4.75.12  Required filing checks

4.75.12.1  (07-06-2010)
Introduction

  1. Even though an organization qualifies for Federal income tax exemption under IRC §401(a) or §501(a), the organization is required to file annual information returns and any applicable related returns.

  2. Required filing checks are necessary to ensure voluntary compliance. Examiners are responsible for determining taxpayers are in compliance with all Federal tax return filing requirements and all returns reflect substantially the correct tax.

  3. Required filing checks include a review of all related returns, including all income, employment, excise and information returns. Where required filing checks are not followed the examiner must indicate the reasons on Form 5773. Similarly, group managers must document in the case file if they concur with the examiner’s determination whether an organization’s compliance with all IRS filing requirements is not warranted.

  4. This section contains specific examination guidelines for Exempt Organizations required filing checks and jurisdiction.

4.75.12.2  (07-06-2010)
Regulatory Authority

  1. IRC §§6041 - 6053 provide reporting requirements of certain information concerning transactions with persons during the course of business, and wages paid to employees. Generally, the regulations require the reporting of items such as payments made in the course of trade or business to another person, payments of dividends, payments of interest, payments of wages, cash receipts in excess of $10,000, etc. Therefore, it is most important that taxpayers (payors) timely file these returns as required.

  2. IRC §6041A (Returns Regarding Payments of Remuneration for Services and Direct Sales), provides that if any person engaged in a trade or business pays an independent contractor for services in the course of that business, remuneration of $600 or more in a calendar year, the payor must file an information return.

    Example:

    Form 1096, Annual Summary and Transmittal of U.S. Information Returns, with accompanying Form 1099-MISC, Statement for Recipients of Miscellaneous Income, must be filed by February 28th of the following year. For information on the requirements for filing Forms 1099 by magnetic media, see the regulations under IRC §6011.

  3. IRC §6041(A)(e) provides that the payor must furnish the payee a written statement setting forth the amount of such payments. The statement must be furnished to the payee on or before January 31 of the year following the calendar year for which the return was made.

  4. IRC §6051 and the regulations thereunder require that any person who, in the course of a trade or business in which such person is engaged, receives cash in excess of $10,000 in one transaction (or two or more related transactions), file a report of the transaction.

  5. IRC §6051(a) and Treasury Regulations §§31.6051-1(a) and (b) provide that employers must furnish Form W-2, Wage and Tax Statement, to employees for remuneration paid during the calendar year showing the total amount of wages paid subject to withholding of income tax, the total amount of wages paid subject to FICA tax, and the total amount of income tax and FICA tax deducted and withheld. The statement must be furnished to the employee on or before January 31 of the succeeding calendar year.

  6. Forms W-2 are filed with the Social Security Administration and are due on or before the last day of February following the calendar year in which compensation was paid.

4.75.12.3  (07-06-2010)
General Guidelines

  1. In the interest of conserving resources, increasing compliance, and reducing multiple contacts with taxpayers, it is incumbent upon the EO examiner to include during the examination an appropriate review of other returns filed by the exempt organization to assure the taxpayer is in compliance with all filing requirements. This responsibility also extends to various regulatory and occupational taxes under other Compliance Division’s jurisdiction.

  2. Examiners should be alert to possible liability for other Federal taxes and determine whether the taxpayer has complied with the filing requirements.

  3. Required filing checks consist of the analysis of the return information and, when warranted, expansion of the examination to include additional returns.

  4. Group managers are responsible for ensuring the scope and the depth of the required filing check coverage is adequate. If a group manager concludes an examiner’s time determining an organization’s compliance with all IRS filing requirements is not warranted, the group manager must document this in the case file.

  5. The scope of the examination will depend on the adequacy of the taxpayer’s records. However, the examiner is expected to continue the examination to a point where it is reasonable to conclude the return requirements have been fulfilled.

  6. If an examiner finds a required return has not been filed the examiner will solicit the delinquent return (except as provided in IRM 4.75.22, EO Delinquent/Substitute Returns Procedures, when fraud or willful failure to file is indicated). If the examiner secures a delinquent return, the examiner will generally examine such return unless:

    1. Not required to do so under required filing check procedures; or

    2. The delinquent return is within the jurisdiction of another Compliance division.

  7. The penalty provisions under IRC §§6651 and 6652 must also be considered.

4.75.12.4  (12-20-2004)
Inspection versus Examination

  1. An examiner may inspect any return filed by the organization or related entity. The purpose of the inspection is to review a filed return for correctness, accuracy and timely filing. If the return is outside the examiner’s expertise the inspection will be to check timely filing only.

