4.23.12  Delinquent Return Procedures

Manual Transmittal

September 16, 2011

Purpose

(1) This transmits a revision to the Table of Contents and text for IRM 4.23.12, Employment Tax, Delinquent Return Procedures.

Material Changes

(1) Editorial and technical changes have been made throughout this Section. References to LMSB have been changed to LB&I.

(2) 4.23.12.1. Additional exam techniques provided for determination of filing requirements.

(3) 4.23.12.1(6). Deleted requirement to obtain a statement under penalties of perjury from a taxpayer describing actions that prevented the timely filing of returns.

(4) 4.23.12.2. Added clarification.

(5) 4.23.12.3. New section "Controlling and Processing Delinquent and Substitute for Returns in Employment Tax" and following subsections are extensively revised to reflect employment tax procedures.

(6) 4.23.12.3.1. New subsection "Securing Controls for Delinquent and Substitute for Returns."

(7) 4.23.12.3.2. New subsection "Processing Delinquent Returns."

(8) 4.23.12.3.3. New subsection "Processing Substitute for Returns." Additional information included discussing the definition of "valid return."

(9) 4.23.12.5(1). Added Form 2504-S. Referenced new subsection for substitute for return procedures.

(10) 4.23.12.5(2) Referenced new subsections for delinquent and substitute procedures.

(11) 4.23.12.9. Deleted "Substitute for Employment Tax Returns" as the procedures are covered in 4.23.12.3. Subsequent sections renumbered.

Effect on Other Documents

This material supersedes IRM 4.23.12, dated 12/16/2008.

Audience

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

Effective Date

(09-16-2011)

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

4.23.12.1  (09-16-2011)
Overview: Initial Delinquency Procedure

  1. This section outlines the procedures for delinquent and substitute returns.

  2. In the interest of reducing multiple contacts with taxpayers, examiners will attempt to determine whether the taxpayer is fulfilling all Federal tax obligations during the course of either a compliance check or in the course of an examination of an assigned return.

  3. When an examiner discovers during any examination that a taxpayer may have failed to file required Federal tax returns, he/she will, before soliciting any returns, determine the taxable periods and type of returns for which the taxpayer may be liable. The following can be used to assist the examiner in making this determination:

    • BMFOLI: shows the history of filing or non-filing, by tax period and Master File Transaction code (MFT),

    • INOLE: shows the filing requirements for each taxpayer,

    • BMFOLU: shows the W-2s filed by the taxpayer and may indicate the number of years for which the corresponding employment tax returns are due,

    • BMFOLE: shows if the taxpayer has gone out of business and taken steps to close the account by appropriately marking any returns as "final."

  4. If a return or returns are determined to be required, the examiner will ascertain the reasons why the taxpayer failed to file the required returns and determine whether any indications of fraud exist.

  5. When information is developed during an examination that indicates the taxpayer’s failure to file a required return or returns is willful, or if there is any other indication of fraud, the case will be referred to Criminal Investigation after conferring with a Fraud Technical Advisor (FTA). In such cases the examiner will not solicit delinquent returns, payment of tax, or any agreement from the taxpayer. If the taxpayer furnishes delinquent returns to the examiner or indicates he/she intends to file delinquent returns, the examiner will notify Criminal Investigation through proper channels. For additional information, see IRM 25.1.7, Fraud Handbook - Failure to File, and IRM 20.1.2, Penalty Handbook - Failure to File/Failure to Pay Penalties.

  6. If it is determined that indications of fraud are not present, the taxpayer will be advised that he/she is required to file all delinquent returns without regard to the number of years or taxable periods involved. In addition, all taxes, penalties and interest are immediately due. The taxpayer will be asked to deliver the returns promptly to the examiner. The examiner will fully document the reasons for the non-filing of the returns in their workpapers. The examiner should also request payment of the liabilities and explain the taxpayer’s options for collection alternatives (e.g., installment agreement, offer-in-compromise). The examiner should also be prepared to discuss services available from the Taxpayer Advocate Service, if necessary.

