4.23.10  Report Writing Guide for Employment Tax Examinations (Cont. 1)

4.23.10.12 
Preparation of the Employment Tax Report

4.23.10.12.2  (05-07-2013)
Railroad Retirement Tax Act (RRTA) Examination Reports

  1. The report writing instructions for FICA tax examinations apply generally to RRTA tax examinations. However, references on report forms to FICA should be changed to RRTA. If RRTA and income tax withholding are both being adjusted by the examination, a separate Form 4668 will be prepared for each type of tax, as income tax withholding is reported quarterly on Form 941 and the RRTA tax liability is reported annually on Form CT-1, Employer's Annual Railroad Retirement Tax Return. In addition, Form CT-2, Employee Representative's Quarterly Railroad Tax Return, is a quarterly return filed by employee representatives to pay Tier 1 and Tier 2 taxes as provided in IRC 3211, Rate of Tax, and IRC 3212, Determination of Compensation.

  2. When using Form 4668 for either CT-1 or CT-2 adjustments in an RRTA examination, the following additional modifications are necessary to encompass the various taxes unique to railroad examinations. These include:

    1. RRTA compensation adjustment for both employer and employee, Tier 1.

    2. RRTA compensation adjustment for both employer and employee, Tier 2.

    3. RRTA sick pay adjustment for both employer and employee, Tier 1.

  3. Any additional modifications may be made to adapt existing report forms to RRTA examinations. The case file will include a memorandum to the Railroad Retirement Board (RRB) stating each employee's name and SSN, the name of the railroad employer, and the increase or decrease in the amount of compensation subject to railroad retirement tax for each employee. Due to disclosure concerns, this memorandum should not contain any references to income tax withholding, FICA wage, or FICA tax adjustments.

  4. In RRTA examinations involving the conversion of an employee from FICA coverage to RRTA coverage, the examiner will advise the taxpayer to file a protective claim under IRC 3503, Erroneous Payments, and the regulations thereunder. No action should be taken on these claims until all administrative and judicial proceedings have been resolved. See IRM 4.23.8.6.2, Special Rules Relating to FICA and RRTA Taxes, for additional procedures on RRTA conversion cases.

  5. Upon closing a case converting workers from FICA coverage to RRTA, Form 3198 should include instructions on correct processing and the case should be flagged "Stop 537G Large Corp/Technical" for processing in the Covington, KY, processing center. The Form 3198 should also indicate that copies of the report should be forwarded to the RRB.

  6. Any questions involving railroad employment taxes should be directed to the LB&I Railroad Collateral Subject Matter Experts, found in the LB&I Technical Advisors listing Issue Practice Groups and International, Industry and Other Technical Guidance, under "Railroad." The railroad website, "Railroad Technical Guidance," includes sections for Resources, Issues, Hot Topics, and a link to the Technical Advisor.

4.23.10.12.3  (04-10-2009)
Employment Tax Claim Report

  1. Examiners will prepare reports for cases in which claims are allowed in-full or in-part under the same procedures prescribed for other cases. Include a statement regarding the disposition of the claim in the "Other Information" section of Form 4666 and attach Form 4667, Form 4668, and/or Form 4668-B to point out the tax adjustments.

  2. Refer to IRM 4.23.13, Employment Tax Refund or Abatement Claims, for instructions.

4.23.10.12.4  (04-10-2009)
Employment Tax No-Change Report

  1. If all employment tax returns examined result in no change, the no-change report will be issued using Form 4666 and the appropriate closing letters. See IRM 4.23.10.6, Notification Letters in No-Change or No-Liability Cases. In EP/EO examinations, the examiner will also enter the no-change disposal code on Form 5772, EP/EO Workpaper Summary.

  2. All no-change reports should include the caveat:

    "This examination report is subject to the approval by the (appropriate designee):" Examples include:

    • Chief, Employment Tax Operations,

    • Director of Field Operations, or

    • Director of Indian Tribal Governments.

  3. If the examination did not address worker classification issues, the following disclaimer should be entered on the Form 4666:

    "The examination of your employment tax returns as reflected on this report did not include an examination for employment tax purposes of whether any individuals should be treated as employees of the taxpayer for the purposes of Section 530 of the Revenue Act of 1978, as amended by Section 1122 of the Small Business Job Protection Act of 1996."

  4. If the examination addressed worker classification issues for some classes of workers and not for others, it is recommended that the disclaimer in (2) above specify which classes of worker were examined. See IRM 4.23.10.12.8(4).

  5. In examinations, Employment Tax Specialists should control all 4 quarters of Form 941 when an examination covers the entire year. This applies even if the case results in a no-change. This will more accurately reflect the audit work conducted. In some cases, the fourth quarter return for each calendar year examined may initially be controlled. Controls on prior/subsequent or related quarters should be requested as soon as it is determined they will be included as part of the exam. This will ensure that proper inventory controls are in place and prevent delays when the case is ready for closure from the group.

  6. When a Form 941 examination for less than a calendar year results in a no-change, no-change only the quarters examined. Explain in the workpapers the reason for not examining the other quarters in the calendar year.

  7. The taxpayer will be issued a no-change report on Form 4666 indicating the period(s) and return form(s) examined and closed as no-change.

  8. Guidelines for notification letters to the taxpayer and the taxpayer's representative in no-change cases are found in IRM 4.23.10.6, Notification Letters in No-Change or No-Liability Cases.

  9. The above procedures will not be used for an examination if there are both change and no-change results for the various returns examined in a calendar year examination or multiple year examination. Rather, the no-change will be included with the change results in a single examination report:

    1. Form 4666 will always be used in such reports.

    2. The no-changes will be reported in the summary section of Form 4666 by entering the period and return form number, writing "No-Change" in the tax column and entering a dash in the page column.

    3. Form 4667, Form 4668-B, or Form 4668 will not be completed for the years no-changed. The changes will be reported as usual, including entering the examination results in the summary portion of Form 4666.

  10. When a taxpayer's employment tax returns are examined concurrently with other returns (income tax returns or TE/GE returns such as Form 990) and the employment tax examination results in a no-change, a statement to that effect will be included in the income tax or TE/GE examination workpapers. The statement should identify the employment tax returns examined and indicate briefly the extent of the examination.

4.23.10.12.4.1  (04-10-2009)
No-Change Reports for Section 530 Eligible Taxpayers

  1. The question of whether a business is eligible for section 530 treatment must be addressed first in every worker classification case. See IRM 4.23.8.2, Introduction, and IRM 4.23.5.2, Section 530 of the Revenue Act of 1978. If the firm is eligible for section 530, the examiner is to discontinue the examination with regard to the qualified occupation. This discontinuance means that the worker status has not been determined as to whether the occupation class is that of employee or independent contractor.

  2. If an examination was limited to just the issue of the occupation covered by section 530, the examination is to be closed as a no-change. Form 4666 should include a statement as to the description of the worker classification that qualifies, the reason section 530 exists for that classification, and an explanation that the return was accepted as filed.

  3. If the examination also includes other issues, those issues will be completed prior to a report being issued - whether no-change or change. However, the statement described in paragraph (2) above shall be included on Form 4666.

4.23.10.12.5  (05-07-2013)
Employment Tax Change Report

  1. In examinations, Employment Tax Specialists should control all 4 quarters of Form 941 when an examination covers the entire year. This will more accurately reflect the audit work conducted. In some cases, the fourth quarter return for each calendar year examined may initially be controlled. Controls on prior/subsequent or related quarters should be requested as soon as it is determined they will be included as part of the exam. This will ensure that proper inventory controls are in place and prevent delays when the case is ready for closure from the group.

  2. The restriction on assessment in IRC 7436 created the requirement for a separate agreement form, Form 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases. This form is to be used for solicitation of agreement for issues relating to worker classification and section 530. See Exhibit 4.23.10-7, Form 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases, for instructions on completion of the form.

  3. Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment, is the agreement form to be used in two situations:

    1. In employment tax examinations where any worker classification issue was examined and accepted and other non-IRC 7436 issues are adjusted, (i.e., fringe benefits). The non-IRC 7436 issues are reflected on the Form 2504, and the identity of the worker job classification that was accepted in the exam should be notated in the "Other Information" section of the Form 4666.

    2. In employment tax examinations where the worker classification adjustment is adjusted and reflected on Form 2504-WC and there are other non-IRC 7436 issues. The non-IRC 7436 adjustments should be reflected on a separate Form 2504.
      See Exhibit 4.23.10-5, Form 2504 - Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment.

  4. Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 Statement), is used when other employment tax audit issues not related to worker classification and section 530 are examined and adjusted, and the examination did not address issues with regard to employee classification and worker status. The form contains the following disclaimer statement;

    "The examination of your employment tax returns as reflected on this report did not include an examination for employment tax purposes of whether any individuals should be treated as employees of the taxpayer pursuant to Section 530 of the Revenue Act of 1978, as amended by Section 1122 of the Small Business Job Protection Act of 1996."
    See Exhibit 4.23.10-6, Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 Statement).
    See IRM 4.23.10.12.11, Form 2504, Form 2504-S, and Form 2504–WC, for additional information.

  5. Separate reports (Form 4666, Form 4667, Form 4668, Form 4668-B) and agreement forms (Form 2504 and Form 2504-WC) MUST BE prepared if both IRC 7436 and non-section 7436 issues are present. Examiners may encounter situations in which there are a combination of agreed and unagreed adjustments involving IRC 7436 and non-section 7436 issues.

  6. When agreement is reached with the taxpayer, the examiner will prepare and furnish an examination report (Forms 4666, 4667, 4668-B, 4668, 2504, 2504-S and/or 2504–WC) to the taxpayer at the closing conference. A copy will also be given to the taxpayer's representative if provided for by a power of attorney. The taxpayer and representative will be provided final notice by Letter 3382, Notification Letter - Agreed Employment Tax Change Cases, after the case has cleared technical review.

  7. All agreed reports are subject to the approval by the (appropriate designee):

    • Chief, Employment Tax Operations,

    • Appropriate Director for LB&I or TE/GE function, or

    • Director of Indian Tribal Governments.


    A caveat to this effect is included on Form 4666 for agreed reports.

  8. Since the reasons for adjustments are explained at the conclusion of the examination, a written explanation is not required unless it is deemed necessary by the examiner. A written explanation will be furnished if specifically requested by the taxpayer or his/her representative and for all unagreed examination issues.

  9. If a report furnished during a closing conference is found to be in error, a corrected report will be made. If the taxpayer does not agree with the corrected report, prepare a report under procedures for unagreed cases. When there is a corrected report, agreed or unagreed, the examiner will enter in the remarks section of Form 4666, "This corrected report supersedes report dated _____" and annotate at the top of the report form "CORRECTED REPORT."

  10. If additional information is received that would change the original report, prepare a revised examination report. On the revised report, adjust the amounts as shown on the original tax return. It is not necessary to prepare a revised report showing the amount "as previously adjusted." The tax report should be noted as "Revised Report" at the top of the form and the statement, "This revised report supersedes report dated ____," in the remarks section. Receipt of Forms 4669/4670 or proof of payment of SUTA taxes are examples where revised reports are used.

  11. When an examination results in an agreement to the findings on one type of tax or issue and no agreement on another, separate reports will be prepared. See IRM 4.23.10.16.1, Partial Assessment / Quick Assessment Processing, for instructions.

  12. When income tax withholding is computed, the examiner will advise the taxpayer of his rights under IRC 3402(d) and furnish a supply of Forms 4669 and a Form 4670.

    1. Form 4669, Statement of Payments Received, is provided for the taxpayer/employer to secure statements from payees and employees that the income tax on the payments in question has been satisfied.

    2. Form 4670, Request for Relief from Payment of Income Tax Withholding, is used to summarize and transmit the Forms 4669 to the Campus processing center and to request relief from payment under IRC 3402(d).

      Note:

      IRC 3402(d) does not apply when only IRC 3509 rates are used or the income tax was actually deducted and withheld but not reported to the Service. In these situations, Form 4668, line 12, "Maximum Tax available for abatement under IRC 3402(d)," should be labeled "NONE."

  13. Employers' requests under IRC 3402(d) for relief from the payment of income tax withholding are generally handled at Campuses as ADP adjustments. However, the examiner does have the authority to accept the Forms 4669/4670 for income tax withholding adjustment under IRC section 3402(d). See IRM 4.23.8.4.2, Procedures for Granting Relief Under IRC 3402(d) by Examiners, for additional instructions on granting relief under IRC section 3402(d). If the examiner does not receive Forms 4669/4670 from the employer by the time the case is closed, the taxpayer should be instructed to wait until they receive a notice of assessment before submitting Forms 4669/4670 to the processing center for abatement.

  14. For further information on the partial assessment procedures and report writing for IRC 3402(d) examinations involving field abatements, see:

    • IRM 4.23.10.16.2, Examination Procedures for IRC 3402(d) Relief, and

    • IRM 4.23.10.16.3, Examination Report Forms for IRC 3402(d) Examinations.

4.23.10.12.6  (05-07-2013)
Household Employment Taxes

  1. Special requirements apply to household employers with domestic employees under IRC 3510, Coordination of Collection of Domestic Service Employment Taxes With Collection of Income Taxes, and IRC 3121. For wages paid after December 31, 1994:

    • Household employers generally must report and pay FICA taxes, FUTA tax, and any withheld income tax on a calendar year basis,

    • Household employers are not liable for FICA taxes with respect to any household employee to whom the employer pays "cash wages" of less than the minimum dollar threshold during the year, and

    • Household employees under the age of 18 at any time during the year are exempt from FICA taxes, unless household work is the employee's principal occupation. This exemption does not apply to FUTA tax.

  2. Household employers generally report FICA and FUTA taxes and any withheld income tax with respect to household employees on Schedule H, Household Employment Taxes, which is filed with the employer's individual income tax return.

  3. Household employers who file Schedule H must pay FICA and FUTA taxes and any withheld income taxes by the due date for their individual income tax returns, not including any extensions, for the applicable year. The employer for purposes of Schedule H is whoever applied for the EIN on Form SS-4. If the return is a joint return, only one taxpayer can be the employer of record on Schedule H, and this should be the same taxpayer who obtained the EIN. The employer is responsible for filing Forms W-2 and W-3 for the household employees.

  4. Employers that have both household employees and other employees who are not household employees may choose either of two options for reporting employment taxes, including any withheld income tax, with respect to the household employees. These employers may either:

    1. Report FICA and FUTA taxes and any income tax withholding for household employees annually on Schedule H, and report FICA and FUTA taxes and any income tax withholding for other employees on Forms 941/944 and 940/ 940–EZ (obsolete after 2005), or

    2. Report FICA taxes and any income tax withholding for all employees (household employees and other employees) quarterly on Form 941 (or annually on Form 944) and report FUTA taxes annually for all employees on Form 940 or Form 940-EZ (obsolete after 2005), and

      1. Pay or deposit FICA and FUTA taxes and any withheld income taxes for the household employees along with the employment taxes for the other employees, and

      2. File Form W-2 for the household employees with the other employees' Forms W-2 and Form W-3.

  5. For FICA, FUTA, and ITW purposes, an administrator or executor of an estate who maintains a private home for the decedent's family, or a trustee that maintains a home as a private home for a beneficiary of the trust, is a household employer of any employee that performs domestic services in the home.