  2. An examiner should not ask questions about an item on the return unless the return is to be examined. Once an examiner requests to look at the return’s books and records, an examination has begun and the organization and/or taxpayer are entitled to an examination report.

4.75.12.5  (07-06-2010)
Examination Jurisdiction

  1. EO has examination responsibility for all EO returns, for all related employment tax and information returns, and for exempt organizations not required to file an annual information return due to falling below the filing requirement gross receipt threshold.

  2. The appropriate Compliance Division has examination responsibility for other Federal tax returns. However, EO examiners are required to perform a required filing check to inspect all federal returns to ensure they have been filed properly.

  3. The Compliance Divisions have been assigned the similar task of developing their own employment tax programs. To ensure consistency, both in the approach and in the interpretation and application of law, on going communication between the Divisions is essential. Areas may develop their own systems to accomplish this coordination.

  4. EO has primary examination responsibility for employment tax returns filed by IRC §501(a) organizations, IRC §527 organizations, and IRC §529 organizations. The other Compliance Divisions have primary examination responsibility for all other employment tax returns.

  5. The returns and schedules under EO jurisdiction are listed in Exhibit 4.75.12-1.

4.75.12.6  (07-06-2010)
Filing Verification

  1. Examiners, during the pre-examination phase of the examination, are to verify whether all returns within the taxpayer’s realm of influence have been filed. To decrease taxpayer burden, examiners should use internal sources of information, e.g. Corporate Files on Line (CFOL). CFOL is used to obtain information relating to the taxpayer’s prior and subsequent years, related returns, and any other returns the taxpayer is required to file.

  2. CFOL provides on-line access (research only) to tax account, tax return and other related information through Integrated Data Retrieval System (IDRS). See Document 6209, ADP and IDRS Information, for additional information on CFOL command codes.

    Reminder:

    Treasury employees (including IRS employees) are prohibited from accessing tax account information, unless such employee’s official duties require access for tax administration purposes. See §6103(h)(1). BROWSING IS ILLEGAL AND CONSTITUTES UNAUTHORIZED ACCESS. BROWSING COULD RESULT IN SEVERE ACTION AGAINST THE IRS EMPLOYEE.

4.75.12.6.1  (12-20-2004)
BMFOL, IMFOL

  1. Business Master File on Line (BMFOL) and Individual Master File on Line (IMFOL) provides research of nationwide entity and tax data information posted to the Business Master File (BMF).

4.75.12.6.2  (12-20-2004)
PMFOL

  1. Payer Master File on Line (PMFOL) is a research tool, which provides information from Payer Master File (PMF) at Martinsburg Computing Center (MCC).

4.75.12.6.3  (12-20-2004)
IRPTR

  1. IRPTR is used to request Information Returns Processing (IRP) from the Information Returns Master File (IRMF) for a particular taxpayer identification number. The request may be made for Payee or Payer Information.

4.75.12.6.4  (12-20-2004)
IRPOL

  1. Accesses Information return master file profile by Taxpayer Individual Number (TIN) and tax year. This file makes available data extracted from Forms 1099, W-2 and W-4.

4.75.12.6.5  (12-20-2004)
BRTVU, RTVUE

  1. BRTVU provides a display of the transcribed line items on all business tax returns and their accompanying schedules or forms as the returns are processed at the campus.

  2. RTVUE provides a display of line items transcribed from Form 1040 series and their accompanying schedules and/or forms as the returns are processed at the campus.

4.75.12.6.6  (12-20-2004)
INOLE

  1. INOLE provides access to the National Account Profile (NAP) which contains selected entity information for all Master File (MF) accounts. This command code will provide filing status, filing requirements, cross-references to other TINs, etc.

4.75.12.7  (07-06-2010)
Case File Documentation

  1. Examiners are required to document required filing check actions taken and decisions made in the workpapers and on Form 5773, EO Workpaper Summary Continuation Sheet.

  2. The examiner should specify on Form 5773:

    1. The required filing check procedures considered;

    2. Those returns/forms required to be filed, and ;

    3. Whether the returns were filed timely by the taxpayer.

  3. If the taxpayer has correctly filed all required returns, the examiner should identify the specific returns in the comments.

  4. If the minimum required checks are not completed, an explanation is to be included by the examiner and managerial involvement documented in the workpapers.

