranged by specific purpose;

    1. Section 100 - 190, Administrative and Planning

    2. Section 200 - 205, Evaluation of Records and Fraud

    3. Section 300 - 305, Penalty Consideration

    4. Section 400 - 499, Identified/Classified Issues

    5. Section 500 - 599, Additional Issues

    6. Section 600 - 999, Miscellaneous

  4. Each section, 1XX through 3XX, has references and links to additional lead sheets.

  5. Enter all wage adjustments by year and amount for each rate used in the "Adjustments to Wages" columns in sections 4XX and 5XX. This provides source data for report preparation and highlights adjustments for any reviewer.

  6. The following list contains the mandatory lead sheets available in the ETLS - Employment Tax Lead Sheets package. All examiners must complete these mandatory workpapers in all employment tax cases, except where noted:

    • 000: Form 4318 ET, Employment Tax Examination Workpapers – Index

    • 100: Activity Record, Form 9984, Examining Officer's Activity Record

    • 105: Pre-Plan Administrative Lead Sheet

    • 115: GM Concurrence Meeting Check Sheet (Options for RA/ ROE Grades 13 and above; not required for ET Tax Compliance Officers (TCO))

    • 120: Initial Taxpayer Contact Check Sheet

    • 125-1: Initial Appointment Agenda

    • 125-2: Initial Interview Questions

    • 130-1: Multi-Year and Related Returns Lead Sheet

    • 130-2: 1099 Filing Requirement Checks

    • 135: Records Check List

    • 140: Mandatory Issues Check Sheet (Not required for ET TCOs)

    • 150: Risk Analysis Workpaper (Not required for ET TCOs)

    • 200: Payroll Reconciliation & Evaluation

    • 203: Internal Controls - Tip Audits

    • 205-1: Fraud Awareness Lead Sheet

    • 300: Penalty Approval Form

    • 940: Closing Documents - Closing Conference Agenda

    Note:

    National Research Project (NRP) employment tax cases are delivered through Report Generation Software (RGS) and contain a pre-populated workpaper package in the Data Capture Instrument-1, (DCI-1). As all issues in the Employment Tax NRP study are under examination, Lead Sheets 140 and 150 are not contained in the package and not required.

  7. Risk-based decision-making is critical to the effective allocation of limited examination resources. Workpaper #150, Risk Analysis Workpaper, has been changed from an issue-by-issue approach to one of a global or case focus; therefore, this workpaper is not required for each new issue added or for each issue declassified – it is only required for each taxpayer/entity. This design supports the Value-Added Decision Making (80/20) concept and the Mid-Audit Decision Point (50% Rule) concept of the ETLS - Employment Tax Lead Sheet process.

    Note:

    The Risk Analysis Workpaper is not required for ET Tax Compliance Officers (TCOs). When an ET TCO expands the scope beyond the classified issue or limits the scope, it is discussed with the manager and the decision is documented on Form 9984, Examining Officer’s Activity Record.

  8. All GS-12 and below employment tax specialists (except for ET TCOs) must hold a Group Manager Concurrence Meeting (GMCM) within 30 calendar days after completion of the initial appointment. During the GMCM, the examiner should be prepared to discuss:

    • The initial appointment and Mutual Commitment Date (MCD),

    • The plan for completing the case, and

    • Concerns.

    The GMCM should be documented on the GM Concurrence Meeting Check Sheet (Workpaper #115).

    Note:

    While the GMCM is not required for TCOs or GS-13 and above examiners, they are encouraged to utilize the GMCM when the facts of the case indicate managerial involvement may become necessary.

4.23.4.5  (09-04-2014)
Guide for Examiners Using Issue Management Systems (IMS)

  1. The Issue Management System (IMS) is required to be used during all LB&I team audits or after the examiner has received training on the use of the system (See IRM 4.23.4.1(3)). IMS is designed to:

    • Support remotely located revenue agents,

    • Enhance issue identification,

    • Improve issue tracking and reporting,

    • Share information through a centralized data repository, and

    • Capture data in support of performance measures.

  2. Examiners will establish their cases in the IMS program. When required, the IMS system can be used to:

    • Perform preliminary risk analysis,

    • Perform in-process risk analysis for issues,

    • Set-up and monitor case assignments,

    • Input and monitor issue progress and status of IDRs,

    • Prepare and monitor Forms 5701, if used,

    • Input case documents and time information per issues,

    • Generate various time reports and activity records, and

    • Create a next case cycle automatically populating selected information from a previous case cycle (LB&I team audits only)

    For more information on IMS, refer to the IMS web site at: http://lmsb.irs.gov/hq/bsp/IMS/3_8/ims_agent_home38.asp.

4.23.4.6  (09-04-2014)
Procedures for Employment Tax Examiners Working on LB&I team audits – General

  1. All employment tax examiners working on coordinated LB&I examinations must follow LB&I audit procedures discussed here. Examiners working LB&I stand-alone employment tax audits may use either the procedures discussed below or the ETLS - Employment Tax Lead Sheets, covered in IRM 4.23.4.4. The following sections will provide guidance specific to LB&I procedures, including:

    • Mandatory workpapers,

    • Pre-examination analysis and audit plan requirements,

    • Risk Analysis,

    • Requests for Additional Time,

    • Information Document Request (IDR) preparation,

    • Form 5701, Notice of Proposed Adjustment preparation,

    • Issue Lead Sheet,

    • Workpaper Organization,

    • Package Audit, and

    • Workpaper Disposition.