  7. The examiner will set a specific date for receiving the return(s). The date should be reasonable in light of the facts and circumstances in the case, the number of employees involved, and other factors which may extend the time necessary to prepare a proper and correct return. The taxpayer will be informed that failure to tender the delinquent return(s) by the specific date will be considered as a definite refusal to file under the provisions of the Code.

  8. When a taxpayer is advised to file all required delinquent returns but refuses to file, or states he/she is unable to file all of the returns, a determination will be made as to the extent the filing requirements should be enforced. This determination must be consistent with the criteria in Policy Statement 5–133, Delinquent returns - enforcement of filing requirements, found at IRM 1.2.14.1.18. Delinquency procedures are normally enforced for a six-year period of delinquency. Any deviation from the general six-year guideline must be approved by the examiner's manager.

  9. For delinquent information returns and employee wage statements, see IRM 4.23.8.10, Delinquent Forms W-2/W-2c, and IRM 4.23.9.12, Penalties for Failure to File Certain Information Returns or Furnish Certain Statements.

4.23.12.2  (09-16-2011)
Delinquent Returns With No Tax Due

  1. There are some delinquent employment tax returns filed on which no balance due was originally reflected. As a result of an examination, however, additional tax is proposed. Since the returns as originally filed reflected no taxes due, they were processed without considering the delinquency features or without securing from the taxpayer any statement of reasonable cause for delay in filing. In such cases, the examiner will, after considering the statement of the taxpayer, recommend to assert or not to assert the delinquency penalties in the examination report. Any appropriate comments as to the recommendation for the assertion or non-assertion of penalties will be incorporated in the report transmittal or workpapers.

4.23.12.3  (09-16-2011)
Controlling and Processing Delinquent and Substitute for Returns in Employment Tax

  1. Employment tax non-filers can be processed using either Delinquent Return or Substitute for Return (SFR) procedures. Most employment tax non-filers will follow the SFR procedures for assessments; however, this does not preclude the examiner from following the appropriate Delinquent Return procedures when appropriate. It is important to remember, however, that once SFR procedures have been started, they cannot be changed and the return controlled with an SFR must be processed as such to final closure.

4.23.12.3.1  (09-16-2011)
Securing Controls for Delinquent and Substitute for Returns

  1. The procedures for requesting controls will vary depending on how the case will be worked.

  2. To secure controls for following Delinquent Returns procedures, the examiner will complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, to establish a non-filer via ERCS and include the following entries:

    • Do you want the original return?: Answer "N" for no, since there is no return to request.

    • Do you want Labels?: Answer "Y" for yes or "N" for no.

    • Push Code: Enter "020" to establish Delinquent Return controls. A push code must be used when establishing AIMS controls if there is no TC 150 posted at Master File. The Push Code holds the TC 424 at Master File until a TC 150 posts.

    • Source Code: Use "24" for the primary quarter that is being established and "44" for all related non-filed periods being established.

    • Reason for Request: Must be entered and consistent with the Push Code used. For Push Code "020" - enter: "DELINQUENT RETURN SECURED BY EXAMINATION."

  3. To secure controls for following Substitute for Return procedures, the examiner will complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, to establish a non-filer via ERCS and include the following entries:

    • Do you want the original return?: Answer "N" for no, since there is no return to request.

    • Do you want Labels?: Answer "Y" for yes or "N" for no.

    • Push Code: Enter "036" to establish a TC150 SFR posting and the appropriate controls. A push code must be used when establishing AIMS controls if there is no TC 150 posted at Master File. The Push Code holds the TC 424 at Master File until a TC 150 posts. Using "036" will cause a computer generated SFR to post to Master File. This will be reflected on the module as a TC150 SFR.

    • Source Code: Use "24" for the primary quarter that is being established and "44" for all related non-filed periods being established.

    • Reason for Request: Must be entered and consistent with the Push Code used. For Push Code "036" enter "EXAM/SFR."

  4. To secure controls when a TP does not have a Taxpayer Identification Number (TIN) [Employer Identification Number (EIN) for BMF]:

    • The examiner should request that the taxpayer submit Form SS-4, Application for Employer Identification Number, to secure an EIN.