  6. Home care service recipients (HCSR) are individuals enrolled in government programs under which they receive health care and personal attendant care that will usually constitute domestic services for employment tax purposes. They are generally the employer of the home care service providers for employment tax purposes. A HCSR may designate an agent under IRC 3504, Acts to Be Performed by Agents, to perform acts required of them as an employer. Generally, IRC 3504 agents for HCSRs file aggregate Forms 941, attaching Schedule R (Form 941), to report FICA taxes and withheld income taxes, and file aggregate Forms 940, attaching Schedule R (Form 940), to report FUTA taxes. See Rev. Proc. 80–4, 1980–1 C.B. 581 and Notice 2003-70, 2003-43, I.R.B. 916 for special rules that apply to state and local government agencies that act as agent for HCSRs.

  7. If the "cash wages" paid to any household employee by a household employer is more than the dollar threshold in a calendar year, all of the "cash wages" paid to that employee are subject to FICA taxes. The dollar threshold is adjusted annually for inflation. Refer to Schedule H and Publication 926, Household Employer's Tax Guide, for the yearly thresholds and additional information.

  8. The threshold for FUTA "cash wages" is not adjusted annually. Unlike the FICA threshold, the FUTA threshold is based on total "cash wages" paid by the employer to all domestic employees. A household employer must file a FUTA tax return only if they paid cash wages of $1,000 or more in any calendar quarter in this year or during the previous calendar year for household work. Thus, if in a calendar quarter an employer pays $500 each to a baby sitter and a housekeeper, FUTA taxes are due on wages paid to all household employees this year and next year. Because different criteria apply, it is possible to be liable for FUTA but not FICA tax for a domestic employee, or vice versa.

  9. IRC 3510 does not transform the taxes withheld and paid by household employers from employment to income taxes, it merely changes the manner of reporting and collection. Therefore, any employment tax audit adjustments should not be reflected on report Form 4549, Income Tax Examination Changes. Examiners are to use employment tax report forms; Form 4666, Form 4667, Form 4668, Form 2504, Form 2504-S, and/or Form 2504–WC, for adjustments of employment taxes for household employees. Adjustments to the annual Schedule H should be made in the 4th quarter of these forms, as applicable. Furthermore, if no Schedule H is included with the employer's filed income tax return, the statute of limitations has not started to run with respect to the employment taxes.

  10. All Schedule H examinations must be controlled on AIMS and ERCS using MFT 30. If the taxpayer did not file Form 1040, then a substitute for return must be filed in order to process the Schedule H adjustment. As employment tax changes, adjustments to Schedule H cannot be included in a statutory notice of deficiency.

  11. When a Schedule H adjustment is made, Form 3198 should be attached to the case file with the following notation in other instructions: "Schedule H Adjustment – Forms 4666, 4667, 4668 & 2504 (2504-WC) enclosed for the primary/secondary (whichever applies) taxpayer." It is important to designate the primary or secondary taxpayer as the employer for joint filers, since this determines the reference numbers that will be used in accurately completing Form 5344.

  12. Schedule H employers may be eligible for the relief provisions of Section 530, the relief provisions of IRC 3509, and the special procedures of IRC 7436 if the applicable requirements are met. IRM 4.23.10.9, above, and IRM 4.23.5.2, Section 530 of the Revenue Act of 1978, for additional information.

4.23.10.12.6.1  (10-19-2010)
Schedule H Resources

  1. Employees can find processing and examination instructions relating to Schedule H in a number of IRM sections, including:

    • IRM 4.4.10.5, Schedule H (Form 1040) Household Employment Taxes, - Group Responsibility

    • IRM 4.10.8.13.10, Adjustment to Schedule H - Household Employment Taxes

    • IRM 21.7.2.4.11, Household Employment Taxes

    • IRM 21.7.3.4.16, Schedule H FUTA Erroneously Reported

    • IRM 21.7.4.4.1.11, Social Security Domestic Employment Reform Act of 1994 (SSDERA) and BMF Schedules H

    • IRM 25.6.1.9.4.3, Forms Reporting More Than One Item of Tax

    • Exhibit 4.4.12-3, Item 15 Reference Numbers for Forms 940, 941, 942, 943, and 945

    • Exhibit 25.6.23-3, Instructions for Updating the Statute on AIMS

  2. Examiners are also reminded that Schedule H examinations are employment tax related, and require employment tax procedures for claims processing and statute controls. Additional information can be found at:

    • IRM 4.23.13, Employment Tax Refund or Abatement Claims

    • IRM 4.23.14, Statute Control and Extension

4.23.10.12.7  (05-07-2013)
Form 4665

  1. Form 4665, Report Transmittal, is used in unagreed cases. It is not required in agreed cases but may be used if deemed necessary by the examiner.

  2. Form 4665 is used to summarize the unagreed issues, if necessary, and should indicate whether the taxpayer was offered the opportunity to discuss the unagreed issues with a manager.

  3. Rev. Proc. 2012-18 provides the following guidance on any transmittal to Appeals in Section 2, .03, 4(b) Transmittal.

    The transmittal memorandum, a T-Letter, or any similar document that the originating function uses to transmit the administrative file (transmittal) should not include statements or comments intended to influence Appeals' decision-making process. This includes recommendations concerning what Appeals should consider and how Appeals should resolve the case. In contrast, it is permissible to include in the transmittal a neutral list of unagreed issues, without discussion, and to indicate which ones, if any, are coordinated issues. If the transmittal includes the type of statements or comments described in the second sentence of this paragraph, or includes other prohibited communications in a document that is either placed on top of the administrative file as a transmittal or inserted into the administrative file in conjunction with preparing the case for transmission to Appeals, the document must be shared by the originating function with the taxpayer/representative at the time that the administrative file is sent to Appeals.

4.23.10.12.8  (04-10-2009)
Form 4666

  1. Form 4666, Summary of Employment Tax Examination, is used as a cover and reference sheet and summarizes the FICA, RRTA, income tax withholding, and FUTA adjustments.

  2. Form 4666 is the first page of the report and will be numbered "1 of xx." Form 4667, Form 4668-B, and Form 4668 will also be numbered and the numbers shown in column (g) of Form 4666.

  3. Exhibit 4.23.10-1, Form 4666, Summary of Employment Tax Examination, for specific instructions for completing Form 4666. It will be used in all employment tax reports:

    • Covering more than one type of employment tax

    • Involving claims for refund

    • Reporting both change and no-change examination results

    • Multiple year examinations

    • Requiring its use for the sake of clarity because of the size or content of the report

  4. If a worker job classification was examined and accepted as independent contractor, a statement should be included on the Form 4666 noting the job category accepted. Section 530(e)(2)(A) limits the prior audit safe haven for audits commenced after December 31, 1996, that included an examination for employment tax purposes of the status of the class of workers at issue or of a substantially similar class of workers. Also, if no worker job classification was examined, a statement to that effect should be included. See IRM 4.23.10.12.4, Employment Tax No-Change Report.

4.23.10.12.9  (05-07-2013)
Form 4667

  1. Form 4667, Examination Changes-Federal Unemployment Tax, is the basic report form for examinations of Form 940. Form 4667 summarizes the examination changes made to the taxpayer's FUTA liability.

  2. See Exhibit 4.23.10-2, Form 4667, Examination Changes — Federal Unemployment Tax, for specific instructions for completing Form 4667. They are self-explanatory except for the following:

    1. Line 14 - Enter the state taxable payroll as corrected in the examination

    2. Line 18 - The amount on line 18 also depends on whether the taxpayer pays the additional required contributions to the state timely. Form 940-B may be used to obtain the state certification for contributions and the determination of timeliness

    Note:

    The November 2012 revision of Form 4667 removed the instructions to complete Lines 10 through 33 only if certification was received of additional state wages paid. The bottom section of the form is always to be completed.

4.23.10.12.10  (11-15-2011)
Form 4668

  1. Form 4668, Employment Tax Examination Changes Report, is the basic report form for examinations of Form 941, Form 943, Form 944, Schedule H, and for RRTA Form CT-1 and Form CT-2. It is used for additional tax, overassessment, or delinquent tax proposals. See Exhibit 4.23.10-3 for specific instructions for completing Form 4668.

  2. Form 4668 reports adjustments to total wages/tips, withholding taxes, and various credits and computes the additional tax. These adjustments are allocated either quarterly or annually, based on the required return, in order to compute applicable penalties and interest.

  3. Use separate Forms 4668 for each calendar year or portion of a calendar year examined for each return examined. In addition, multiple Forms 4668 may be necessary for each period if IRC 7436 issues are present or if there is a partial agreement.

  4. Form 943, Employer's Annual Tax Return for Agricultural Employees, is used to report FICA wages and any income tax withholding. Examination of Form 943 is conducted under MFT Code 11 and Activity Code 467. Since Form 943 is an annual return, only column (e), 4th quarter of Form 4668, should be completed to show the increase or decrease in FICA wages and income tax withholding.

  5. Form 944, Employer's ANNUAL Federal Tax Return, is designed so the smallest employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is expected to be $1,000 or less) will generally file and pay these taxes only once a year instead of every quarter. Examination of Form 944 is conducted under MFT Code 14 and Activity Code 462. Since Form 944 is an annual return, only column (e), 4th quarter of Form 4668, should be completed to show the increase or decrease in FICA wages and income tax withholding. For additional information on Form 944 examinations, see IRM 4.23.8.14, Form 944 Examinations and Filing Requirements.

  6. Form W-2s or Form W-2cs must be issued to affected employees. Insert the number of employees requiring a Form W-2 to be filed, as well as whose Form W–2 should be corrected by filing Form W–2c, in the information section at the bottom of the form. Enter the last day for filing Forms W-2/W–2c and Form W-3/Form W–3c in the applicable space.

  7. If the examiner secures original or delinquent Forms W-2 during the examination, refer to IRM 4.23.8.10, Delinquent Forms W–2/W–2c, for mailing and processing instructions. If the Forms W-2 are not secured prior to closing, the employer should be instructed to mail the forms to the address included on the bottom of the Form 4668.
    For SB/SE,
    IRS Centralized Case Processing
    Mail Stop 8412-G
    201 W Rivercenter Blvd.
    Covington, KY 41011

    For LB&I
    LB&I Centralized Case Processing (CCP):
    Internal Revenue Service
    CCP-Scowcroft Building
    Mail Stop 4030
    1973 North Rulon White Blvd.
    Ogden, UT 84404

    For TE/GE divisions
    Consult your respective operating procedures.

4.23.10.12.10.1  (11-15-2011)
Form 4668-B

  1. Form 945, Annual Return of Withheld Federal Income Tax, is used for non-payroll income tax withholding. Non-payroll items include:

    • Pensions

    • Annuities and IRA's

    • Military retirement

    • Gambling winnings

    • Indian gaming profits

    • Backup withholding


    It is an annual return with a due date of January 31.

  2. Adjustments of back-up withholding and income tax withholding reportable on Form 945 are reflected on Form 4668-B, Report of Examination of Withheld Federal Income Tax. Examination of Form 945 is conducted under MFT Code 16 and Activity Code 463. See Exhibit 4.23.10-4 for specific instructions for completing Form 4668-B.

4.23.10.12.11  (11-15-2011)
Form 2504, Form 2504-S, and Form 2504–WC

  1. Form 2504 and Form 2504-S are the agreement forms for an employment tax examination, or portion of an employment tax examination, involving non-section 7436 issues. These summarize the total tax adjustments and penalties. No-change periods are not reflected on either Form 2504 or Form 2504-S. Instructions for completing Form 2504 is in Exhibit 4.23.10–5 and instructions for Form 2504-S is in Exhibit 4.23.10-6.

    • Form 2504 without the section 530 statement is used for taxes related to adjustments to the non-section 7436 portion of an employment tax examination where a worker classification issue was also part of the examination, whether or not the examination of worker status resulted in reclassification. Any adjustments from worker classification will be reflected on Form 2504-WC. See Exhibit 4.23.10-5.

    • Form 2504 without the section 530 statement is also used for the non-section 7436 portion of an employment tax examination where a worker classification issue was part of an examination and Form 2504-WC is used for additional tax on the worker classification issue. See Exhibit 4.23.10-5.

    • Form 2504-S with the section 530 statement is used when the examination did not include an examination for employment tax purposes of any worker classification issue. See Exhibit 4.23.10-6.

  2. Form 2504-WC, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment in Worker Classification Cases (Employment Tax), is the agreement form used for taxes related to adjustments for the portion of an employment tax examination involving IRC section 7436 issues of worker classification and section 530. See Exhibit 4.23.10-7 for instructions on completing Form 2504-WC.

  3. Taxpayers should be requested to sign the agreement form. The examiner should furnish the taxpayer with a signed copy of the agreement form. Taxpayers must be informed that signing Form 2504, Form 2504-S and/or Form 2504–WC requires them to prepare and file Form W–2 or Form W–2c for employee wage issues.

    Note:

    Forms W-2 are not to be filed for CSP cases. See IRM 4.23.10.10.2, CSP Procedures, and IRM 4.23.6, Classification Settlement Program (CSP).

4.23.10.12.12  (04-10-2009)
Explanation of Adjustments: Form 886–A, Form 5701, and Reengineering Lead Sheet Copies

  1. Form 886-A, Explanation of Items, is used when written explanations of adjustments are required. Exhibit 4.23.10-9, Form 886–A Format for Employee vs. Independent Contractor Adjustment, for an illustration of the recommended format for an employee vs. independent contractor adjustment.

  2. In lieu of Form 886-A, a copy of the examiner's reengineering lead sheet relating to each adjusted issue may be attached to the examination report. The copy of each issue lead sheet used as an attachment to the examination report may be modified to remove extraneous information (e.g., work paper cross-referencing, audit steps that were not employed during the audit, etc.) that would not be of use to the taxpayer or representative.

  3. In addition, Form 5701, Notice of Proposed Adjustment (NOPA), is used to summarize proposed adjustments to the taxpayer for LB&I cases.

4.23.10.13  (11-15-2011)
Credit for FUTA Tax

  1. IRC 3302(a), Contributions to State Unemployment Funds, allows for credits against the FUTA tax for payment of state unemployment taxes (SUTA) if the taxpayer reports the additional tax to the state and provides proof of payment of the state taxes due. The following procedures are applicable in these cases:

    1. The burden of proof of payment is on the taxpayer.

    2. The taxpayer should be notified as soon as correct figures are available to facilitate closing of the case. Allow the taxpayer 30 days to obtain proof of payment.

    3. If the taxpayer fails to furnish proof of payment within 30 days and will not agree to the gross FUTA tax, the examiner should close the case as unagreed. However, a reasonable approach should be followed if it is obvious that proof of payment will be submitted within a few days after the 30-day period.

  2. IRC 3302(a)(3) states that if the taxpayer pays the state contribution late, only 90 percent of the credit that would have been allowed if the contributions were timely will offset the Federal tax. The payment to the state must be confirmed by receiving proof of payment from the taxpayer or by contacting the state before the 90 percent offset is allowed. Payments to the state as a result of wage adjustments from an employment tax examination are considered late.

