4.23.12  Delinquent Return Procedures

Manual Transmittal

February 02, 2015

Purpose

(1) This transmits revised IRM 4.23.12, Employment Tax, Delinquent Return Procedures.

Material Changes

(1) Editorial and technical changes have been made throughout this section.

(2) IRM 4.23.12.3. Subsection title changed to Controlling and Processing Delinquent and Substitute for Returns. Minor editing and clarifications made.

(3) IRM 4.23.12.3.1. Subsection title changed to Securing Controls using either Delinquent or SFR Procedures.

(4) IRM 4.23.12.3.1. Extensive changes to instructions for delinquent returns and Substitute for Returns (SFR).

(5) IRM 4.23.12.3.2. Subsection title changed to Processing Delinquent Returns under either Delinquent or SFR Controls. Extensive revision on procedures.

(6) IRM 4.23.12.3.3. Subsection title changed to IRC 6020(b) Procedures for SFR Employment Tax Cases. Extensive revision report package instructions for SFRs.

(7) IRM 4.23.12.4. Revised instructions on delinquent return processing for non-employment tax returns.

(8) IRM 4.23.12.5. Subsection title changed to Penalty Determinations in Delinquent Return Cases. Discussion limited to revised procedures on penalties for delinquent returns and updated Policy Statement number 3-2.

(9) IRM 4.23.12.6. Updated Policy Statement 3-5 (formerly P-2-11).

(10) IRM 4.23.12.11. Deleted subsection Referral to Examination because this material is addressed in IRM 4.23.12.4, Delinquent Tax Returns Secured (Other than Employment Tax Returns).

Effect on Other Documents

This material supersedes IRM 4.23.12, dated 9/16/2011.

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

(02-02-2015)

Barbara J. Fiebich
Director, Specialty Exam Policy and Quality
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 determine whether the taxpayer is fulfilling all Federal tax obligations during the course of either a compliance check or the 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 information is available to assist 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 a summary of 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, contact a Fraud Technical Advisor (FTA) to discuss a possible referral to Criminal Investigation. In such cases, do 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, 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 no indications of fraud are present, advise the taxpayer 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. Fully document the taxpayer's reasons for the non-filing of the returns in the case file. The examiner will 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 (TAS), 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. Inform the taxpayer 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 requires managerial approval.

  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, however, as a result of an examination, 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 a statement from the taxpayer as to the cause for delay in filing. The examiner will secure a statement from the taxpayer and determine if reasonable cause exists. The decision as to whether to assert delinquency penalties will be made based on this statement. Examiner comments as to the assertion or non-assertion of penalties will be incorporated into the report transmittal and workpapers.

4.23.12.3  (02-02-2015)
Controlling and Processing Delinquent and Substitute for Returns

  1. Employment tax non-filers can be processed using either Delinquent Return or Substitute for Return (SFR) procedures.

    Note:

    Most employment tax non-filers worked by specialists within the SB/SE Employment Tax Program will follow the SFR procedures for assessments; however, this does not preclude the examiner from following the Delinquent Return procedures when appropriate. It is important to remember, however, that once SFR procedures have been started, they cannot be changed. The return controlled with an SFR must be processed as such to final closure. Procedures for using either Delinquent or SFR processes are detailed below.

4.23.12.3.1  (02-02-2015)
Securing Controls using either Delinquent or SFR Procedures

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

  2. For 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 Transaction Code (TC) 150 posted on Master File. The Push Code holds the TC 424 at Master File until a TC 150 posts.

    • Source Code (SC): Enter the appropriate source code which depends on the origination of the examination. If the employment tax return(s) are a referral via the Specialist Referral System, use SC "24" for the primary quarter and "44" for all related non-filed periods being established. If the non-filed periods are related to another case (e.g., income tax, other employment tax case), the examiner will use SC "44" for all periods.

    • Reason for Request: Enter a reason consistent with the Push Code used. For Push Code "020" , enter: "DELINQUENT RETURN SECURED BY EXAMINATION."

  3. For Substitute for Return (SFR) 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" if there is no TC 150 on the module. This push code will establish a TC 150 SFR.
      - Enter "050" if there is a TC 150 SFR posted to the account but no return was secured and processed for the module. This will allow SFR non-filer controls to establish using an "EE" statute date.