    • In the interim, the group should request a dummy EIN (via Command Code AMTIN7) from the local AIMS/ERCS unit. Establish NMF AIMS control using Form 5354, Examination Request Non-Master File. See IRM 4.4.9.4.2 for additional information. The NMF control is to provide AIMS/ERCS controls until a TIN is secured. After the TIN is secured, close the NMF control with a DC "28" .

  5. If the taxpayer will not request their own EIN, contact the campus Entity Control section to obtain the assignment of a permanent EIN using the following procedures:

    • Prepare a dummy Form SS-4 and fax to the appropriate Campus using the internal fax number found on SERP (EIN Assignment on the "Who/Where" tab). http://serp.enterprise.irs.gov/databases/who-where.dr/ein-assign.dr/ein-asgnmt-state-align.htm. See IRM 21.7.13.7.1 for EIN Assignment State Mapping. Examiners should include their name, position, fax and phone number on the fax cover sheet. These requests will be worked on an expedite basis and the EIN will be provided using whatever response requested by the examiner (fax, phone or E-mail).

    • Once the TIN is secured, follow the procedures for establishing controls using either (2) or (3) above.

    • SFR controls cannot be requested on a temporary or invalid TIN.

    • The case cannot be forwarded to Centralized Case Processing (CCP) for closing unless a TIN has been secured.

4.23.12.3.2  (09-16-2011)
Processing Delinquent Returns

  1. Examiners securing delinquent returns will advise the taxpayer that all taxes, penalties and interest are immediately due.

  2. The processing of a secured delinquent return will vary depending on the circumstances for each tax period:

    • If the examiner secures a delinquent return and there is no TC 150 SFR posted, see IRM 4.4.9.5, Delinquent Return Secured - No TC 150 Posted, for the initial processing of the delinquent return.

    • If additional adjustments are necessary, the examiner will have to wait until the return has posted, and then proceed with the examination using normal audit procedures.

  3. If the examiner secures a delinquent return and there is a TC 150 SFR posted and the examiner wants to accept the return as filed, the examiner should do the following:

    • Since there is already a TC 150 SFR posted at Master File, the secured return must be processed as a TC 300 and the case closed as an agreed closure. The closed case must be sent to Centralized Case Processing within 7 days of receipt of the return.

    • Prepare an examination report that matches the delinquent return received.

    • Complete the Form 5344, Examination Closing Record, as required and close the case following agreed procedures.

  4. If the examiner secures a delinquent return and there is a TC 150 SFR posted and the examiner does not want to accept it as filed, the examiner should do the following:

    • Since there is already a TC 150 posted at Master File, the secured return must be processed as a partial assessment within 7 days of the receipt of the return. Prepare the Revenue Agent Report (RAR) to match the secured delinquent return. If the tax per return is zero, do not request a partial assessment. Continue with the examination, preparing a final RAR when the audit is complete.

    • Complete the audit and prepare a final audit report to reflect additional assessments or to reflect no changes made, as appropriate.

    • Complete the Form 5344 as required and close the case to CCP or Technical Services, as appropriate.

4.23.12.3.3  (09-16-2011)
Processing Substitute for Returns

  1. If the examiner is following SFR procedures in any non-filer case, the following actions will be taken to work the case:

    • Controls will be requested following the procedures outlined above in IRM 4.23.12.3.1(3).

    • The examiner will work the case as if no return has been secured. If the taxpayer submits a delinquent return to the examiner, procedures will be followed as outlined in IRM 4.23.12.3.2 and the secured return will be incorporated into the final audit report.

      Note:

      Even though the delinquent return is not being processed, the receipt of a valid return DOES start the running of the assessment statute of limitations.
      To constitute a valid return that is sufficient to start the running of the statute of limitations, more is required than just a taxpayer signature. The return must satisfy the substantial compliance test of Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986). See also Rev. Rul. 2005-59. This is true whether the return is prepared and submitted by the taxpayer or is prepared by the Service and signed by the taxpayer under IRC 6020(a).
      The examiner must update the statute to 3 years from the date received using the appropriate procedures.