4.75.12.8  (07-06-2010)
Required Filing Checks

  1. Required filing checks should include questionable Form W-4 procedures, employment tax, excise tax, information returns, pension plan returns, and Form 8300. Although not all-inclusive, the following is a list of the organization’s returns to be inspected:

    • Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

    • Form 941, Employer’s Quarterly Federal Tax Return

    • Form W-2, Wage and Tax Statement

    • Form W-4, Employee’s Withholding Allowance Certificate

    • Form 1096, Annual Summary and Transmittal of U.S. Information Returns, including Form 1099 series

    • Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations

    • Form 4720, Return of Certain Excise Taxes on Charities and other persons under Chapters 41 and 42 of the IRC

    • Form 5500 series, Annual Return/Report of Employee Benefit Plan

    • Form 8300, Reports of Cash Payments Over $10,000 Received in a Trade or Business.

4.75.12.8.1  (07-06-2010)
Required Filing Check Techniques

  1. Determine whether the organization has filed all other required Federal returns. This responsibility extends to various regulatory and occupational taxes under other Compliance Division’s jurisdiction. To satisfy the required Filing Check procedures in an examination, include in the workpapers sufficient information to explain the audit steps taken and findings reached.

  2. If the examiner finds a required return, under the jurisdiction of EO has not been filed, solicit the delinquent return (except when fraud or willful failure to file is indicated). If the return is under the jurisdiction of another compliance Division, the examiner will prepare Form 5346, Examination Information Report, giving all pertinent information, and forward it to Classification for transmittal to the appropriate function for consideration.

  3. All related returns should be reconciled with the expenses shown on the primary return under examination.

  4. Determine whether the taxpayer has properly handled transactions considering the following areas:

    1. If the examination shows related entities, inspect their returns to determine whether examinations are warranted.

    2. During the examination of a Form 990, 990-EZ, 990-PF or 990-BL, where the facts and circumstances of the particular case warrant, the examiner should inspect the retained copies of the officers’ personal income tax returns or secure a RTVUE printout to determine whether all items of gross income (as discerned from the EO examination) have been included on the returns. If the taxpayer has not properly reported all items of gross income, prepare a discrepancy adjustment report or if a full examination is warranted, complete Form 5666 or 5346 and forward to Classification for transmittal to the appropriate function for consideration.

      Note:

      Ask the individuals for copies of their returns, not those of the organization.

    3. If the taxpayer refuses to provide the requested return and the examiner can not determine whether the items of gross income have been included on the officers’ returns by reviewing the RTVUE printout, prepare Form 5346, providing all pertinent information. The group manager, after approving the information report, will refer it to the Classification function for transmittal to the appropriate Division for consideration. The appropriate Compliance division will determine if an examination will be conducted.

    4. If it appears the exempt organization has violated the provisions of §4980B concerning the continuation of health care benefits, prepare and refer a Form 5666 or Form 5346 to Classification.

    Should the organization refuse to file a return under the jurisdiction of EO, the examiner should follow the procedures outlined in IRM 4.75.22, Delinquent/Substitute Returns.

4.75.12.8.2  (07-06-2010)
OCEP Required Filing Checks

  1. Because Office/ Correspondence Examination Program (OCEP) cases are limited scope examinations, the procedures for required filing checks are somewhat different because the records are reviewed at the examiner’s office. The normal compliance checks contained in this IRM do not apply to OCEP. These cases require only IDRS research to confirm filing compliance. See IRM 4.75.27.

4.75.12.9  (12-20-2004)
Prior and Subsequent Years Returns

  1. During the course of an examination, inspect the organization’s retained copy of the exempt organization returns for the prior and subsequent years for proper filing and to evaluate audit potential in instances such as, recurring issues or transactions that may adversely affect the exempt status or tax liability of the taxpayer.

  2. Determine whether increases or decreases in activities and financial data affect the organization’s exempt status or result in tax. Such changes may warrant securing the return for examination.

    Caution:

    Examiners must consult the group manager before examining prior and/or subsequent year returns.

  3. An inspection is essentially equivalent to the classification of a return to determine if an examination is necessary. Consequently, if the examiner does not initiate an examination, the examiner may not examine records concerning the copy inspected.

  4. When evaluating the returns for issues related to the year under examination:

    1. Check for large, unusual, and questionable items;

    2. Compare amounts on a proportional basis as a percentage of gross receipts or gross income;

    3. Question large variances or amounts only present in one year.

    Reminder:

    Documentation cannot be requested for amounts in prior or subsequent years without opening them for examination.

  5. If the inspection of prior and/or subsequent years return does not result in an examination, inform the taxpayer of the determination and that in no instance will such action preclude the possibility of the return being selected and subject to examination as a result of any other return selection method.

  6. The examiner should document in the workpapers the retained copies inspected and explain why an examination was not warranted.