4.23.4.6.1  (09-04-2014)
Mandatory Workpapers

  1. Examiners must prepare individual Form(s) 4564, Information Document Requests (IDR), and Form(s) 5701, Notice of Proposed Adjustment (NOPA), for each issue being developed. For information on other IMS mandatory input requirements, refer to the following IMS web site, IMS Mandatory Minimum Input Requirements for All New Starts and In-Process Cases, at http://lmsb.irs.gov/hq/bsp/IMS/MandatoryInput111208.asp.

  2. The examiner will create:

    • Form 13744, Examiner’s Risk Analysis Worksheet, and an audit plan consisting of:
      - Form 4764-A, LB&I Examination Plan, Part III - Summary of Assignments, and
      - Form 4764-B, LB&I Examination Plan, Part III - Examination Procedures.

  3. Form 4764-A and Form 4764-B are the examination workpaper cover sheets. These forms are used for pre-employment tax examination planning and as the first page and leadsheet to the audit workpapers. These forms also summarize the audit results.

  4. ) For further guidance, examiners should refer to IRM 4.10.9, Workpapers, and IRM 4.46, LB&I Guide for Quality Examinations.

4.23.4.6.2  (09-04-2014)
Pre-Examination Analysis and Audit Plan

  1. The examination plan (audit plan) provides the following information:

    • Agreements with the taxpayer,

    • Information for Service personnel,

    • Examination scope,

    • Examination procedures, and

    • Time estimates.

  2. Examiners are required to prepare an audit plan. The due date of such plan will be agreed to between the LB&I coordinator (or LB&I group manager if no LB&I coordinator), and employment tax specialist. The plan is prepared by the Team Coordinator using Form 4764, LB&I Examination Plan. In those cases where only an employment tax examination is being conducted, it will be the responsibility of the Employment Tax Specialist to complete the relevant portions of Form 4764. The form should contain the following information:

    • Name of entity,

    • Years involved,

    • Brief description of the examination assignment,

    • Planned start and completion dates of the ET examination,

    • Issues being examined shown by SAIN (Standard Audit Index Number), and

    • A description of the specific examination techniques to be used.

  3. The taxpayer will be given a copy of the audit plan and such action should be documented in the Examining Officer’s Activity Record. See IRM 4.46.3.4.2.3.6, Taxpayer Acknowledgement.

  4. During the pre-planning stages of the examination, the examiner should review a copy of the income tax return filed by the taxpayer to determine if there are any large, unusual or questionable (LUQ) employment tax issues. The relevant pages of the return should be included in the closed employment tax case file. Relevant pages may include, but are not limited to:

    • First four pages of Form 1120, U.S. Corporation Income Tax Return

    • Form 851, Affiliations Schedule,

    • Consolidated schedule of income and deductions,

    • Statement of "Other Deductions" ,

    • Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return

    • M-2, Analysis of Unappropriated Retained Earnings per Books, and

    • M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More.

  5. In addition to reviewing the related income tax return, the examiner should review taxpayer historical files as well as any prior employment tax audit reports for potential issues. IDRS command code "BMFOLZ" can be used to determine if there were any prior employment tax examinations.

  6. An officer of a corporation must sign either the communications agreement contained in the Audit Plan or any other type of written authorization that designates the persons with whom the examination team can communicate. A copy of the written authorization must be included and documented in the employment tax case file.

4.23.4.6.3  (09-04-2014)
Risk Analysis

  1. ) Risk-based decision-making is critical to the effective allocation of limited examination resources. A risk assessment must be conducted with the initial planning of the examination, when 50 percent of the case time has been reached, and when a significant event occurs.

  2. The first risk analysis is prepared during the initial planning phase of the examination. Depending on materiality and/or compliance considerations, the risk analysis can be done on an issue-by-issue or a case basis.

    • Form 13744, Examiner’s Risk Analysis Worksheet, should be completed as part of the pre-audit analysis

    • Team Manager must approve all risk analyses

  3. The mid-cycle risk analysis is optional for key and related cases that are corporate case Activity Code 221 and below, partnerships, S-Corporations, individuals returns, and if the case will be closed within 12 months of the status 12 date.

  4. The mid-cycle risk analysis includes time applied and indicates if additional time is needed. It also covers the number of Forms 5701, Notice of Proposed Adjustment, issued plus the number of Form 4564, Information Document Requests (IDRs) issued and outstanding. The examiner should also state the potential tax liability by issue and by year and provide a brief assessment of the audit.

4.23.4.6.4  (09-04-2014)
Requests for Additional Time

  1. After the agent completes the mid-cycle risk analysis, it may be apparent that additional time will be needed to complete the examination. If the examiner needs more time than was originally planned, an explanation of why additional time is warranted and how much additional time is needed to complete the examination should be provided.