    • SFR’s relating to returns of tax that follow deficiency procedures with the failure to pay penalty applied under IRC 6651(a)(2) must follow IRC 6020(b) Certification Procedures and must include a Form 13496, IRC Section 6020(b) Certification, for each tax period. Employment tax examinations involving worker classification issues requiring a Notice of Determination under IRC 7436 are considered as returns that follow deficiency procedures.

    • For SFR’s showing tax that does not follow deficiency or deficiency-type procedures (e.g., non-worker classification employment adjustments), examiners must still follow IRC 6020(b) Certification Procedures; however, in lieu of Form 13496, the examiner may prepare a hardcopy SFR and sign their names on the taxpayer’s signature line followed by the words:
      "This return was prepared and signed under authority of IRC 6020(b)."

    • If the taxpayer executes a waiver on Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment, or Form 2504–WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases, the Form 2504/2504–WC does not constitute a return under IRC 6020(a) and therefore does not commence the running of the assessment statute of limitations. See Rev. Rul. 2005-59.

    • The SFR is treated as a return filed by the taxpayer under IRC 6651(g) for purposes of determining the amount of the failure to pay penalty under IRC 6651(a)(2). See IRM 4.23.9.10, Assertion of Failure to Pay Penalty and IRM 4.23.9.11, Penalty for Failure to Make Timely Deposits, for procedures on failure to pay and failure to deposit penalties.

    • The appropriate standard preliminary letters, identified in IRM 4.23.10.8, 30–Day Letters, will be used in all cases in which there has been a failure to file returns.

    • Normal Appeal procedures apply to substitute returns.

4.23.12.4  (12-16-2008)
Delinquent Tax Returns Secured (Other than Employment Tax Returns)

  1. In situations where the examiner secured delinquent returns not within his/her examination responsibility, the examiner will file the returns with the appropriate Campus under existing IRM procedures. Also, if the examiner feels the returns need to be screened further or examined by another operating division, the examiner should prepare Form 5666, TE/GE Referral Information Report, or Form 5346, Examination Information Report, and attach a copy of the delinquent return(s) to the information report. The manager, after approving the information report, will forward the documents to the appropriate operating division for consideration. (To ensure uniformity when forwarding information to the SB/SE or the LB&I division, the TE/GE examiner may use Form 5346.)

  2. All delinquent returns will be date stamped with an official received date stamp by the securing examiner. In some cases a taxpayer may have returns with a refund due and have a balance due on other returns. Attach a separate Form 13133, Expedite Processing Cycle, to each return to expedite processing. The refund returns will subsequently post and offset the balance due module.

  3. Attach Form 3198, Special Handling Notice for Examination Case Processing, to each return indicating whether or not the Delinquency Penalty should be assessed.

4.23.12.5  (09-16-2011)
Delinquent Employment Tax Returns Secured

  1. Once an employment tax examination has begun, the examiner will generally follow the Substitute For Return procedures outlined in IRM 4.23.12.3 above. The examination report and Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment, 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, will report the correct figures. This procedure precludes a no-change report if the taxpayer files a delinquent employment tax return during the course of the examination.

  2. If the taxpayer submits delinquent employment tax returns, the examiner will inspect the returns to determine whether to accept the returns as filed or to begin an examination. Procedures outlined in IRM 4.23.12.3 above will be followed, as appropriate.

  3. When a delinquent employment tax return is received from a taxpayer, the examiner will determine whether failure to file and failure to pay penalties are to be asserted. See Policy Statement 2–7, Reasonable cause for late filing of return or failure to deposit or pay tax when due, found in IRM 1.2.12.1.2, regarding acceptable reasonable causes for failure to file. The examiner’s recommendation for assertion or no assertion of the penalties will accompany each delinquent return.

  4. Delinquent returns secured by the examiner must be processed with the examiner’s recommendation for assertion of applicable penalties whether or not the taxpayer agrees to the assertion of penalties. These requirements preclude affording appeal rights prior to assessment of the penalties. The taxpayer should be advised of post-assessment penalty appeal procedures. The taxpayer does not have to pay the penalties to get an administrative appeal.