    • Source Code (SC): The appropriate source code will depend on the origination of the examination. If the employment tax return(s) are being opened as the original exam at the group level because it was received as a referral via the Specialist Referral System, the examiner will use SC "24" for the primary quarter and "44" for all related non-filed periods being established. If the non-filed periods are related to another case (e.g., income tax, other employment tax case), the examiner will use SC "44" for all periods.

    • Reason for Request: Enter a reason consistent with the Push Code used. For Push Code "036" or "050" , enter "EXAM/SFR."

  4. To secure controls when a taxpayer does not have a valid Employer Identification Number (EIN) for BMF:

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

    • Establish Non-Master File (NMF) controls using the SSN of the primary owner of the business as follows: "XXXXXXXXX-D" . The NMF control provides AIMS/ERCS controls until an EIN is secured and allows the examiner to charge time to the case on ERCS.

    • After the EIN is secured, close the NMF control with a Disposal Code (DC) "28" and establish controls using the EIN.

      Note:

      If a foreign entity is involved, see IRM 21.7.13.3.2.7, Foreign Entities - Definitions and Instructions, for procedures unique to these entities.

  5. If the taxpayer refuses to request their own EIN, contact the campus Entity Control Section to obtain the assignment of a permanent EIN using procedures outlined in IRM 21.7.13.3.8, Receiving EIN Applications From Field Compliance.

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

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

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

4.23.12.3.2  (02-02-2015)
Processing Delinquent Returns under either Delinquent or SFR Controls

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

    Note:

    To constitute a valid return that is sufficient to start the running of the statute of limitations, more information 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 and IRM 25.6.1.6.14, Criteria for Establishing a Statute of Limitations Period. 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).

  2. The processing of a secured delinquent return will vary depending on what exam controls were used when establishing the tax period (e.g., either Delinquent or SFR controls outlined in IRM 4.23.12.3.1). The type of controls used will determine how to proceed with working and closing the exam.

  3. If the examiner secures a valid delinquent return after establishing controls using the Delinquent Return procedures outlined in IRM 4.23.12.3.1(2) (No TC 150 SFR), 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 or the case cannot be closed within seven days, process the delinquent return as noted above in (3) and continue to work on audit development. Wait until the delinquent return has posted (TC 150) before submitting the case for final closure.

  4. If a valid delinquent return is secured after establishing SFR controls (IRM 4.23.12.3.1(3)), the examiner must decide if the return submitted is substantially correct or if additional adjustments will be necessary to properly reflect wages.

    Note:

    Any time a valid delinquent return is secured from the taxpayer after establishing SFR controls, do NOT follow IRC 6020(b) procedures outlined in IRM 4.23.12.3.3 for that tax period. Each employment tax period stands alone – therefore, some periods may fall under the IRC 6020(b) processing and others may not.

  5. If the return is substantially correct and the case can be closed within seven days of receipt:

    • Prepare an employment tax exam report (ETER) using the appropriate Form 2504 to match the submitted return. This report does not need to be issued to the taxpayer as long as the tax is equal to or less than the tax shown on the submitted returns.

    • Update the statute to properly reflect three years from the date the delinquent return was filed, and

    • Close the case using DC "03" .

    There is no need to obtain a signature on the ETER as long as the computed tax on the report is equal to or less than the amount reported on the signed return submitted by the taxpayer.

  6. If the case cannot be closed within seven days of receipt of the signed return, or if it is determined that the submitted return is not substantially correct:

    • Update the statute date to properly reflect three years from the date the delinquent return was filed.

    • Process the delinquent return as a partial assessment within seven days of receipt. Prepare and attach a Form 13133, Expedite Processing Cycle, to each return. See IRM 4.23.10.16, Partially Agreed Cases, for partial assessment procedures.

      Note:

      EXCEPTION: If the delinquent return reflects a zero tax due, no partial assessment is necessary.

    • Fully develop any additional issues identified. Prepare and issue a report via normal procedures reflecting appropriate adjustments or no-changes.

      Note:

      Because the delinquent return was processed as a partial agreement, the audit report will only include adjustments made to the amounts shown on the delinquent return.

    • Close the case using the appropriate Disposal Code.

    • Examiners will document in the comment section of the Form 3198, Special Handling Notice for Examination Case Processing, that the delinquent return(s) was considered during the exam.