  3. Follow the instructions for Form 4667 at Exhibit 4.23.10-2, Form 4667, Examination Changes—Federal Unemployment Tax, to compute the allowable credits for late payments. Examiners may also use the Worksheet for Credit Computation found in the instructions to the Form 940 to correctly compute the allowable credits. See IRM 4.23.10.12.9, Form 4667, and IRM 4.23.8.7, Federal Unemployment Tax, for further information.

  4. To obtain the state certification to verify whether payments are made, timely or otherwise, Form 940-B, Request for Verification of Credit Information Shown On Form 940, may be used.

4.23.10.14  (04-10-2009)
Securing Form W-2 or W-2c

  1. Form W–2, Wage and Tax Statement, and/or Form W–2c, Corrected Wage and Tax Statement, should be secured by the examiner in all agreed cases involving employees for non-CSP issues. Non-CSP issues include taxpayers that have previously entered into a closing agreement to resolve classification of the workers at issue, recharacterization of payments, and fringe benefit issues. See IRM 4.23.6.8, Cases Excluded from CSP, for entire listing. The employer will be instructed to prepare Forms W–2 and/or Form W–2c, whichever is applicable, to report the amount of wage adjustment for each employee affected by the employment tax examination.

    Note:

    For CSP cases, see IRM 4.23.6, Classification Settlement Program (CSP).

  2. Employers will be instructed to submit these statements to the examiner using the appropriate cover document, Form W–3, Transmittal of Wage and Tax Statements, and/or Form W-3c, Transmittal of Corrected Wage and Tax Statements. Since no income taxes were actually withheld from the employees’ wages as a result of the examination, no withheld income tax related to the employment tax examination should be reported on these statements.

    1. If the names of the workers are unknown, the taxpayer is to report the total amount of wages paid to the workers on one aggregate Form W–2/W-2c and identify the Payee as "Unknown."

    2. The employer should be given a reasonable period of time (i.e., 30 days) to prepare these wage statements.

  3. If the forms are secured, reconcile the FICA wages on Form W-3 and Form W–3c to the FICA wages on Form 4668 and resolve any discrepancies with the taxpayer.

    1. Annotate in red, "Delinquent Wage Statements Secured By SB/SE (LB&I or TE/GE) - Penalty Considered" across the bottom of Form W–3. This will alert the Social Security Administration that the IRS has taken appropriate action concerning the assertion of penalties under IRC 6721, Failure to File Correct Information Returns, and IRC 6722, Failure to Furnish Correct Payee Statements.

    2. Send the Forms W–2/W–3 and/or W–2c/W–3c to the Social Security Administration via Form 3210. See IRM 4.23.8.10, Delinquent Forms W–2/W–2c, for the applicable address.

    3. Make the annotation "Wage Statements Secured By Examiner" on Form 4668 in the block regarding the filing of Forms W–2/W–2c and in the other instructions section of Form 3198, Form 3198-A, or Form 9231, Collection - Employment Tax Examination Handling/Routing Instructions.

    4. Corrected or delinquent Form W-2's/W-2c's of 250 or more are required to be filed on electronic media.

  4. If there are circumstances that prevent the employer from filing the required forms at the current time, the examiner may permit the employer to submit the required Forms W–2c to the Internal Revenue Service by the last day of February following the quarter in which they agree to the proposed employment tax assessment. (For example, for an examination conducted in September 2012, Form W–2c is to be submitted by the last day of February 2013.) The Forms W–2 for back year examinations are due upon request since these forms are delinquent. Refer to IRM 4.23.8.10, Delinquent Forms W–2/W–2c, for additional instructions on processing Forms W–2/W–2c.

  5. For information concerning requirements for electronic filing, see the General Instructions for Forms W-2 and W-3.

4.23.10.14.1  (02-01-2003)
Conversion of Worker Status

  1. The examiner will identify cases in which the issue on Form 4668 is the conversion of workers from independent contractor status to employee status. Annotate "Reclassification - independent contractor/employee status" in the special instructions section of Form 3198, Form 3198-A, or the "other" section of Form 9231, Collection - Employment Tax Examination Handling/Routing Instructions. This procedure will assist the support operation in identifying any Forms W–2/W–2c if they are subsequently filed by the employer with the Social Security Administration.

4.23.10.15  (05-07-2013)
Agreed Employment Tax Reports

  1. Agreed Form 940 examination - additional tax or over-assessment cases, including changed delinquent return cases:

    1. Prepare report on Form 4666 and Form 4667.

    2. Separate Forms 4667 are required for each tax period. In addition, IRC 7436 and non-7436 issues are to be separated.

    3. Secure agreement on Form 2504, Form 2504-S, and/or Form 2504–WC. (There may be more than one waiver required.)

    4. Furnish a copy of the report to the taxpayer.

  2. Agreed Form 940 examination - substitute for return case:

    1. Follow substitute for return procedures. See IRM 4.23.12.3, Controlling and Processing Delinquent and Substitute for Returns in Employment Tax and following sections.

    2. Prepare report on Form 4666 and Form 4667.

    3. Separate Forms 4667 are required for each tax period. In addition, IRC 7436 and non-7436 issues are to be separated.

    4. Secure agreement on Form 2504, Form 2504-S, and/or Form 2504–WC. (There may be more than one waiver required.)

    5. Furnish copy of report to taxpayer. A copy of the audit report must be furnished to the taxpayer when a SFR case is closed agreed based on the signatures on secured delinquent returns. Penalties and post-assessment appeal rights must be discussed with the taxpayer.

  3. Agreed Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT–2 examinations - additional tax cases, including changed delinquent return cases:

    1. Prepare report on Form 4666 and applicable Form 4668 and/or Form 4668-B.

    2. Separate Forms 4668 are required for each tax year and return type. In addition, IRC 7436 and non-7436 issues are to be separated. Form 4668-B is used for Form 945 examinations.

    3. Secure agreement on Form 2504, Form 2504-S, and/or Form 2504–WC. (There may be more than one waiver required.)

    4. Furnish copy of report to taxpayer.

  4. Agreed Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT–2 examinations - over-assessment cases, including changed delinquent return cases:

    1. The procedures in IRM 4.23.8.6.3, Specific Instructions - FICA Overpayments,IRM 4.23.8.7.5, Federal Unemployment Tax Return Processing Procedures, and IRM 4.23.8.8, Computing Income Tax Withholding, will be followed.

    2. Form 4666 and applicable Form 4668 and/or Form 4668-B will be used if a report is prepared.

    3. If the taxpayer elects to make an adjustment on a subsequent return, prepare a "no–change" report. See IRM 4.23.10.12.4, Employment Tax No-Change Report.

    4. Furnish copy of report to taxpayer, if required.

  5. Agreed Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT–2 examinations - substitute for return cases:

    1. Follow substitute for return procedures. See IRM 4.23.12.3, Controlling and Processing Delinquent and Substitute for Returns in Employment Tax and following sections.

    2. Prepare Form 4666 and Form 4668 and/or Form 4668-B.

    3. Separate Forms 4668 are required for each tax year and return type. In addition, IRC 7436 and non-7436 issues are separated. Form 4668-B is used for Form 945 examinations.

    4. Secure agreement on Form 2504, Form 2504-S, and/or Form 2504–WC. (There may be more than one waiver required.)

    5. Furnish copy of report to taxpayer. A copy of the audit report must be furnished to the taxpayer when a SFR case is closed agreed based on the signatures on secured delinquent returns. Penalties and post-assessment appeal rights must be discussed with the taxpayer.

  6. Separate reports MUST BE prepared for IRC 7436 and non-section 7436 issues. If an examination has both issues, one set of Forms 4666, 4667, 4668, and 4668-B will be noted "Form 2504–WC - IRC section 7436 issues," and the other set of reports will indicate "Form 2504 - non-section 7436 issues," in the "Other Information" section near the bottom of the reports. This will help the taxpayer understand the adjustments and tax computation of the separate issues.

4.23.10.15.1  (05-07-2013)
Consents under $250,000

  1. Effective September 23, 2011, the policy for use of fax and signature stamps (fax policy) was revised to increase the threshold amount for acceptance of consents to assess additional tax and taxpayer closing agreements by fax from $25,000 to $250,000.

  2. Specifically, consents to assess additional tax (Forms 4549, 870, and others) of $250,000 or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax.

  3. In addition, taxpayer closing agreements involving tax amounts of $250,000 or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax.

  4. Consents to assess tax in excess of $250,000 and taxpayer closing agreements involving tax amounts in excess of $250,000 should be secured with original signatures that are delivered in person or by mail.

4.23.10.15.2  (05-07-2013)
Employment Tax Procedures for Agreed Unpaid Cases over $100,000

  1. IRM 4.20.1.2, Examiner's Responsibilities, states that if the examiner does not secure full payment or an installment agreement from the taxpayer, a referral to Collection should be considered. A referral is mandatory for agreed unpaid cases over $100,000. See IRM 4.20.1.2(5), Examiner’s Responsibilities.

  2. When a case meets this criteria:

    • The employment tax examiner will discuss the case with their manager

    • The employment tax manager will contact the local Collection group manager with respect to the case

    • Any requested documentation will be furnished to the Collection Division

  3. The examiner will document these actions in the Form 9984, Examining Officer's Activity Record, and in the SB/SE re-engineering workpapers Administrative lead sheet, Workpaper #105, in the "Payment" section.

  4. The local Collection office will take the necessary action to ensure prompt assessment and proceed with the necessary collection actions.

4.23.10.16  (04-10-2009)
Partially Agreed Cases

  1. Taxpayers who disagree with any of the proposed adjustments will be informed of their right to discuss the proposal with the examiner's manager. Taxpayers will also be informed of formal appeal rights.

  2. When agreement is reached with the taxpayer on one or more issues and other issues remain unagreed, the following procedures will be followed:

    1. Prepare (2) sets of Form 4666, Form 4667, Form 4668, Form 4668-B, Form 2504, Form 2504-S, and/or Form 2504–WC and the appropriate explanation of adjustments. See IRM 4.23.10.12.12, Explanation of Adjustments: Form 886-A, Form 5701 and Re-engineering Lead Sheet Copies. One set will show the amount of tax for the issues which have been agreed upon and will be clearly identified as a "Partial Agreement." The other set will show the amount of tax for the unagreed issues. Secure the taxpayer's signature on the Form 2504, Form 2504-S, and/or Form 2504–WC that covers the agreed issues.

    2. If both IRC 7436 and non-section 7436 issues are involved, there may be multiple sets of agreed and unagreed reports. See IRM 4.23.10.12.5.

    3. Consolidate the agreed IRC section 7436 and agreed non-section 7436 reports for assessment.

    4. Forward the partial agreement(s) to Centralized Case Processing (CCP) for assessment. See IRM 4.23.10.16.1, Partial Assessment / Quick Assessment Processing.

    5. Follow the procedures for unagreed IRC 7436 and non-section 7436 issues.

    6. Explain the details of the agreed and unagreed issues on Form 4665.

    7. Upon closing, forward both sets of reports in the same case file. Form 3198, Form 3198-A, or Form 9231 will be noted that the case is partially agreed.

  3. See IRM 4.23.10.8, 30-Day Letters, if the taxpayer does not agree to the proposed adjustments after expiration of the 30-day letter.

4.23.10.16.1  (10-19-2010)
Partial Assessment/ Quick Assessment Processing

  1. A streamlined process for cases requiring expedited assessments has been created. This process is available for:

    1. Partial agreements,

    2. Quick assessments (See IRM 4.23.11.9, Quick Assessments), and

    3. No-response cases involving both section 7436 and non-section 7436 issues. This situation is present when the non-7436 issue is to be assessed immediately and the IRC 7436 issue is forwarded for issuance of Letter 3523, Notice of Determination of Worker Classification.

  2. Expedited process procedure (agreed cases or partially agreed cases):

    1. Notify the CCP by phone to inform them that assessment information is to be faxed and to identify the fax recipient. For SB/SE, refer to either the Field Liaison or the Team 101 Manager at this web site: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/default.aspx .

    2. Prepare a fax cover sheet for transmittal with all relevant information, including identification of all parties, the forms attached, and the number of pages. The fax will consist of:

    1. Fax cover sheet,

    2. Completed Form 3198 with the "Partial Assessment" box checked,

    3. Form 2504, Form 2504-S, and/or Form 2504-WC signed by the taxpayer,

    4. Completed agreed report including applicable Form 4666, Form 4667, Form 4668-B, and Form 4668 supporting the waiver,

    5. Copy of the front page of the return (or BRTVU) and BMFOLT Transcript, and

    6. Form 5344 for each period to be assessed. Complete the form as necessary.

  3. Expedited process procedure (No-response unagreed cases):

    1. Notify the CCP by phone to inform them that assessment information is to be faxed and to identify the fax recipient. For SB/SE, refer to either the Field Liaison or the Team 101 Manager at this web site: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/default.aspx .

    2. Prepare a fax cover sheet for transmittal with all relevant information, including identification of all parties, the forms attached and the number of pages. The fax will consist of:

    1. Fax cover sheet,

    2. Completed Form 3198 with the "Partial Assessment" box checked,

    3. Completed report including applicable Form 4666, Form 4667, Form 4668-B, and Form 4668 supporting the tax to be assessed,

    4. Copy of the front page of the return (or BRTVU) and BMFOLT Transcript, and

    5. Form 5344 for each period to be assessed. Complete the form as necessary.

  4. CCP will make the partial/quick assessment within a few days and fax back the copies of Form 5344 marked "Request Completed" and BMFOLT’s showing the pending assessments to associate with the case file.

  5. Upon closing the case, Forms 5344 must be completed for all periods. For periods where there is no additional assessment due to the processing of the partial assessment, show a TC 300 with a zero amount.

  6. Additional instructions for Form 5344 for partial assessments can be found in IRM 4.4.12, AIMS/Processing Handbook, Examined Closings, Surveyed Claims, and Partial Assessments.

  7. TE/GE examiners should refer to their own procedures for their respective organizations.

4.23.10.16.2  (11-15-2011)
Examination Procedures for IRC 3402(d) Relief

  1. To properly assess both income taxes under IRC 3402 or backup withholding under IRC 3406, together with any applicable penalties and interest, examiners will follow a modified Partial Assessment procedure when penalties are to be assessed. This will generate an initial billing notice for the gross amounts shown on the Form 2504 prior to the case being processed for closing. The taxpayer will subsequently receive a second notice containing the abatements allowed in the examination upon final processing of the Forms 4669 by Centralized Case Processing (CCP) at case closing.

  2. This modified Partial Assessment is a two-step process which ensures that the gross amount of tax, penalty, and interest are computed and assessed and that the IRC 3402(d) abatement performed by CCP at case closing only recomputes the income tax portion of the examination.

    Note:

    If the examination does not propose penalties and the interest-free provisions of IRC 6205 are to be allowed, this two-step process is not to be used. The examiner will compute the tax due on Form 4668 or Form 4668-B based on the net payment adjustment using the accepted amounts from the secured Forms 4669. The amount on Line 12 of Form 4668, or Line 20 of Form 4668-B, will reflect the remaining amount of tax available for abatement after the examination allowance.