4.23.12.6  (12-16-2008)
Delinquency Penalty on Timely But Unsigned Return

  1. It is the policy of the Service (see Policy Statement 2–11, Certain unsigned returns will be accepted for processing, found at IRM 1.2.12.1.5) not to assert a delinquency penalty if an unsigned tax return is timely filed on the prescribed form and accompanied by proper payment, provided that:

    1. The taxpayer upon request subsequently files a proper return, and

    2. The facts surrounding the failure to sign the return clearly indicate there was no willful intent to disobey the taxing statute, and gross negligence is not involved.

  2. When it is necessary to rely upon a taxpayer’s failure to sign a return as a defense to the statute of limitations, the delinquency penalty may be asserted to support the Service’s position that the statutory period of limitations does not begin to run until a valid return has been filed.

4.23.12.7  (12-16-2008)
Refusal to File Delinquent Returns

  1. When a taxpayer is advised to file all required delinquent returns but refuses to file, states inability to file, or neglects to file within the time-frame set, a determination will be made as to the extent the filing requirements should be enforced. The application of enforcement procedures will depend upon the facts of each case. This determination must be consistent with the criteria in Policy Statement 5–133, Delinquent returns - enforcement of filing requirements, found at IRM 1.2.14.1.18, and the guidelines outlined below. See IRM 4.23.12.8.

4.23.12.8  (12-16-2008)
Retroactive Enforcement

  1. The extent to which enforcement of delinquency procedures will be undertaken will depend upon the facts of each case. As a general rule, enforcement should not extend beyond six prior years. But enforcement for shorter or longer periods, or not at all, may be determined where such action appears to be in the best interest of the Government from the standpoint of reasonableness, salutary effect on compliance, and prudent deployment of resources. (See Policy Statement 5–133.)

  2. Specific factors that should be taken into account include:

    1. Degree of flagrancy.

    2. Special need to enforce compliance in a specific area.

    3. Whether the delinquency involves trust fund monies collected but not paid over.

    4. Special circumstances peculiar to a specific taxpayer, class, industry or type of tax.

    5. Expenditure of resources required in relation to anticipated results in terms of revenue, provided there are no other overriding considerations.

    6. Period of enforcement used by other IRS activities in return -compliance programs in the same tax area.

  3. Delinquency procedures will generally be enforced if a taxpayer has failed to file a one-time return. In other cases when contact is made with a delinquent taxpayer, delinquency procedures should ordinarily be followed through for at least one period. However, the circumstances of each individual case must be taken into consideration. (Refusal-to-file cases referred to Examination or TE/GE after contact has been made by examiners are required to be fully documented prior to such referral.)

  4. If it is determined that enforcement should extend beyond a six-year period, the examiner will document the case file by outlining the facts of the case and the reasons why enforcement for the longer period is recommended. Such recommendations must receive managerial approval prior to enforcement.

  5. If it is determined that delinquency procedures need not be enforced for the full period of the delinquency if less than six years, the case file must fully document justification for the shorter period. Such determination must receive managerial approval prior to enforcement except in cases where the examiner is satisfied, as a result of information that is available or received from the taxpayer, that there would be no net tax due for the years for which delinquency procedures are not to be enforced.

4.23.12.9  (12-16-2008)
Referral to Criminal Investigation

  1. Cases are referred to Criminal Investigation by using Form 2797, Referral Report of Potential Criminal Fraud Cases. If a case involving a collateral examination results in a fraud referral, the affected examination areas will coordinate the referral. The general guidelines for fraud procedures are outlined in IRM 4.23.9.6, Fraud Penalty.

  2. Instructions for completing Form 2797 can be found in the IRM 25.1, Fraud Handbook, and more specifically, in IRM 25.1.3.2, Preparation of Form 2797.

4.23.12.10  (12-16-2008)
Referral to Tax Exempt and Government Entities

  1. If compliance personnel encounter a responsible officer of a TE/GE organization who refused to file a required return, the employee should prepare Form 5666 or Form 5346. After managerial approval, the Form 5666 or Form 5346 should be forwarded to TE/GE for necessary action.

4.23.12.11  (12-16-2008)
Referral to Examination

  1. Prior to making a referral to LB&I, SB/SE and TE/GE personnel should refer to the procedures outlined in the manual for refusal to file procedures.


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