  7. If the minimum required checks are not completed, an explanation must be included in Form 5773 and managerial involvement documented.

  8. If, during the examination of the assigned return, the examiner obtains information that indicates potential substantive noncompliance in subsequent years for which returns have not yet been filed by the same taxpayer, prepare Form 5666.

  9. If the taxpayer is unable to provide copies of the returns, request a transcript (use command code BMFOLT on IDRS) and a BRTVU printout.

  10. An examination of prior or subsequent year returns may be warranted if:

    • A potential substantive compliance issue is identified, or

    • An issue is developed during the examination of an originally assigned return that carries back or over to the subsequent years returns

      Example:

      If a revocation of exempt status is being raised as an issue in the examination years, all subsequent years' returns, due and filed, will normally be included in the examination. If all subsequent years are not examined, the group manager will prepare a written explanation for inclusion in the workpapers giving the reasons the subsequent years are not examined.

    • There is a large questionable item or items

    • It is likely that an adjustment in the examination year would be treated the same in the prior year

    • There are carryback or carryforward issues

    • Compliance issues need to be considered

    • The current year adjustments will result in taxpayer filing an amended return for the prior period (the examiner will make the adjustment(s) to relieve the taxpayer’s burden)

  11. If adjustments are made to the return(s) under audit, the examiner must specifically document why the other years were not examined.

  12. Obtain group manager approval to extend an examination into either the prior and/or subsequent years. The examiner will document the group manager’s approval to extend the examination to prior or subsequent years in the workpapers or in the Case Chronology Record. Additionally, the group manager should prepare a written statement of approval for inclusion in the workpapers.

  13. Examine prior/subsequent year return(s) concurrently with the assigned return. Ensure sufficient time remains on the statute of limitations before starting an audit of a prior year return. See IRM 25.6, Statute of Limitations.

  14. The examiner shall inform the taxpayer of the decision and ask whether the prior/subsequent year return(s) is under examination. Examiners will verify the presence or absence of an examination indicator on a primary return before initiating an examination. If an examination indicator is present, the examiner will take appropriate steps to coordinate before contacting the taxpayer. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    IF the taxpayer states that the... THEN the examiner...
    Return(s) is not being examined, May extend the examination using the taxpayer’s retained copy.
    Inspected return is under examination Will initiate AIMS research and ascertain the status and/ or results of the examination.
    Prior or subsequent year(s) return is under examination in another Area Contact the group manager in the Area conducting the examination to coordinate the transfer of the return(s) to one agent. If the research reveals that the return is not under examination, with the managers approval, consider extending the examination.

  15. In order to establish cases on AIMS using retained copies of taxpayer’s returns, a module should be created on RCCMS as soon as the examiner knows an examination will be initiated, and establishment requested (with the Update AIMS checkbox selected for BMF modules.)

    Note:

    Ensure that the group manager approves the request for returns or establishment on AIMS and that all codes are correct.

    :

  16. If the examiner is unable to secure the original return or if closing would be delayed by awaiting receipt of the original, the examiner may close the case based on the taxpayer’s retained copy. However, the original returns must be secured in the following instances:

    • Unagreed cases involving fraud

    • Jeopardy assessments

    • When the closing is on the basis of a notice of deficiency

  17. If the case is closed based on a retained copy, the Settlement Codes printed on Form 5546, Examination Return Charge-Out Sheet, will ensure that the tax shown on the retained copy is the same as the tax assessed. Use Command Code BMFOLT or IMFOLT to secure a record of the taxpayer’s account.

4.75.12.9.1  (12-20-2004)
Examination Warranted

  1. Generally, a detailed examination, including penalty consideration is warranted if:

    1. Available information indicates information returns were not filed,

    2. Available information indicates the income amounts were materially incorrect as reported,

    3. The payee TIN or address is missing (if the TINs are missing Backup Withholding is applicable).

    4. Internal procedural controls are lacking, or

    5. The resulting improvement in voluntary compliance (payer or payee) will justify the expenditure of time required to make the necessary verification and/or to secure copies of the incorrect or delinquent returns.

4.75.12.9.2  (12-20-2004)
Examination Procedures

  1. When information returns are included in an examination, inspect retained copies of the information returns required to be filed.

    1. Decide whether all available information requires a further and more detailed examination of the taxpayer’s books and records as they relate to information returns.

    2. If such detailed examination is warranted, complete the examination as part of the EO return examination concurrently.

    3. If the examiner checks information returns for periods other than the EO return examination period, the examiner should extend the examination of the EO return to cover the same periods as the information returns examination.