    Note:

    The two-step process of assessing the gross tax prior to the allowable abatement is only to be used to ensure that the penalty and interest amounts generated from the examination are computed on the gross tax amount in penalty situations.

  3. The examiner should discuss the two-step process with the taxpayer using the statement included on the Form 4666. This should alleviate taxpayer concerns that the Forms 4669 were not properly processed upon receipt of the first notice. See IRM 4.23.10.16.3.

    Note:

    To avoid delays between the issuance of the two taxpayer notices, the Partial Assessment procedures should be performed prior to final group closing procedures. Upon receipt of confirmation from CCP of processing, the case can be closed from the group.

  4. The modified Partial Assessment process to be followed:

    1. Contact the appropriate CCP campus (refer to the CCP Web site below for contact information) to inform that the assessment document is being sent: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/default.aspx

    2. Prepare a fax cover sheet for transmittal with all relevant information, including identification of all parties, the forms attached, and the number of pages. The fax will consist of:

    1. Fax cover sheet,

    2. Completed Form 3198 with the "Partial Assessment" box checked,

    3. Appropriate Form 2504, Form 2504-S, and/or Form 2504-WC signed by the taxpayer,

    4. Completed agreed report including Form 4666, Form 4667, Form 4668, and/or Form 4668-B supporting the waiver, and

    5. Form 5344 for each period to be assessed (Form 5599, TE/GE Examined Closing Record, for TE/GE. Complete the form as shown below.

    6. When penalties are applied, Form 3177, Notice of Action for Entry on Master File. The following will be reflected on Form 3177:
      a. TC 470 (No Closing Code)
      b. Posting Delay Code 2
      c. Applicable tax periods (Only 1 form is required if all tax periods are listed)
      d. CCP will fax verification back showing assessment made

    Note:

    Examiners must close the case immediately upon receipt of the faxed Form 3177 verification from CCP. Timely processing of such cases is imperative, as a delay between receiving the CCP fax and closing the case interrupts the process and may result in the taxpayer getting a bill for tax that was to have been abated through the exam process.

    Initial Form 5344 Instructions, (Form 5599):

    • Label this initial Form 5344 - "PARTIAL ASSESSMENT - GROSS TAX & PENALTIES."

    • Only the left side of Page 1 of the initial Form 5344 is input – You do not need to complete Items 16 through 43 or attach Page 2 of this initial Form 5344.

    • All adjustments for the examination, including any other employment tax issues other than the IRC 3402(d) items (fringe benefits, IRC 3509, etc.), are to be included on this initial Form 5344.

    • ITEM 11: Entry required if TC 308 is entered in Item 12.

    • ITEM 12: Include gross tax amount as TC 300 (or 308 if Interest-free). Also enter any applicable penalties.

    • ITEM 15: Include all reference codes and amounts corresponding to the entire examination assessment.

  5. Upon completion of the partial assessment, CCP will:

    1. Stamp the initial Form 5344 "Request Completed."

    2. Fax a copy back to the field for association with the original case file to show that the assessment was completed within 5 days.

  6. Upon verification of the partial assessment, continue with final closing of the case from the exam group. The second Form 5344 must be entirely completed. Enter the amount of abatement based on Forms 4669 allowed in exam as a "301" or "309" in Item 12, and the corresponding reductions of line items in Item 15.

    Final Form 5344 Instructions (Form 5599):

    • Label the second Form 5344 - "FINAL CLOSURE - F4669 ABATEMENT."

    • Complete both the left and right sides of Form 5344, including Page 2, per normal closing procedures.

    • The only adjustments to be reflected on the left side of Page 1 are the IRC 3402(d) abatement adjustments allowed in the examination.

    • ITEM 11: Enter if TC 309 is entered in Item 12.

    • ITEM 12: Include the abatement tax amount as TC 301 (or 309 if Interest-free).

    • ITEM 15: Include corresponding reference amounts for the IRC 3406 backup withholding abatement or IRC 3402 income tax withholding portion only.

  7. Additional instructions for Form 5344 for partial assessments can be found in IRM 4.4.12, AIMS/Processing Handbook, Examined Closings, Surveyed Claims, and Partial Assessments.

4.23.10.16.3  (11-15-2011)
Examination Report Forms for IRC 3402(d) Examinations

  1. Form 4666: The following statement should be included on the Form 4666 to explain the two-step notice processing to the taxpayer, if applicable:

    This report reflects the agreed total income tax under IRC 3402 (including applicable assessments of IRC 3406, Backup Withholding), without consideration of any abatements provided by the taxpayer on Forms 4669

    Forms 4669, Statement of Payments Received, have been provided by the taxpayer to abate all or part of the total income/backup withholding tax assessment per the abatement procedures of IRC 3402(d). A credit for this tax abatement is shown as a credit memo on the Form 2504 agreement. A listing of all payments and the abatements allowed in the examination are attached to this report.

    To accurately reflect the examination results, the Service Center will mail two notices to the taxpayer:
    1. The first notice will show total tax and penalties due without regard to the Forms 4669’s solicited in exam.
    2. The second notice will be issued 4 to 6 weeks later reflecting the net tax due after the Form 4669 abatements are processed.

  2. Form 4668:

    • For Form 941 examinations, Line 12 of Form 4668, "Maximum tax available for abatement under IRC 3402(d)," should identify the total income tax available for use as an income tax credit by quarter. Both the maximum available IRC 3402(d) credit and the IRC 3402(d) credits allowed in the examination from the payees' Form 4669’s should be identified by quarter on the payee spreadsheet. The total IRC 3402(d) credit allowed for the year should match the IRC 3402(d) quarterly credit amounts listed in the "Memo" section of the applicable Form 2504.

    • The taxpayer/employer is liable for the gross amount of penalties assessed as a result of the examination. Penalties are not decreased when the income tax withholding is abated. Where penalties are involved, the examination report Form 4668, line 5, will continue to show the gross liability for all taxes without regard to this adjustment procedure. Penalties on lines 7–10 will also be computed on the net amount of proposed taxes combined with any increase of decrease of credits on Line 6.

      Note:

      Reminder - FTD penalties are only computed on taxes actually withheld or on taxes required to be submitted by the employer.

  3. Form 4668-B:

    • For Form 945 examinations, Line 20 of Form 4668-B, "Maximum tax available for abatement under IRC 3402(d)," should identify the total available credits for withholding tax for the year. Both the maximum available credit and the IRC 3402(d) credits allowed in the examination from the payees' Forms 4669 should be identified on the payee spreadsheet. The total IRC 3402(d) credit allowed for the year should match the IRC 3402(d) credit amounts listed in the "Memo" section of the applicable Form 2504.

    • The taxpayer is liable for the gross amount of penalties assessed as a result of the examination. Penalties are not decreased when the tax withholding is abated. Where penalties are involved, the examination report Form 4668-B, line 14, will continue to show the gross liability for all taxes without regard to this adjustment procedure. Penalties on lines 15–18 will be computed on the gross amount of proposed taxes.

  4. Form 2504 series:

    • The Form 2504 used in the examination will reflect the gross tax examination results on the first line of the form in the "Adjustment To Tax, Credits and Penalties" section.

    • The amount accepted for abatement will be included on the first line of the "Memo: Abatement amount under IRC 3402(d) - See explanation on Form 4666" section located at the bottom of the Form 2504. There are only 3 entries per year/form:
      1. The applicable Tax Period of the abatement,
      2. The Return Form Number of the abatement, and
      3. The Abatement amount.

      Note:

      This section of the form is to inform the taxpayer that Forms 4669 for that total have been accepted.

    • The IRC 3402(d) amount should NOT be shown in the "Adjustment To Tax, Credits and Penalties" section or used to compute a net amount. The taxpayer is agreeing to the gross tax assessment shown in the "Amount of Tax" section prior to any abatement.

    • Examiners are reminded to use the correct version of the three Forms 2504 available. If the IRC 3402(d) abatement applies to a worker reclassification case, use the Form 2504-WC.

    Note:

    IRC 3402(d) abatements are not available for worker reclassification issues computed using IRC 3509.

    • For examinations that did not involve an examination of worker status, i.e., Form 945 for Backup Withholding, Form 2504-S with the section 530 disclaimer should be used.

4.23.10.17  (05-07-2013)
Unagreed Employment Tax—Examination Reports

  1. When the examiner and the taxpayer can not reach an agreement, a report consisting of Form 4666, Form 4667, Form 4668-B, Form 4668, Form 2504, Form 2504-S, and/or Form 2504–WC, and an explanation of adjustments will be prepared. Separate reports MUST BE prepared for IRC section 7436 and non-section 7436 issues. These reports are issued to the taxpayer with a 30–day letter. Follow the instructions for issuing a 30–day letter. See IRM 4.23.10.8.

  2. The final merits of a case may be judged by individuals far removed from the office of origin. Adjustments initially agreed to by the taxpayer may, at a later date, become the subject of controversy. An audit package with proposed adjustments is not complete without a narrative statement (Explanation of Adjustments) which fully justifies all changes for which no agreement has been secured.

  3. Form 4665, Report Transmittal, should be used in unagreed cases to provide a summary of unagreed issues. Information contained in this form should complement and not repeat information in the report and workpapers.

  4. In the case of a taxpayer protest where issues are raised outside the original examination, prepare a supplemental Explanation of Adjustments. See IRM 4.23.10.17.3, Alternative Position in Unagreed Cases.

  5. Examiners should prepare a disc with copies of all report files to be included in the case file to assist Technical Services and other reviewers in preparation of files and schedules.

4.23.10.17.1  (04-10-2009)
Preparing Explanation of Adjustments

  1. The key to sustaining an examiner's adjustment is the narrative in the explanation of adjustments. See IRM 4.23.10.12.12. These narratives should be prepared for each unagreed issue and any alternative issue proposal. See Exhibit 4.23.10-9, Form 886–A, Format for Employee vs. Independent Contractor Adjustment, for illustration.

  2. The narrative should be divided into five parts with modifications as needed for specific cases. The five parts are:

    • Issues

    • Facts

    • Law

    • Taxpayer's position

    • Service's position

    In addition to these five required elements, if a penalty is assessed or an alternative tax computation for a worker reclassification issue is computed, these are also included in the explanation.

  3. Issues - The issue or issues involved in a case (i.e., reclassification, backup withholding, unreported remuneration, etc.) will be listed and their relevance to the case explained. For reclassification cases, the explanation should address:

    1. Section 530 - The applicability of section 530 must be discussed in worker classification cases. Explain whether the consistency and reporting requirements were met and whether the taxpayer has demonstrated a reasonable basis for not treating the worker(s) as employee(s). See IRM 4.23.5.2, Section 530 of the Revenue Act of 1978, and subsequent subsections for additional information.

    2. Identify the three categories of evidence (Behavioral Control, Financial Control, and Relationship of the Parties). All evidence should be weighed to determine whether a worker is a common law employee based on the nature of the business under examination.

    3. If more than one class of workers is involved, a separate explanation of the common law rules and section 530 should be made for each class.

    4. IRC 3509 rates - State what rate is used to compute the proposed tax and explain why that rate is used.

    5. CSP - State whether a CSP offer was made and the result.

  4. Facts - Address the business background and the taxpayer's operations in general. In developing and presenting evidence, be sure to secure enough information in your workpapers to make it easy to track down where the evidence is located and the nature of the evidence - a document or a witness.

  5. Law - Specific reference to relevant court cases, Revenue Rulings, Revenue Procedures and other compelling sources should be cited. The relationship of sources cited to the subject case must be clearly established.

  6. Taxpayer's Position - If known, the taxpayer's position regarding all issues, including section 530, will be stated objectively. This should include all legal or other citations relied upon in support of their position.

  7. Service's Position - This will be a summation of the position taken by the examiner. The examiner will address the taxpayer's position point by point. Specific reference will be made to information developed through on-site observation of the business premises, third-party interviews, interviews with the taxpayer, answers to common law questions, statutory authority, or other legal resources and any other relevant sources to support the Service's position.

  8. Tax Computation - The tax computation rate must be explained in worker classification cases. If IRC 3509(a) or IRC 3509(b) rates are not used, a full explanation is required. In addition, a statement on the application and computation of CSP should be included.

  9. Penalty - If assessed, explain the reasons for penalty proposal(s) and address any reasonable cause factors. Also, include the computation or spreadsheet used.

4.23.10.17.2  (11-15-2011)
Unagreed Employment Tax Report Forms

  1. Unagreed Form 940 examination - additional tax or over-assessment cases, including changed delinquent return cases:

    1. Prepare report on Form 4667.

    2. Separate Forms 4667 are required for each tax period.

    3. Prepare explanation of adjustments.

    4. A copy of the report will be issued to the taxpayer with the 30-day letter.

  2. Unagreed Form 940 examination - substitute for return cases:

    1. Follow substitute for return procedures. See IRM 4.23.12.3, Controlling and Processing Delinquent and Substitute for Returns in Employment Tax and following sections.

    2. Prepare report on Form 4667.

    3. Separate Forms 4667 are required for each tax period.

    4. Prepare explanation of adjustments.

    5. A copy of the report will be issued to the taxpayer with the 30-day letter.

  3. Unagreed Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT–2 examinations - additional tax cases, including changed delinquent return cases:

    1. Prepare report on Form 4668 unless Form 4668-B is used for Form 945 examinations.

    2. Separate Forms 4668/4668-B are required for each tax year.

    3. Prepare explanation of adjustments.

    4. A copy of the report will be issued to the taxpayer with the 30-day letter.

  4. Unagreed Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT–2 examinations - over-assessment cases: the procedures in IRM 4.23.8.6.3, Specific Instructions - FICA Overpayments,IRM 4.23.8.7.4, FUTA Tax Overpayments, and IRM 4.23.8.8.1, Income Tax Withholding Overpayments - Current Year, will be followed.

  5. Unagreed Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT–2 examinations - substitute for return cases:

    1. Follow substitute for return procedures. See IRM 4.23.12.3, Controlling and Processing Delinquent and Substitute for Returns in Employment Tax and following sections.

    2. Prepare report on Form 4668 unless Form 4668-B is used for Form 945 examinations.

    3. Separate Forms 4668/4668-B are required for each tax year.

    4. Prepare explanation of adjustments.

    5. A copy of the report will be issued to the taxpayer with the 30-day letter.

  6. Separate unagreed reports must be prepared for IRC 7436 and non-section 7436 issues. See IRM 4.23.10.12.5, Employment Tax Change Report.

  7. The explanation of adjustments will follow the format described in IRM 4.23.10.17.1, Preparing Explanation of Adjustments, above.

  8. Follow the procedures for issuance of the 30–day letter for unagreed cases. See IRM 4.23.10.17, Unagreed Employment Tax – Examination Reports. See IRM 4.23.10.8, 30–Day Letters.

  9. Taxpayer will receive a copy of the unagreed employment tax reports with the 30–day letter.

4.23.10.17.3  (10-19-2010)
Alternative and Whipsaw Positions in Unagreed Cases

  1. Rev. Proc. 99-28 defines the term "whipsaw" as a situation produced when the government is subjected to conflicting claims of different taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and differing characteristics of transactions will benefit one and hurt the other for tax purposes.