    It is important to note that employment tax case files can include a combination of returns being processed using the Delinquent Return procedures or SFR procedures, as each tax period stands alone.

4.23.12.3.3  (02-02-2015)
IRC 6020(b) Procedures for SFR Employment Tax Cases

  1. IRC 6020(b) procedures ONLY apply when case files involving non-filed returns are closed without receipt of a signed return from the taxpayer. This is true no matter what type of controls (delinquent and/or SFR) were originally established.

  2. When signed returns are not received by the conclusion of the examination, the examiner must certify in accordance with IRC 6020(b) that the adjustments are to be treated as the return filed by the taxpayer for purposes of determining the Failure to Pay (FTP) penalty. See IRM 20.1.2.2.10, Substitute for Return—IRC 6651(g).

  3. In SFR cases where a valid delinquent return is NOT submitted during the exam, the examiner must follow the IRC 6020(b) Certification Procedures outlined below:

    1. Prepare one Form 13496, IRC Section 6020(b) Certification, for each examined tax period. Each quarterly Form 941 (or yearly Form 943, Form 944), as well as each Form 940, constitutes a separate tax period. The form must be signed and dated. The date must be on or after the date of the 30-day letter or agreed report. Identify the tax period to which the form corresponds to by entering "tax period ended [insert date]" in the tax year box in the top right area of the Form 13496. Attach one Form 13496 behind the Form 5344, Examination Closing Record, for each SFR period included in the file.

    2. Prepare one report package that includes the complete Employment Tax Examination Report (ETER) (Form 2504 and appropriate attachments) pertaining to each specific SFR tax period. Include the issue lead sheets (or Form 886-A) citing facts, law, etc., including the explanation and computation of penalties. Attach the entire report package behind the most current Form(s) 5344 and Form 13496 to which the report relates. Rubber-band or otherwise secure all other tax periods and the report package together.

    3. Include a comment in "Other Instructions" of the Special Features section of Form 3198, Special Handling Notice for Examination Case Processing, that this closing is an "IRC 6020(b) – SFR case."

  4. 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) or IRC 6651(a)(3). 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.

  5. Normal appeal procedures apply to all unagreed substitute for return cases.

  6. If the taxpayer executes a waiver on:

    • Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment,

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

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

    the signature on the executed Form 2504 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.

4.23.12.4  (02-02-2015)
Delinquent Tax Returns Secured (Other than Employment Tax Returns)

  1. Stamp all secured delinquent returns with an official date stamp.

  2. If the secured delinquent returns are not within the examiner's responsibility (i.e., no exam controls will be established), file the returns with the appropriate Campus address, as noted in the return instruction package for the secured return (e.g., Form 1040, Form 1120, etc.). Document the case activity record that the return(s) were secured and forwarded.

  3. Referrals generated by SB/SE Employment Tax Examiners: If the secured delinquent returns need to be screened further by the another function, complete Form 5346, Examination Information Report.

    • For SB/SE income tax referrals, send to:
      Internal Revenue Service
      201 W Rivercenter Blvd
      Stop 5702A/Employment Tax
      Covington, KY 41011

    • For any other referral, send directly to the appropriate function.

  4. Referrals generated by non-SB/SE examiners should follow their local procedures.

4.23.12.5  (02-02-2015)
Penalty Determinations in Delinquent Return Cases

  1. In cases where no return has been filed (or a delinquent return is secured), determine whether to assert the failure to file and failure to pay penalties. See Policy Statement 3-2 (Formerly P-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. Document the recommendation for assertion or non-assertion of the penalties in the case file.

  2. Penalty recommendations for delinquent returns must be made whether or not the taxpayer agrees to the assertion of the penalties.

  3. The failure to file and failure to pay penalties are automatic penalties and will be asserted unless case processing is notified otherwise.

4.23.12.6  (02-02-2015)
Delinquency Penalty on Timely But Unsigned Return

  1. It is the policy of the Service not to assert a delinquency penalty if an unsigned tax return is timely filed on the prescribed form and accompanied by proper payment (see Policy Statement 3-5, Certain unsigned returns will be accepted for processing, found at IRM 1.2.12.1.5), 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

    3. 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 taxpayer 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 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 a responsible officer of a TE/GE organization refuses 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.


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