  2. The SB/SE Employment Tax team manager and the LB&I team manager must approve a request for additional time.

4.23.4.6.5  (09-04-2014)
Information Document Requests (IDRs)

  1. All requests for information should be specific, clear, and concise and must be in writing using Form 4564, Information Document Request (IDR).

  2. Prior to issuing an IDR, the examiner should discuss with the taxpayer and the team coordinator what specific information is needed. The taxpayer may be able to explain what type of information is available and may suggest a preferred way to request it on the IDR. Conferring with the team coordinator also ensures that the employment tax examiner does not ask for information that is already available.

  3. The team coordinator may determine the numbering system that is used for all IDRs issued. An IDR log is maintained to provide a source for assigning numbers and to monitor response times.

  4. Four copies of each IDR request are printed. Two are given to the taxpayer, one is given to the team coordinator and one is maintained in the examiner's case file.

  5. IDRs should generally include only one issue or subject. This results in a faster turnaround time since information covering multiple topics may need to come from several sources.

  6. The Information Document Request Management Process is used for all cases. During the opening conference, the team coordinator and taxpayer will work together to agree to acceptable response times to all IDRs issued. The importance of timely responses is emphasized as it will improve cycle time and promote earlier issue resolution. The agreed upon response time is communicated to the audit team and procedures to ensure both the IRS and taxpayer adhere to the agreed time frames will be enforced per established guidelines.

  7. A memorandum of understanding stating the agreed upon IDR response time is signed by the taxpayer and team coordinator or agent in charge. IDR procedures established by LB&I will be followed by the employment tax examiner working with the LB&I income tax team.

  8. The process does not preclude the examination team from using judgment on a case by case basis. Continuous collaboration is needed to reach realistic due dates and dates can be revised based upon the facts and circumstances. A detailed description of the IDR Management Process can be found at IRM 4.46.4.5, Information Document Request Process.

4.23.4.6.6  (09-04-2014)
Form 5701 – Notice of Proposed Adjustment

  1. All adjustments are proposed on a Form 5701, Notice of Proposed Adjustment, as they are developed. This form serves as a cover sheet to Form 886–A, Explanation of Adjustments, which is attached to fully explain the basis for proposing each adjustment. The Forms 5701 and Form 886-A will be attached to the audit report.

  2. Potential adjustments should be discussed with the team coordinator and the taxpayer prior to issuing the notice.

  3. The employment tax team manager reviews and signs the Form(s) 5701. This signature indicates the team manager has accepted the examiner’s position on the issue. A Territory Manager’s approval/signature is required on all Form(s) 5701 involving issues on:

    • IC cases with adjustments of $10 million or more

    • CIC cases with adjustments than of $50 million or more

  4. The Form(s) 5701 and Form(s) 886-A are to be attached to the final audit report.

4.23.4.6.7  (09-04-2014)
Issue Lead Sheets

  1. Form 4764-B, LB&I Examination Plan, Part III - Examination Procedures Section, is the lead sheet to describe the audit procedures applied and the conclusions reached for each issue. They should be properly headed, include a discussion of the applicable law, document the audit trail, and lead to a clear and logical conclusion.

  2. Supporting documentation should be attached as a workpaper when further explanation is needed to support conclusions reached.

  3. Lead sheets also serve as an index for any workpapers that relate to a specific issue. All workpapers should be numbered, indexed, and referenced to the issue lead sheet.

4.23.4.6.8  (09-04-2014)
Workpaper Organization

  1. Workpapers should be organized by SAIN number. This will ensure all team members' audit case files are organized in a consistent manner, allowing for ease of review by the team coordinator, team managers and others.

  2. Current SAIN codes for employment tax examiners can be found using the following link:
    http://mysbse.web.irs.gov/Specialty/et/initiate/work/setting/default.aspx

4.23.4.6.9  (09-04-2014)
Package Audit Requirements

  1. In support of the LB&I Executive Compensation Strategy (IRM 4.46.3.5, Corporate Officers’ Returns), Employment Tax Specialists are required to inspect officer and key executives’ returns when conducting an examination of an LB&I taxpayer outside of a team audit. If issues are found, Form 5346, Exam Information Report, will be completed and forwarded per local procedures. Additional guidance on inspection of officer returns has been published in Q & A format at: http://lmsb.irs.gov/hq/fs/employment_tax/ASPVersion/Resources_and_Information/CEC/CEC_FAQ.asp.

4.23.4.6.10  (09-04-2014)
Workpaper Disposition

  1. For CIC cases, the employment tax audit workpapers will remain at the audit site. At the conclusion of the examination, they will be archived by the team manager along with the workpapers of the other team members. The workpapers provide important historical information and are valuable for any subsequent cycles that may be opened.

  2. For IC cases, workpapers are included in the closed employment tax case file.

  3. When closing a related case at the same time as the primary/key case file, the required administrative workpapers do not need to be duplicated in the related case files if:

    • the related cases are being closed from the group at the same time, and

    • the returns are properly linked on ERCS and identified as being either the Primary/Key Return or the Related Return.


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