  2. Examples of potential whipsaw issues in employment tax include:

    • The identification of the employer when two different taxpayers are contesting responsibility for withholding taxes. This may arise in prevailing wage audits, between the common-law employer and a third-party who may actually distribute the payments.

    • An audit of a temporary staffing service (TSS): TSS treats workers as Independent contractors. Examiner proposes to reclassify to Employees. TSS argues that workers are employees of their client. Examiner issues an Employment Tax Examiner's Report (ETER) for worker reclassification on both the TSS and client.

  3. For additional information on whipsaw issues and examples, see IRM 4.10.13.5, Adjustments Between Correlative Taxpayers (a/k/a Whipsaw Issues), and IRM 4.10.7.4.9, Whipsaw (a/k/a correlative adjustments).

  4. An alternative position for an issue in an unagreed case is a secondary position that the Service may ultimately rely on if the primary position cannot be upheld. An alternative position is recommended in unagreed cases due to the fact that Appeals generally will not raise new issues. It is the responsibility of Examination to identify all potential issues during the audit.

  5. There may be more than one alternative position. Therefore, the examiner must outline all alternative positions with regard to the contested issue that may be applicable in case the primary position is not sustained. See IRM 4.10.8.11.3, Alternative Positions.

  6. Examples of potential alternative positions in employment tax include:

    • Backup withholding versus employee reclassification

    • Statutory employee versus common law employee

    • Assertion of penalties. The negligence penalty is the standard alternative position when asserting the fraud penalty. See IRM 4.10.8.11.3.1, Reports for Alternative Positions.

4.23.10.17.3.1  (10-19-2010)
Procedures for an Alternative Position in an Unagreed Case

  1. An alternative position may be proposed for an unagreed case in order to strengthen the Service's position in Appeals with respect to that particular case. The primary reason for the examination adjustment should be written as the primary position. The secondary reason for the adjustment will usually address a different set of law and argument supporting the adjustment made and is called the alternative position.

  2. When proposing an alternative position or approach in an unagreed civil case, the alternative position or approach must be discussed with the taxpayer or his/her authorized representative and must be presented in the portion of the report sent to the taxpayer. This includes any additional basis or reasons for the proposed adjustment.

  3. An alternative position or approach is presented on a Form 4668 with a separate explanation of adjustments: Form 886-A, Form 5701, or a redacted re-engineering workpaper. If the alternative position results in a different tax computation, an alternative computation of tax is prepared.

  4. Form 4668 and the explanation of items for the alternative position should be marked "ALTERNATIVE ISSUES" on the top of each page and inserted in the report of examination behind the report forms relating to the primary position.

  5. In all unagreed cases where alternative positions are raised, separate reports will be prepared for both the primary and alternative positions. Attach the alternative position behind the primary position. Each report will include a explanation of adjustments containing detailed explanations of the facts, law and argument, taxpayer's position, and the conclusion.

4.23.10.17.3.2  (10-19-2010)
Backup Withholding in Worker Reclassification Exams

  1. Backup withholding is a strong secondary position in a worker reclassification case in which the employer did not issue Forms 1099 and did not solicit and receive TINSs from the workers. In this situation, it would be a strong secondary position if the primary position of employee reclassification is not upheld in Appeals.

  2. It is a hybrid of the alternative and whipsaw positions. It is an alternative position and not a whipsaw issue, in that it does not affect two different taxpayers. However, it is a whipsaw issue, in that it affects two different tax returns - Form 941 and Form 945. This necessitates two different reports and waivers - Form 2504 and Form 2504-WC. It also requires controlling two different tax returns.

  3. For unagreed reports involving both IRC 7436 and non-section 7436 issues, see IRM 4.23.10.9.1, General Overview of 7436, and IRM 4.23.10.8, 30-Day Letters.

4.23.10.17.4  (04-10-2009)
Review of Protests

  1. A taxpayer's protest generally will be reviewed at the group level, as designated by management, within 7 calendar days of receipt to determine whether:

    1. The protest is adequate,

    2. The case requires further development by the examiner, and

    3. The examiner’s report should be modified.

    See IRM 4.10.8.11.9, Response to Preliminary (30-Day) Letters, for information on small case requests and formal protests.

  2. For formal protests, determine whether the taxpayer's written protest includes the following:

    1. A statement that the taxpayer wants to appeal the findings of the examiner to the Appeals office

    2. The taxpayer's name and address

    3. The date and symbols from the letter transmitting the proposed adjustments and findings being protested

    4. The tax periods or years involved

    5. An itemized schedule of the adjustments with which the taxpayer does not agree

    6. A statement of facts supporting the taxpayer's position on any contested factual issue

    7. A statement outlining the law or other authority upon which the taxpayer is relying

    8. A declaration of truth under penalties of perjury

  3. After review of the protest, the examiner should prepare a rebuttal to address or clarify any new facts presented or arguments made by the taxpayer. This rebuttal will serve to supplement the information contained within the examiner's report and offer a constructive response to the taxpayer's arguments that were presented in the protest. If a rebuttal is prepared, a copy must be provided to the taxpayer.

  4. The taxpayer should be given the opportunity to meet with the examiner's manager to attempt to resolve the unagreed issues. If the disagreements cannot be resolved at the manager's conference or the taxpayer declines to meet, the entire case should be transferred to Appeals.

  5. For additional information, see IRM 4.10.8.11, Unagreed Case Procedures: Preliminary (30-Day) Letters.

4.23.10.18  (10-19-2010)
Procedures for Adjusting the Employee's Share of FICA

  1. There will be instances when only the worker is being examined. When a worker provides the examiner with sufficient evidence that the services he/she performed for someone else (individual, partnership, corporation, etc.) were that of an employee rather than an independent contractor, yet he/she was treated as an independent contractor, the examiner should adjust the worker's return for the employee's share of FICA.

    1. For determinations made by the SS-8 Units: Sufficient evidence will include the completion of the Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. By filing Form SS-8 and identifying the worker’s name, the worker has agreed to our disclosing his/her name to the employer in the context of rendering the SS-8 determination.

    2. Field examinations may use the questions found in the SS-8 in making the determination. However, the form should NOT be given to the taxpayer for completion. The field will make a determination and document the evidence in the workpapers. The audit report will include an explanation of adjustments outlining the determinative factors. See IRM 4.23.10.12.12.

  2. Also, a worker could have been determined to be an employee, but due to Section 530 of the Revenue Act of 1978, the employer is not liable to withhold the employee's share of FICA. However, the worker remains liable for the employee's share of FICA. Additionally, a worker may have received a Form W–2 from an employer as a result of a worker status determination and would be liable for the employee's share of FICA unless the employer paid the FICA tax that it should have withheld from the employee.

  3. If a worker who has filed and paid self-employment tax is determined to actually be an employee and is liable for the employee's share of FICA, Form 885–E, Schedule for FICA Tax Adjustment of Wages not Previously Reported, must be prepared. The following special instructions will be followed in preparing the Form 885–E:

    1. Part A - Enter amounts received during the respective periods indicated. If unable to accurately determine amounts per period, the amount of reclassified wages should be deemed to be earned equally over the periods the worker performed services for the payer.

    2. Part B - Enter the occupation and SSN of the person receiving these reclassified wages.

    3. Part C - Self-explanatory.

    4. Employer's Information - Enter name and address of employer paying the wages and, if known, employer identification number.

    5. For SSA Use Only - Make no entry in this space.

    6. Re-file Number - Make no entry in this space.

    7. After completion, Form 885–E will be attached to top of the front inside of the case folder.

    Note:

    The interest-free provisions of IRC 6205, Special Rules Applicable to Certain Employment Taxes, does not apply to an employee's Form 1040. IRC 6205 only applies to employers.

  4. The income tax report (e.g. Form 4549, Income Tax Examination Changes) will contain the computation and an explanation of the adjustment in the "Other" section of the income tax report:
    "In connection with the examination of your income tax return (Form 1040) for the year(s), an adjustment has been made for the employee share of the FICA tax imposed by IRC 3101(a) and IRC 3101(b) in the amount of $______, computed as ($____ of wages X _____ %)."

    Note:

    Form 8919, Uncollected Social Security and Medicare Tax on Wages, is helpful in computing this adjustment.

  5. The adjustment for employee's share of FICA will be reflected on Form 2504 without the section 530 disclaimer. See Exhibit 4.23.10-5. Since the adjustment for employee FICA tax is not an income tax adjustment, Form 2504 must be used to solicit agreement to the adjustment for employee's share of FICA. The Form 2504 will be prepared as follows:

    1. Tax Period Ended — Use the tax period of the Form 1040 in the year/month format (i.e., 2006/12)

    2. Return Form Number — Form 1040

    3. Kind of Tax — "Employee's Share of FICA - IRC 3101"

    4. Amount of Tax — Show the correct amount as reflected in the examination report

    5. Penalty — Enter code section, title, and amount of each penalty

    Note:

    The statute date of the employee's share of FICA tax corresponds to the statute date of the employer's Form 941. See IRM 4.23.14.5, Employee's Share of FICA, for additional information.

  6. To ensure proper processing of the adjustment for employee's share of FICA, Form 3198, Special Handling Notice, must be prepared and attached to the case file. Check "Other" in the Special Handling Section and insert "Form 885–E enclosed." If the adjustment (overassessment or deficiency) also involves SECA tax, enter "Form 885–E enclosed."

  7. The Self-Employment Income/Tax Adjustment Information is forwarded to the Social Security Administration (SSA) electronically. The attached Form 3198 must indicate the Self-Employment Income/Tax Adjustment figures for primary and/or secondary taxpayer. The computer generated page of the Revenue Agent Report must be attached to the Form 5344 that contains the reference number information entered in Item 15 of the Form 5344.

    1. The net increase or decrease to the self-employment income (SEI) of the primary taxpayer is Reference Number 878. Enter the SEI adjustment multiplied by .9235. The amount entered with Reference Number 878 must not bring the taxpayer's total SEI over the maximum amount subject to self-employment, taking into consideration any wages paid to the taxpayer that calendar year. Reference Number 889 is required with Reference Number 878.

    2. The net increase or decrease to the SEI of the secondary taxpayer — Reference Number 879. Enter the SEI adjustment multiplied by .9235. The amount entered with Reference Number 879 must not bring the taxpayer's total SEI over the maximum amount subject to self-employment tax, taking into consideration any wages paid to the taxpayer that calendar year. Reference Number 889 is required with Reference Number 879.

    3. The net increase or decrease for the primary taxpayer that is subject to Medicare tax — Reference Number 895.

    4. The net increase or decrease for the secondary taxpayer that is subject to Medicare tax — Reference Number 896.

    5. The net increase or decrease to the total self-employment tax reference number 889. If both taxpayers on a joint return have self-employment tax adjustments, combine the net increase or decrease of both and enter only one amount.

4.23.10.18.1  (10-19-2010)
Unagreed Reports for Employee Share of FICA on Form 1040

  1. When an income tax examination includes an adjustment for the employee’s share of FICA tax, the FICA tax adjustment must be processed as a partial assessment prior to the income tax case being closed to Centralized Case Processing (CCP), IRM 4.4.10.3, Processing Employee Share of FICA- CCP Responsibility.

  2. Since FICA tax is not an income tax, it is not subject to deficiency procedures and cannot be included on a statutory notice of deficiency. When a statutory notice is to be issued, any adjustments made to the employee share of FICA is to be processed as a partial assessment.

  3. The partial assessment should be closed using Disposal Code "08" without an agreement date. Disposal Code "08" should be used since the 30 day interest free period is not applicable to employee FICA tax. All partial assessment information should be faxed to the appropriate CCP campus. For additional information, refer to the following:

    • IRM 4.10.8.13.9, Report Writing, Adjustment for Employee FICA Tax

    • IRM 4.4.10.3, Processing Employee Share of FICA- CCP Responsibility

4.23.10.19  (10-19-2010)
Procedures for Employee Tax Adjustment on Tip Income Not Reported to Employer

  1. An adjustment is warranted if an employee's cash tips total $20 or more in a month while working for any one employer, and the employee did not report all such tip income to his/her employer. Agreement to the adjustment will be solicited on Form 2504 without the section 530 disclaimer.

  2. When a tip income adjustment is made to a filed tax return or a delinquent return is secured after a "Dummy TC 150" has posted, the information is forwarded to SSA electronically. A Form 3198 (Form 3198-A) must be attached to the case file indicating the Tip Income/Tax Adjustment figures. A computer generated page of the Employment Tax Examiner's Report (ETER) that contains the reference number information should be attached to the Form 5344 (Form 5599), or the correct figures entered in Item 15 of the Form 5344.

    1. Adjustment to Primary Unreported Tip income — Reference Number 891.

    2. Adjustment to Secondary Unreported Tip income — Reference Number 892.

    3. Amount of unreported tip income adjustment for the primary taxpayer that is subject to Medicare — Reference Number 898.

    4. Amount of unreported tip income adjustment for the secondary taxpayer that is subject to Medicare tax — Reference Number 899.


    See IRM 21.6.4.4.14.6, Form 4137, Social Security and Medicare Tax on Unreported Tip Income, Adjustments.

  3. If a tip income adjustment is made to a delinquent return secured after a "Dummy TC 150" has posted, a Form 885–T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, must be completed because it is used to forward the information to SSA.

4.23.10.20  (05-07-2013)
Assembly of Employment Tax Case File Folder - LB&I Cases

  1. Case file assembly is different based on the type of cases being closed. In addition, there are some forms that are not common that may have to be attached or put in a case file. Please refer to http://lmsb.irs.gov/hq/pqa/Case_Closing/Case_Closing_Procedures.asp for further examples of forms to be included in case file.

  2. In general, LB&I employment tax case file assembly instructions:

    1. For CIC cases, the employment tax audit workpapers and related forms will remain at the audit site. (i.e. Copy of audit reports and attachments, Form 4764 - Examination Plan Series work papers, Form 9984,, relevant workpapers, etc.).

    2. For IC cases, all relevant documents and workpapers must be closed with the case file.

    3. All employment tax returns (filed by the same entity) can be included in one case file. The returns need to be identified on Form 3198.

  3. LB&I Workpaper Assembly:

    1. Form 4764 Series, LB&I Examination Plan.

    2. Form 9984, Examining Officer’s Activity Record.

    3. Form 4764-B, LB&I Examination Plan, Part III - Examination Procedures Section.

    4. Workpapers and miscellaneous documents (In multiple year cases, include the workpapers in the most current year of the examination and notate all Form 3198’s as to the location.)

    Note:

    See IRM 4.23.10.20.1 for assembly of forms and letters not specifically mentioned in this section.

4.23.10.20.1  (05-07-2013)
Assembly of Employment Tax Case File Folder - SBSE

  1. Tax returns are to be assembled in case files by year and type of return.

  2. Attach the following to the face of the folder:

    1. Form 895, Notice of Statute Expiration, Part 2 (if statute involved).

    2. Form 3198, Special Handling Notice, or Form 9231 (if applicable). (In multiple year cases, include the workpapers in the most current year of the examination and notate all Form 3198’s as to their location).

    3. Form 10329, Transmittal Sheet for Related Cases.

  3. Attach the following to the inside of the folder (stapled to left side):

    1. Copy of Command Code AMCLS, AMDISA, or AM424 print.

    2. Form 885-E, Schedule for FICA Tax Adjustment of Wages Not Previously Reported.

    3. Form 885-T, Adjustment of Social Security Tax on Tip Income.

    4. Form 2363, Master File Entity Change (change of Name/Address).

    5. Form 5345-D, Examination Request - ERCS Users.

    6. Form 5346, Examination Information Report.

    7. Form 5348, AIMS/ERCS Update (Examination Update).

    8. Form 5349, Examination Correction Request.

    9. Copy of report for State agency.

    10. Computer disks for unagreed files. Computer diskettes should be labeled with:

    • Identification of disk content.

    • Software format.

    • Employee’s name.

    • Date created.

    • Index file with name and description of each file.

    • Diskette should be encrypted.

  4. Forms and documents enclosed in the case file:

    1. Case closing letters to be mailed by Centralized Case Processing.

    2. Waiver and Acceptance Forms:

      • Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Excise or Employment Tax),

      • Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 statement), and/or

      • Form 2504-WC, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment in Worker Classification Cases (Employment Tax).

      • Form 2297, Waiver of Statutory Notification of Claim Disallowance.

      • Form 3363, Acceptance of Proposed Disallowance of Claim for Refund or Credit.

    3. Form 4665, Report Transmittal, (for unagreed or partially agreed cases).

    4. Taxpayer’s protest and correspondence in unagreed cases.

    5. Examination report, including:

      • Form 4666, Summary of Employment Tax Examination (numbered).

      • Form 4667, Examination Changes — Federal Unemployment Tax (numbered).

      • Form 4668, Employment Tax Examination Changes. Attach the listing of employees who should receive wage statements Forms W-2/W-2c from the taxpayer, per IRM 4.23.8.10.2, Delinquent Forms W–2/W–2c Not Secured by Examiner.

      • Form 4668-B, Report of Examination of Withheld Federal Income Tax (numbered).

      • Form 5701, Notice of Proposed Adjustment (B&I).

      • Explanation of Adjustments, including Form 886 – A, Explanation of Items (pages numbered).

    6. Employment Tax Returns (original, copy, BRTVU or SFR). See (5) below for additional detail.

    7. Workpaper assembly. See (6) below.

    Note:

    Form 886 – A, Form 4666, Form 4667, Form 4668, and Form 4668-B will be stapled together. Form 4318, or Form 9984 and other numbered workpapers will be stapled together. Form SS–10 (original) should be stapled to the back of the most recent return to which it relates. Photocopies of Form SS–10 will be attached to the back of the other returns.

  5. Forms and documents to be attached to the tax return, SFR, or BRTVU:

    1. Stapled to front of the first page:

      • Form 2503, Survey After Assignment - Excise or Employment Tax.

      • Form 9440, Taxpayer Levy Source and Contact Information.

      • Form 5344, Examination Closing Record.

      • Form 3244-A, Payment Posting Voucher - Examination (attached to face of the return).

    2. Stapled to the reverse of the first page:

      • Form 2848, Power of Attorney and Declaration of Representative, stapled to reverse of the first page of tax return.

      • Form SS-10, Consent to Extend the Time to Assess Employment Taxes, and copies of Letter 907 and Letter 928, (if applicable).

      • Form 906, Closing Agreement on Final Determination Covering Specific Matters.

    3. Attached to the last page of return:

      • Amended returns/Claims.

    4. Attached to last page, facing out:

      • BMFOLT – stapled to back facing out.

      • Form 5546, Examination Return Charge-Out.

  6. Workpaper Assembly

    1. SBSE Assembly - Re-engineering:

      • Form 4318-ET, Index of Examination, and Form 4318-ET, Continuation of Examination Workpapers.

      • Form 9984, Examining Officer's Activity Record.

      • Other numbered work papers (In multiple year cases, include the workpapers in the most current year of the examination, and notate all Form 3198’s as to the location).

  7. See IRM Exhibit 4.4.1-8, Case Assembly, for additional information.

4.23.10.20.2  (05-07-2013)
Form 5344/Form 5599 - Additional Entries for Completion of Employment Tax Closures

  1. The completion of Form 5344 for all employment tax examinations will follow the instructions found in IRM 4.4.12, AIMS/Processing Handbook, Examined Closings, Surveyed Claims, and Partial Assessments. For TE/GE, use Form 5599, TE/GE Examined Closing Record, and follow the instructions in IRM 4.5.2, TE/GE AIMS Manual - TE/GE Examined and Non-Examined Closures. The following additional items apply:

  2. The following entries are mandatory for all employment tax examinations:

    1. Item 11 - Interest Computation Date,

    2. Item 12 - Tax, Penalty and Interest Adjustments,

    3. Item 13 - Disposal Code,

    4. Item 15 - Credit and Tax Computation Adjustments,

    5. Item 39 - Disclosure Code, and

    6. Item 418 - 3121(q) Amount - Enter for Tip Examinations.

  3. To aid examiners in completing Item 39, please see the disclosure code list at Exhibit 11.3.37-4, State Agency Codes, in IRM 11.3.37, Recordkeeping and Accounting for Disclosures.

Exhibit 4.23.10-1 
Form 4666, Summary of Employment Tax Examination

Preparation Instructions Form 4666, Summary of Employment Tax Examination

(1) Date of Report - enter date report is completed.
 
(2) Type of Report - check applicable box.
 
(3) Unagreed or Agreed - check applicable box.
 
(4) Calendar Year (column (a)) - for annual returns, list calendar year examined. For quarterly returns, list the year only if all its quarters result in the same result - a change or a no-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 from line 5 of Form 4668, line 14 of Form 4668-B, and/or line 8 of Form 4667.
 
(7) Increase (Decrease) in Allowed Credits (column (d)) - enter the total amounts from line 6 of Form 4668 .
 
(8) Penalty (column (e)) - enter the applicable code sections and the identified amount of the specific penalties from lines 7, 8, 9, and 10 of Form 4668. Enter lines 15, 16, 17, and 18 of Form 4668-B, and/or line 9 of Form 4667.
 
(9) Total Adjustment and Penalties (column (f)) - enter the sum of columns (c) and (e), less column (d), for each line. Remember, an increase in credits will reduce the total adjustment.
 
(10) 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. Indicate whether this report relates to a "Form 2504–WC section 7436 Issue" or "Form 2504 non-section 7436 issue."

Note:

A caveat of acceptance by the appropriate official is to be included on all no-change and agreed reports. See IRM 4.23.10.12.4(2)

and IRM 4.23.10.12.5(7).

Note:

If the exam did not address worker classification issues, use the statement in IRM 4.23.10.12.4(3).

Note:

For cases where a worker classification job category was examined and accepted, identify the worker job description for future section 530 consideration. See IRM 4.23.10.12.4(4).

 
See IRM 4.23.10.12.4.1. This statement is to be included on a no-change report when the taxpayer was determined to qualify for section 530 relief with regard to a specific category of worker.
 
See IRM 4.23.10.16.3, Examination Report Forms 4666, 4668, and 2504 for IRC 3402(d) Examinations, for the statement to be included in IRC 3402(d) two-step abatement examinations.

Exhibit 4.23.10-2 
Form 4667, Examination Changes—Federal Unemployment Tax

Preparation Instructions Form 4667, Examination Changes—Federal Unemployment Tax

(1) Date of Report - enter date report is completed.
 
(2) Type of Report - check applicable box.
 
(3) Agreed or Unagreed - check 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) Lines 10 and 11 - use a separate column for each state and experience rate period. On line 11, enter calendar year where taxpayer does not have an experience rate or where experience rate is constant throughout the year.
 
(7) Line 12 - enter the experience rate as determined by the state. If the experience rate exceeds 5.4%, enter 5.4%.
 
(8) Line 13 - enter taxable FUTA wages as corrected in the examination. This should be the same as Line 3.

Note:

If more than one state is involved, the total of all columns in Line 13 should equal Line 3.

 
(9) 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.
 
(10) Line 15 - enter 5.4%. Line 22 will be the same percentage.
 
(11) Line 18 - enter contributions timely paid.
 
(12) Line 19 - enter contributions paid late.
 
(13) Line 20 - for any state to which the credit reduction is applicable, enter the rate from Schedule A, Form 940 for the year under examination.
 
(14) Bottom of Form — include such items as statements regarding revised or corrected reports, delinquency, explanation of adjustments, information regarding penalties, etc. at the bottom of the form. Indicate whether this report relates to a "Form 2504–WC, section 7436 issues" or "Form 2504, non-section 7436 issues."

Exhibit 4.23.10-3 
Form 4668, Employment Tax Examination Changes Report

Specific Item and Line Instructions for Completing Form 4668

(1) Return form number - enter Form 941, Form 943, Form 944, Form CT-1, Form CT-2 or Schedule H.

Note:

For RRTA examinations, this form will need modifications. Contact the LB&I Railroad Collateral Subject Matter Experts, found in the LB&I Technical Advisors listing Issue Practice Groups and International, Industry and Other Technical Guidance, under "Railroad."

 
(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 5 and 11.
 
(6) Total increase or (decrease) in credits - enter the total amount of lines 6.
 
(7) 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.
 
(8) Examination discussed with - self explanatory.
 
(9) Agreed or unagreed - check applicable block.
 
(10) Line 1. Enter the social security and Medicare taxes from Schedule of Adjustments, Line 7.
 
(11) Line 2. Enter the social security and Medicare taxes attributable to IRC 3121(q) from Schedule of Adjustments, Line 8.
 
(12) Line 3. Enter the increase (decrease) in tax exemption on exempt wages/tips from Schedule of Adjustments, Line 10.
 
(13) Line 4. Enter the total income tax withholding from Schedule of Adjustments, Line 17.
 
(14). Line 5. Delinquent tax or total tax increase (decrease) (Lines 1, 2, and 4 minus/plus Line 3).
 
(15) Line 6. Total increase (decrease) in credits from Schedule of Adjustments, Line 23.
 
(16) Line 7. Enter the amount of penalty under IRC 6651(a)(1).
 
(17) Line 8. Enter the amount of penalty under IRC 6651(a)(2).
 
(18) Line 9. Enter the amount of penalty under IRC 6656.
 
(19) Line 10. Enter IRC section number in space provided for any other penalty and the amount of the penalty in columns (b) through (e).
 
(20) Line 11. Enter sum of penalties in Lines 7, 8, 9, and 10.
 
(21) Line 12. Enter the maximum amount of tax subject to the provisions of IRC section 3402(d). If not applicable, enter "None." Tax from lines 12 and 13 on Schedule of Attachments (IRC section 3509), and any portion of line 14 from the Schedule of Adjustments that is not subject to IRC section 3402(d), are not abatable.

Note:

The amount subject to IRC 3402(d) abatement listed in Line 12 INCLUDES amounts allowed by the examiner as part of the exam when using the 2-step process described in IRM 4.23.10.16.2.

If the examiner does not use the 2-step assessment process and instead nets the tax due, Line 12 should reflect the remaining amount of tax available for abatement. See IRM 4.23.8.4, IRC 3402(d) - Relief for Employer When Employees Have Paid Income Tax on Wages.

 
(22) 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. See IRM 4.23.10.12.10.
 
   

Note:

The following notation, "Wage Statements Secured by Examiner," should be made in the block regarding the filing of Forms W–2/W–2c and in the "other" instructions section of the attached Form 3198, Special Handling Notice, or Form 3198-A. Also, indicate whether this report relates to a "Form 2504–WC, IRC section 7436 issue" or "Form 2504, non-section 7436 issue."

 
 
 
Page 2 Line Instructions "Form 4668 - Schedule of Adjustments"
 
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).

Note:

For annual returns 943, 944, Schedule H, and CT-1, use only column (e) for wage input.

 
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).
 
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).
 
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) for tip adjustments.
 
5. Any other adjustment to Social Security or Medicare wages that doesn’t fit into the categories on Lines 1 through 4, with the appropriate percentage entered in column (a).
 
6. Use for any adjustment that does not affect an employee's social security or Medicare tax not dependent on a specific percentage.
 
7. Compute the social security and Medicare taxes for lines 1, 2, 3, 4, and/or 5 and adjustment for any amounts on line 6.
Enter these totals on Page 1, Line 1.
 
8: Enter the tax adjustment for tips under IRC 3121(q). Reference Code 114 is only available for tax years beginning with 2011 for current quarter assessments for tips under IRC 3121(q).
Enter these totals on Page 1, Line 2.
 
9: Adjustment to wages subject to HIRE exemption. This is only available for the 2nd, 3rd and 4th quarters of 2010. For adjustments to Form 943 or 944, you may only make entries in the 4th quarter of 2010.
Important: Entering a positive number increases the amount of exempt wages or tips, and will decrease the tax. If the taxpayer overstated the exempt wages, enter the amount disallowed as a negative number. Enter the rate (6.2% for 2010) in column (a).
 
10. Adjustment to the tax on the wages shown on Line 9. Multiply the wages on Line 9 times the rate in Line 9, column (a).
Enter these totals here and on Page 1, Line 3.
 
11. Enter the applicable income tax withholding rate in column (a) and the amount of the wage adjustment in columns (b) through (e). The split line allows you to enter two different rates, or use one of the lines to enter wages where tax was actually withheld but not reported on Form 941, 943 or 944. Any wages entered may be required to be shown on Line 12 of the front page of Form 4668 as being available for abatement under IRC § 3402(d).
 
12. Enter the applicable income tax withholding rate(s) under IRC section 3509(a) in column (a) and the amount of the wage adjustment in columns (b) through (e).
 
13. Enter the applicable income tax withholding rate(s) under IRC section 3509(b) in column (a) and the amount of the wage adjustment in columns (b) through (e).
 
14. For any additional wage amount subject to income tax withholding that doesn’t fit on lines 11, 12 or 13, enter the percentage in column (a) and the quarterly amounts in columns (b) through (e) for Form 941, or the annual amount in column (e) for Form 943 or 944.
a) Enter any income tax withholding computed by the taxpayer for the examiner under IRC 3402(b) or IRC 3402(c). This is abatable under IRC 3402(d).
b) Enter any income tax withholding actually deducted and withheld but not reported to the Service. (This is NOT subject to IRC section 3402(d)).
 
15. Use this line to enter Federal income tax withheld, but not previously reported, such as when working a CAWR case, or in the situation where the taxpayer did not report all the wages he paid.
 
16. Use this line for any other adjustment to Federal income tax withheld. A positive entry will increase the tax, a negative entry will decrease the tax.
 
17. Compute the income tax withholding for lines 11, 12, 13, 14, and adjust for any amounts on lines 15 and 16.
Enter these totals on Page 1, Line 4.
 
18. This line is only available for tax years 2009 through 2011.
Important: Entering a positive number increases the amount of COBRA premiums that qualify for reimbursement. If the taxpayer overstated the amount of qualified COBRA premiums that he paid, enter the amount disallowed as a negative number.
 
19. This line is available for tax years before 2011.
Important: Entering a positive number increases the amount of Advance Earned Income Tax Credit. You may find this situation in a CAWR case, if the taxpayer actually paid the AEITC to his employees. On the other hand, if the taxpayer overstated the AEITC, enter the amount disallowed as a negative number.
 
20. This line is only available for tax year 2010. If you’re making adjustments to Form 941, entries can only be made in the 2nd quarter. For adjustments to Forms 943 or 944, you can make entries only in the 4th quarter.
Important: Entering a positive number increases the amount of exempt wages or tips. If the taxpayer overstated the exempt wages, enter the amount disallowed as a negative number.
 
21. Increase (decrease) in credit for exempt wages/tips on Line 20 (Line 20 x rate).
 
22. Increase (decrease) in other credits.
 
23. Net increase (decrease) in credits (sum of Lines 18, 19, 21, and 22).
Enter these totals on Page 1, Line 6.
 

Exhibit 4.23.10-4 
Form 4668-B, Report of Examination of Withheld Federal Income Tax

Specific Item and Line Instructions for Completing Form 4668

(1) Return form number - enter Form 945.
 
(2) Name and address of Taxpayer - 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 14 and 19.
 
(6) Examination discussed with - self explanatory.
 
(7) Agreed or unagreed - check applicable block.
 
Line Instructions
(8) Lines 1 through 5. Enter the description of payments subject to tax, the applicable code section, applicable tax rate, the amount of payments, and compute the tax and enter in (e).
 
(9) Line 6. Enter the non-wage taxes withheld but not reported.
 
(10) Line 7. Enter any other adjustments to non-wage withholding.
 
(11) Line 8. Total of lines 1 through 7.
 
(12) Lines 9 and 10. Enter payments subject to IRC 3406 backup withholding, the applicable tax rate, and compute the tax.
 
(13) Line 11. Enter backup withholding taxes withheld but not reported.
 
(14) Line 12. Enter any other adjustments to backup withholding.
 
(15) Line 13. Compute the total adjustment to backup withholding, lines 9 through 12.
 
(16) Line 14. Compute total of taxes due, Line 8(e) plus line 13(e).
 
(17) Lines 15 through 18. Enter applicable penalties.
 
(18) Line 19. Total Penalties, Lines 15 through 18.
 

Exhibit 4.23.10-5 
Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Excise or Employment Tax)

Instructions for Completion of Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment

General
   
  Form 2504 without the section 530 disclaimer statement is used for taxes related to adjustments to the non-section 7436 portion of an employment tax examination where a worker classification issue was also part of the examination, whether or not the examination of worker status resulted in reclassification. If any workers were accepted as being independent contractors, be sure to identify any job classification that was accepted in a statement on the Form 4666. See IRM 4.23.10.12.4.
  If any workers were reclassified as employees, use Form 2504-WC to report additional tax due to the change in worker status.
  In addition, Form 2504 without the section 530 waiver statement is to be used for the assessment of the employee's share of FICA. See IRM 4.23.10.18.Procedures for Adjusting the Employee's Share of FICA.
   

Preparation of the Form 2504 is generally self-explanatory, with much of the information being carried over from the Form 4666, Summary of Employment Tax Examination. Entries for Form 940, Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT-2 are placed on separate lines. Entries for additional tax and penalties, or entries for a decrease of tax and penalties, or entries for the increase and/or decrease of credits, are shown on Form 2504. No-change periods are reflected on Form 4666 only.

Note:

For IRC 3402(d) adjustments, see IRM 4.23.8.4. Also see IRMs 4.23.10.16.1 and 4.23.10.16.2.

IRM 4.23.10.16.3, Examination Report Forms for IRC 3402(d) Examinations, contains detailed instructions on the Form 2504 credit memo entries.

   
Instructions
   
1 Write or type the name and address of taxpayer. Include the EIN.
   
2 Tax period ended - List each year as follows:
  (a) For Forms 940, 943, 944, 945, and CT-1, the tax period is expressed as the year, i.e., 2009.
   
  (b) For Forms 941 and CT-2, the tax period is expressed as calendar quarters, i.e., 03/31/2009–12/31/2009.
   
3 Return Form Number - Self-explanatory.
   
4 Kind of Tax and Internal Revenue Code Section - As follows:
   
  (a) For Form 940 - FUTA IRC 3301.
   
  (b) For Form 941, 943 and 944 - FICA & IT W/H, IRC 3101, IRC 3111 & IRC 3402.
   
  (c) For Form 945 – Backup W/H IRC 3406 or ITW IRC 3402.
   
  (d) For Form CT-1 – RRTA IRC 3201 & IRC 3221.
   
  (e) For Form CT-2 – RRTA IRC 3211.
   
5 Amount of Tax - Self-explanatory.
   
6 Credit Increase (Decrease) - Self-explanatory. For COBRA Credit, HIRE Credit, and Advanced Earned Income Credit increases or decreases.
   
7 Penalty - Self-explanatory.
   
8 Memo: Abatement amount under IRC 3402(d) - See explanation on Form 4666 - Enter the tax period, the form number, and the amount accepted for IRC 3402(d) abatement.

Exhibit 4.23.10-6 
Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 Statement)

Instructions for Completion of Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 Statement)

General
   
  Form 2504-S with the 530 disclaimer statement is used when the examination did not address worker classification issues and includes the following statement:
  "The examination of your employment tax returns as reflected on this report did not include an examination for employment tax purposes of whether any individuals should be treated as employees of the taxpayer for purposes of Section 530 of the Revenue Act of 1978, as amended by Section 1122 of the Small Business Job Protection Act of 1996."
   

Preparation of the Form 2504-S is generally self-explanatory, with much of the information being carried over from the Form 4666, Summary of Employment Tax Examination. Entries for Form 940, Form 941, Form 943, Form 944, Form 945, Form CT-1, and Form CT-2 are placed on separate lines. Entries for additional tax and penalties, or entries for a decrease of tax and penalties, or entries for the increase and/or decrease of credits, are shown on Form 2504-S. No-change periods are reflected on Form 4666 only.

Note:

For IRC 3402(d) adjustments, see IRM 4.23.8.4 and following. Also see IRMs 4.23.10.16.1 and 4.23.10.16.2.

IRM 4.23.10.16.3, Examination Report Forms for IRC 3402(d) Examinations, contains detailed instructions on the Form 2504 credit memo entries.

   
Instructions
   
1 Write or type the name and address of taxpayer. Include the EIN.
   
2 Tax period ended - List each year as follows:
  (a) For Forms 940, 943, 944, 945, and CT-1, the tax period is expressed as the year, i.e., 2009.
   
  (b) For Forms 941 and CT-2, the tax period is expressed as calendar quarters, i.e., 03/31/2009 –12/31/2009.
   
3 Return Form Number - Self-explanatory.
   
4 Kind of Tax and Internal Revenue Code Section - As follows:
   
  (a) For Form 940 - FUTA IRC 3301.
   
  (b) For Form 941, 943, and 944 - FICA & IT W/H IRC 3101, IRC 3111 & IRC 3402.
   
  (c) For Form 945 – Backup W/H IRC 3406 or ITW IRC 3402.
   
  (d) For Form CT-1 – RRTA IRC 3201 & IRC 3221.
   
  (e) For Form CT-2 – RRTA IRC 3211.
   
5 Amount of Tax - Self-explanatory.
   
6 Credit Increase (Decrease) - Self-explanatory. For COBRA Credit, HIRE Credit, and Advanced Earned Income Credit increases or decreases.
   
7 Penalty - Self-explanatory.
   
8 Memo: Abatement amount under IRC 3402(d) - See explanation on Form 4666 - Enter the tax period, the form number, and the amount accepted for IRC 3402(d) abatement.

Exhibit 4.23.10-7 
Form 2504–WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases

Instructions for Completion of Form 2504–WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases

General
   
In every worker classification case for which adjustments are proposed, Form 2504–WC must be used. Form 2504–WC includes the language for taxpayers to waive the restrictions on assessment under IRC 7436(d) and IRC 6213(a). Preparation of the Form 2504–WC is generally self-explanatory with much of the information being carried over from the Form 4666, Summary of Employment Tax Examination. Entries for Form 940, Form 941, Form 943, Form 944, Form CT-1 and Form CT-2 are placed on separate lines. Entries for additional tax and penalties, or entries for a decrease of tax and penalties, or entries for the increase and/or decrease of credits, are shown on Form 2504–WC. No-change periods are reflected on Form 4666 only.

Note:

For IRC 3402(d) adjustments, see IRM 4.23.8.4. Also see IRMs 4.23.10.16.1 and 4.23.10.16.2.

IRM 4.23.10.16.3, Examination Report Forms for IRC 3402(d) Examinations, contains detailed instructions on the Form 2504 credit memo entries.

   
Instructions
   
1 Write or type the name and address of taxpayer. Include the EIN.
   
2 Tax period ended - List each year as follows:
  (a) For annual Forms 940, 943, 944, and CT-1, the tax period is expressed as the year, i.e., 2009.
   
  (b) For Forms 941 and CT-2, the tax period is expressed as calendar quarters, i.e., 03/31/2009 –12/31/2009.
   
3 Return Form Number - Self-explanatory.
   
4 Kind of Tax and Internal Revenue Code Section - As follows:
   
  (a) For Form 940 - FUTA IRC 3301.
   
  (b) For Forms 941, 943, and 944 - FICA & IT W/H IRC 3101, IRC 3111 & IRC 3402. Also, IRC 3509(a) or IRC 3509(b), if applicable.
   
  (c) For Form CT-1 - RRTA IRC 3201 & IRC 3221.
   
  (d) For Form CT-2 - RRTA IRC 3211.
   
5 Amount of Tax - Self-explanatory.
   
6 Credit Increase (Decrease) - Self-explanatory. For COBRA Credit, HIRE Credit, and Advanced Earned Income Credit increases or decreases.

Note:

As none of the credits referenced above apply to worker classification, this item will be left blank for F 2504-WC.

   
7 Penalty - Self-explanatory.
   
8 Memo: Abatement amount under IRC 3402(d) - See explanation on Form 4666 - Enter the tax period, the form number, and the amount accepted for IRC 3402(d) abatement.

Exhibit 4.23.10-8 
Filing Instructions For Reclassified Workers

COMPANY NAME: ____________TAX PERIODS
: ____
 The Internal Revenue Service has determined that you are an employee of the company named above, rather than an independent contractor. Because employees are treated differently than independent contractors for tax purposes, the IRS asked the company to give you this notice about changes you may need to make on your Federal Tax Return for the years involved.
 As a worker treated as an independent contractor, you should have received Form 1099–MISC reflecting payments from this company. You should have included this income on Schedule C and Schedule SE and paid self-employment tax.
 Since it has been determined that you were actually an employee, the company is required to give you a Form W–2 for the years involved. Payments reported on W–2 are not subject to self-employment tax but are subject to social security tax and Medicare taxes. Any business expenses you claimed on Schedule C should be moved to Schedule A as an itemized deduction. You may then claim any business expenses allowed for an employee as miscellaneous deductions. In addition, employees are not entitled to claim any Keogh retirement plan deductions. Therefore, if you claimed these deductions they should be removed from your return.
 As a result of the change to your employment status, you may be due a refund or you may owe additional tax. You must now amend your tax return by filing Form 1040X, Amended U.S. Individual Income Tax Return, and attaching Form 8919, Uncollected Social Security and Medicare Tax on Wages, for each tax year involved. Form 8919 is used to report wages when a worker's status has been changed from self-employed (or independent contractor) to that of an employee. Using Form 8919, compute the correct social security and Medicare taxes on the wages reported to you resulting from the worker classification.
 Generally, the statute of limitations for giving you a refund or assessing additional tax is 3 years from the time the return was filed or 2 years after the date the tax was paid, whichever is later.
 The IRS will be contacting you if you had previously filed a protective claim to keep the statute of limitations open, and bring closure to your case.
 The attached Notice 989, Commonly Asked Questions When IRS Determines Your Work Status is "Employee," will answer some of the questions you may have about your responsibilities.
 If you have any questions about these instructions, please call or visit your local IRS office.
Attachment:
Notice 989

Exhibit 4.23.10-9 
Form 886–A Format for Employee vs. Independent Contractor Adjustment

Form 886–A
(REV JANUARY 1994)
EXPLANATIONS OF ITEMS SCHEDULE NO. OR
EXHIBIT
     
NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED
X Corporation. XX-XXXXXXX 2004, 2005 & 2006
     
ISSUE:    
1. Whether the taxpayer qualifies for relief under section 530 of the Revenue Act of 1978.
     
2. Whether or not service providers were employees under the usual common law rules for Federal employment tax purposes and therefore subject to FICA, FUTA, and income Tax Withholding.
     
3. Whether the taxpayer is entitled to lower rates provided by IRC section 3509 of the Internal Revenue Code.
     
4. Whether a Classification Settlement Program offer is applicable for computation of employment taxes at a reduced level.
     
     
FACTS:    
 X Corporation is a family-run and owned business that processes and packages oyster and crab meat. Mr. XYZ, his wife, and their two children are the sole shareholders in the company. Mr. XYZ has operated the company since 1990. Mrs. XYZ, the office manager, and their children, assist Mr. XYZ with the administrative functions of the business. X Corporation employed enough workers to perform the usual tasks of its industry. However, at peak times X Corporation would contract out for additional workers to shuck oysters and pick crabmeat. These workers are treated as independent contractors and enter into a written contract with X Corporation to be paid on a fixed fee per pound of meat shucked or picked. The workers are not guaranteed a minimum level of compensation. The terms of the contract require the workers to perform their services for X Corporation on a full-time basis but do not specify the number of hours to work. X Corporation retains the right to discharge the workers for any violations of the contract terms. The workers are free to terminate their relationship with X Corporation at any time and for any reason. The workers do not receive any employee type benefits such as a pension, health insurance, or paid vacation days. The written agreements are identical for all workers.
     
 There is no formal training for shucking oysters or picking crabs. The workers learn their craft primarily from their parents or family members and from watching other workers. The pickers and shuckers regard themselves as skilled workers. They provide their own aprons, knives, hair nets and gloves at a cost of approximately $15.00. If the worker wants to sit down while he works, he is required to furnish his own stool or bench. While a worker can learn to properly pick a crab or shuck an oyster within a day or so, it sometimes takes months to acquire the necessary speed to earn a living. Supervision of the workers by X Corporation consists mainly of insuring that they maintain the proper Food and Drug Administration (FDA) sanitation standards, such as assuring that the workers wear hairnets and wash their hands before entering the working area. The workers are not allowed to smoke or to wear jewelry and are sent home if they fail to comply with the rules. The workers are entitled to work whenever they wish, can come and go as they please, take breaks whenever they desire, are not required to come to work on a daily basis, can refuse to do any job, and can work for other competitors. They are paid $1.00 to $1.50 per pound of meat picked or shucked.
     
 X Corporation also has a permanent workforce of twenty-five workers who are treated as employees. The permanent workforce is paid on an hourly basis. All workers (permanent or contract ) performed similar jobs as oyster shucker or crab picker. The permanent workers were on the payroll and had proper amounts of FICA and income tax withheld from their wages. X Corporation issued Forms 1099 to the contract workers who were treated as independent contractors. X Corporation refused to agree with the proposed Federal employment tax adjustments claiming the contract workers were not employees for Federal tax purposes. X Corporation contends that it is treating the contract workers as independent contractors in the same manner as its chief competitors. The corporation contends that it is following a "long-standing recognized practice" of a significant segment of the industry in which it is engaged. Therefore, the corporation argues it is entitled to relief under Section 530 of the Revenue Act of 1978.
     
LAW:
 Section 530(e)(3) of the Revenue Act of 1978, as amended by the Small Business Job Protection Act of 1996, clarifies that the first step in any case involving whether the business has the employment tax obligations of an employer with respect to workers is determining whether the business meets the requirements of section 530. If so, the business will not have an employment tax liability with respect to the workers at issue.
     
 Section 530(a)(1) provides, in part, that if, for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, then for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee, unless the taxpayer had no reasonable basis for not treating the individual as an employee.
     
 This relief applies only if both of the following consistency rules are satisfied: 1) all federal tax returns (including information returns) required to be filed by the taxpayer are timely filed on a basis consistent with the taxpayer's treatment of the individual as not being an employee ("reporting consistency" ), and 2) the taxpayer (and any predecessor) has not treated any individual holding a substantially similar position as an employee for purposes of employment taxes for periods beginning after December 31, 1977 ("substantive consistency rule" ).
     
 Section 530(a)(2) sets forth three safe havens in determining whether a taxpayer has a reasonable basis for not treating an individual as an employee. They are reasonable reliance on: (A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or (C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged. A business which fails to meet any of three safe havens may nevertheless be entitled to relief, if the business can demonstrate, in some other manner, any other reasonable basis for not treating the worker as an employee.
     
 IRC section 3121(d)(2) of the Internal Revenue Code provides that the term "employee" means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of employee. See also IRC sections 3401(c) and 3306(i).
     
 The question of whether an individual is an independent contractor or employee is one of fact to be determined upon consideration of the facts and application of the law and regulations in a particular case. With certain limited statutory exceptions, the classification of particular workers or classes of workers as employees or independent contractors, for purposes of Federal employment taxes, must be made under common law rules. Guides for determining the existence of a worker's status are found in three substantially similar sections of the Employment Tax Regulations; namely sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1 relating to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and federal income tax withholding on wages at source, respectively.
     
 Section 31.3121(d)–1(c)(2) of the regulations provides that generally, the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work, but also as to the details and means by which the result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done, but also as to how it shall be done. In this connection, it is not necessary that the employer actually control or direct the manner in which services are performed; it is sufficient if he or she has the right to do so. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished and not as to the means and methods for accomplishing the result, he or she is an independent contractor. Similar language is found in regulation sections 31.3306(i)–1(b) and 31.3401(c)–1(b).
     
 In determining whether an individual is an employee under the common law rules, a number of factors have been identified as indicating whether sufficient control is present to establish an employer– employee relationship. These factors have been developed based on an examination of cases and rulings considering whether an individual is an employee. The degree of importance of each factor varies depending on the occupation and the factual context in which services are performed. See Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992) and Weber v. Commissioner , 103 T.C. 378 (1994), aff'd 60 F.3d 1104 (4th Cir. 1995). See also Breaux and Daigle, Inc. v. U. S., 900 F.2d 49 C.A.5 (La.),1990. Also see Rev. Rul. 87–41, 1987–1 C.B. 296.
     
 Section 3121(d)–1(a)(3) of the regulations provides that if the relationship of an employer and employee exists, the designation or description of the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, co-adventurer, agent, independent contractor, or the like. Similar language is found in regulation sections 31.3306(i)–1(d) and 31.3401(c)–1(c).
     
 Because there are elements of controls as well as autonomy in all cases, regardless of whether an employment relationship or an independent contractor relationship exists, all evidence of both control and lack of control or autonomy must be evaluated in determining whether there is a sufficient degree of control to establish an employment relationship. In doing so, one must examine the relationship of the worker and the business. Facts which illustrate whether there is a right to direct or control how the worker performs the specific tasks for which he or she is hired, whether there is a right to direct or control how the business aspects of the worker's activities are conducted, and how the parties perceive their relationship provide evidence of the degree of control and autonomy.
     
 IRC section 3509 provides that if an employer fails to deduct and withhold any tax under chapter 24 (income tax withholding) or subchapter A of Chapter 21 (employee portion of FICA) with respect to any employee by reason of treating an employee as not being an employee, the employer's liability is 1.5 percent of the employee's wages plus 20 percent of the employee's portion of the FICA tax. The employer's liability is doubled in cases where the employer failed to meet the reporting requirements of IRC section 6041(a) or IRC section 6051 consistent with the treatment of the employees as independent contractors.
     
 IRC section 3509(c) provides that the reduced rates of IRC section 3509 do not apply in cases of an employer's intentional disregard of the requirement to deduct and withhold such tax.
     
 IRC section 3509(d)(1)(C) provides that if the amount of liability for tax is determined under 3509, then sections 3402(d) (regarding credit for tax paid by the worker) and 6521 (regarding offset for payment of SECA tax) do not apply. IRC section 3509(d)(2) provides that section 3509 rates do not apply where the employer withholds income tax withholding but not FICA.
     
 IRC section 3509(d)(3) provides that IRC section 3509 does not apply to an individual described in IRC section 3121(d)(3), "Statutory employee."
     
DISCUSSION OF LAW—SECTION 530
Taxpayer's Position:    
 X Corporation argues that the workers in question were not employees because: 1) Per Section 530, it was a common practice in the seafood industry to treat seasonal workers as independent contractors instead of employees and 2) the workers were not employees under the usual common law rules but were independent contractors.
     
Government's Position:    
 Section 530 provides for the termination of the employer's (not worker's) federal employment tax liability if the requirements of section 530 are met. If the business meets the requirements of section 530 with respect to a class of workers, it is generally not necessary to determine whether the workers are independent contractors or employees.
     
 To qualify for relief under section 530, X Corporation must first have filed all required returns (including information returns) on a timely basis with respect to each worker and treated all workers in similar positions (jobs) the same. X Corporation had five workers during 2000, 2001, and 2002 that were treated as independent contractors. Forms 1099–MISC were timely filed for all the contract workers.
     
 Second, the treatment of a worker as an independent contractor must be consistent with the treatment by the taxpayer (or the predecessor) of any individual holding a substantially similar position (Section 530 (a)(3)). The taxpayer cannot change the treatment of a service provider from employee to a contractor if their position is substantially similar. A substantially similar position exists if the job functions, duties, responsibilities, the party controlling those functions, and the exercise of those duties and responsibilities are substantially similar. The permanent workers performing similar jobs were treated as employees. These workers (employees) had worked for X Corporation for more than five years and were paid a salary tied to hours worked. In addition, some of the contract workers had worked for X Corporation on a seasonal basis for more than five years. All shuckers and pickers including the contract workers performed the same services. The only differences between the service providers were their compensation arrangements. Thus, X Corporation has failed the consistency test under section 530.
     
 Third, the taxpayer must have had a reasonable basis for not treating an individual as an employee to qualify for relief under section 530. The statute provides three non-exclusive methods for showing a reasonable basis. X Corporation contends there is a "long-standing industry practice" for not treating the contract workers as employees. X Corporation has not provided any evidence to establish the recognized practice of a significant segment of the industry. It is the taxpayer's responsibility to present evidence in the form of affidavits, depositions, or other similar evidence to establish the long-standing industry practice and its reasonable reliance on that practice. Thus, X Corporation has not shown it is entitled to relief under the reasonable basis test of section 530.
     
DISCUSSION OF LAW—COMMON LAW RULES
Taxpayer's Position:    
 In support of its contention that contract workers are independent contractors, X Corporation points to the absence of evidence of actual control and the impermanent nature of the working relationship. X Corporation did not provide any contract worker with any minimum guaranteed income, any sick leave or any employee benefits. The workers were free to determine when and for how long they performed their services. It offers no supervision in the manner in which a worker is to perform the task nor does it train workers to perform the task. The workers are entitled to work whenever they wish, can come and go as they please, take breaks whenever they desire, are not required to come to work on a daily basis, can refuse to do any job, and can work for other competitors.
     
Government's Position:    
 In determining whether an individual is an employee or an independent contractor under the common law rules, there are several factors which have been developed to indicate whether there is sufficient control to establish an employer/employee relationship. Although no one factor is definitive on its own, collectively the factors define the extent of an employer's control over the time and manner in which a worker performs. This control test is fundamental in establishing a worker's status. Evidence of control generally falls into three categories: behavioral control, financial control, and relationship of the parties.
     
Behavioral Control
Factors which illustrate whether there is a right to control how a worker performs a task include training and instructions. In this case, the work is a simple task, only requiring the opening, cutting, and removal of the meat from the shell. In this case, the workers did not receive any training or instruction on how to perform the task. X Corporation did not supervise the process but inspected the oyster and crab meat quality when the meat was submitted for packing. The nature of the work is such that little supervision is necessary. The "minimal skill required" to efficiently perform the task argues against an independent contractor status.
     
Financial Control
Factors which illustrate whether there is a right to direct and control the financial aspects of the worker's business include significant investment, unreimbursed expenses, making services available to the relevant market, the method of payment, and the opportunity for profit or loss. In this case, the contract workers furnished their own tools, worked when they wished, and worked for others at will. They were not paid on an hourly basis but rather per pound of meat picked at a nonnegotiable price. However, because they are paid by the per pound of the meat picked rather than on a time basis, it is to their economic advantage to work rapidly and efficiently. Though the faster they pick or shuck, the more they earn, the workers cannot earn a profit in the usual sense of that word. The workers also did not incur any significant investment. These facts indicate an employee-employer relationship. However, the workers were paid on a per pound basis, which is indicative of independent contractor status. Thus, these factors are essentially offsetting.
     
Relationship of the Parties
Factors which illustrate how the parties perceive their relationship include the intent of the parties, as expressed in written contracts; the provision of, or lack of employee benefits; the right of the parties to terminate the relationship; the permanency of the relationship; and whether the services performed are part of the service recipient's regular business activities. In this case, the workers entered into written contracts designating them as independent contractors. No federal income tax or social security and Medicare taxes were withheld from amounts paid to the workers and no employee-type benefits were provided by X Corporation. Their earnings were reported on Form 1099–MISC as nonemployee compensation. These factors indicate the workers could be independent contractors.
     
 However, the right of a business to discharge its workers is often indicative of an employment relationship. In this case, the workers had the right to end their relationship with X Corporation at any time without incurring liability. X Corporation also had the right to discharge the workers. X Corporation could ask a worker not to return if the worker consistently had too much fat or shell in the meat he produced. This right to discharge a worker is a factor indicating that the worker is an employee. But the worker had the right to end his or her relationship with X Corporation at any time without incurring liability which indicates an employer-employee relationship. Therefore, this factor is not indicative of an employment relationship as either employees or independent contractors.
     
 The permanency of the relationship is another factor to consider. If a business engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence of the intent to create an employment relationship. X Corporation had long-term relationships with the workers. Many of the workers are regular and have worked for X Corporation for several years. Thus, the duration of the relationship between X Corporation and the workers supports a finding that the workers were employees. However, a long-term relationship may exist between a business and either an employee or an independent contractor.
     
 Whether the services performed by the workers are part of the regular business of the taxpayer or its predecessor is another factor to consider. In this case, X Corporation is engaged in processing and packing seafood. The success and continuation of the business depend on the seasonal workers. If no worker arrives to pick crabs or oysters, X Corporation would suffer a financial loss. The nature of the work also requires the workers to perform such services on the employer's premises. Thus, the work performed by the workers is an integral part of X Corporation's business operations.
     
 In evaluating the factors in this case, it is clear that X Corporation retained significant control over the contract workers. The only significant difference between the contract workers and the permanent workers is their payment of compensations and employee benefits. Either worker (contract or permanent) could be hired or fired by X Corporation for the same reason. The workers performed their services at X Corporation's premises. The work did not require any special skill. The workers had a continuous relationship with X Corporation as opposed to single transaction. The workers were able to work as much or as little as they chose. Only one factor suggests an independent contractor status, which clearly does not create a genuine issue. Payment per pound indicates an independent contract. However, the workers had no opportunity to gain or lose except from the work of their hands.
     
DISCUSSION OF LAW–SECTION 3509
 IRC section 3509 applies where section 530 relief is not available and gives reduced rates for income tax withholding and the employee's share of FICA where an employer failed to deduct employment taxes by reason of treating such employee(s) as an independent contractor. The tax computation under IRC section 3509 is mandatory in all reclassification cases. The taxpayer cannot waive IRC section 3509 when its conditions are met. However, it is not available where the employer intentionally disregards the requirement to deduct and withhold employment taxes.
     
Taxpayer's Position:    
 X Corporation claims to have a reasonable basis for treating the workers as independent contractors based on the common law. Forms 1099–MISC were timely filed. Therefore, it is entitled to IRC section 3509 reduced rates.
     
Government's Position:    
 The facts weigh heavily in favor of treatment as employees. X Corporation's own treatment of the permanent workforce points toward an employee classification. X Corporation's permanent workforce that held similar jobs was treated as employees. X Corporation believes that because its workers agreed to be independent contractors, therefore they were independent contractors. There is no evidence of a standard in this industry that treats temporary pickers and shuckers as independent contractors. X Corporation has neither presented evidence it had a reasonable basis nor that it relied upon that evidence. These facts indicate that the taxpayer intentionally disregarded the requirement to deduct and withhold income tax and employee FICA. Therefore, X Corporation does not quality for the IRC section 3509 rates.
     
CONCLUSION:
 X Corporation does not quality for relief under section 530 of the Revenue Act of 1978. Although the required returns were timely filed, X Corporation has not shown (1) consistent treatment of workers as independent contractors and (2) reasonable basis for not treating its workers as employees. X Corporation has treated its permanent workforce as employees. These employees held similar jobs or duties as the contract workers. Thus, there is an inconsistent treatment of workers. X Corporation has not shown it is entitled to section 530 relief.
     
 However, the relevant issue in this case is whether X Corporation had a "reasonable basis" for treating its contract workers as independent contractors from their first day of employment. Section 530 relief will not be available if X Corporation fails the safe haven provisions for establishing a reasonable basis. X Corporation relied on the "long-standing industry practice" provision. Based upon the foregoing findings of fact and conclusions of law, there is no evidence to support X Corporation's claim of "industry practice." Accordingly, X Corporation has not shown reasonable reliance on a safe haven sufficient to qualify for relief from employment taxes under section 530.
     
 In addition, X Corporation's treatment of workers as independent contractors is not reasonable under the usual common law rules. X Corporation had the right to fire the workers, schedule their work, set their hours, supervise their work and set their method of payment. In the general sense of an independent contractor, the workers could not realize a profit or incur a loss as a result of their services. They had a very small investment in the tools and equipment that they used. Furthermore, a continuing relationship did exist although work was performed at frequently irregular intervals. The services provided were an integral part of X Corporation's business. The contract workers are employees of X Corporation from their first day of employment for federal tax purposes. X Corporation is liable for the FUTA tax, the employer's and employees' share of FICA tax and income tax withholding. The payroll tax liabilities are assessed at full rates since X Corporation is not entitled to IRC section 3509 rates.
     
 Although the taxpayer is not entitled to relief under section 530 because the taxpayer had a colorable argument, a Classification Settlement Program (CSP) offer was made. The taxpayer rejected the offer at the examination level.

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