  2. The adequacy of taxpayer’s records is a critical factor in determining the scope of the examination. Normally, continue the examination to a point where it is reasonably certain that the information return requirements have been fulfilled. Generally, a detailed examination (including any penalty consideration) is warranted if:

    1. Available information indicates that information returns were not filed;

    2. Available information indicates that the income amounts were materially incorrect as reported; or;

    3. The resulting improvement of voluntary compliance (payor or payees) will justify the expenditure of time required to make the necessary verifications and/or to secure copies of the incorrect or delinquent information returns.

  3. To satisfy the required filing check procedures in an examination, include in the workpapers sufficient information and/or documentation to explain the audit steps taken and conclusions reached.

  4. If the examiner discovers that the entity has not filed returns or forms, the examination of which are within the jurisdiction of another Compliance Division, Form 5666 or Form 5346 will be prepared and sent to Classification for transmittal to the appropriate function. See IRM 4.75.16 for EO closing procedures.

4.75.12.10  (12-20-2004)
Employment Tax Returns

  1. Employment tax obligations are an integral part of the examination of an exempt organization. At a minimum, all employment tax returns must be inspected to ensure required filing compliance. A separate employment tax audit may be necessary if inspection does not reveal compliance.

4.75.12.10.1  (07-06-2010)
Employment Tax Returns Guidelines

  1. Inspect the retained copies of each withholding tax return filed, up to and including, the last quarter for which a withholding tax return was due, for proper filing and payment of taxes.

  2. Withholding taxes include employment taxes such as FICA, RRTA, FIWT, and FUTA as well as back-up withholding, Withholding on income paid to foreign persons, and withholding on gambling winnings. This responsibility also extends when the examined return is only a Form 990-T.

  3. Determine whether available information warrants an employment tax examination of the taxpayer’s books and records. If an examination is warranted, the examiner will conduct the employment tax examination concurrently with the exempt organization return. See Policy Statement P-4-4. Refer to IRM 1.2. and IRM 4.23.

  4. Generally, an employment tax examination is warranted if:

    1. Available information indicates that the employment tax liabilities have not been correctly reported;

    2. Delinquent returns are secured, unless the group manager concludes that such an examination would not be productive, and documents the same;

    3. The potential additional liability or the resulting improvement in voluntary compliance will justify the expenditure of time required to make necessary verification and adjustment.

  5. Examiners should discuss with, and secure approval, by the group manager for employment tax examinations for periods subsequent to the exempt organization return.

  6. In worker classification cases, consideration must always be given to Section 530 relief before asserting that a worker is an employee.

  7. If a required filing check results in an adjustment to the taxpayer’s employment tax liability, perform the following actions:

    1. Secure copies of the returns from the taxpayer, BRTVU printouts or the original returns and a BMFOLT printout;

    2. Initially, employment tax returns are established only for the fourth quarter (or last quarter filed) of each calendar year under examination.

    3. If the examiner determines that the remaining quarters for that calendar year should be examined, the examiner will request AIMS controls for each of those quarters.

    4. If the examiner determines that there will be an adjustment for all four quarters during the initial stages of the examination, AIMS controls should be established for all four quarters immediately.

    5. The return(s) are to be established on AIMS/BMF via RCCMS.

    6. Employment tax adjustments should be allocated to the specific quarters by matching the payment dates, rather than lumping the adjustments to the fourth quarter.

    7. If the examiner determines that the remaining quarters should not be examined, the fourth quarter (or last quarter filed) that was initially established on AIMS should be closed as a no-changed case.

  8. For all open employment tax cases where the examination did not include either the identification of or the development of a worker classification issue, including requests for information or discussion regarding a reclassification issue, the following language should be inserted in the blank space on the bottom of Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment:
    "The examination of your employment tax returns as reflected on this Agreement 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."

  9. The above language should not be used on any of the forms in the examination report when an examination includes either the identification of, or the development of the worker classification issue, including requests for information or discussion regarding a reclassification issue.

  10. If an employer willfully fails to collect or pay employment taxes, consider asserting the penalty provisions under IRC §6672. The employer is liable for the correct amount of FICA tax and income tax withholding from wages, regardless of whether the employer collected the withholding taxes from the employee.

  11. If the employer fails to deduct the tax, the employer is nevertheless liable for the correct amount of tax that should have been withheld. The employee also is liable for the correct amount of tax until it is collected.

  12. If the examiner concurrently examines employment tax returns and Form 990, attach Forms 3198-A, TE/GE Special Handling Notice, to the front of both the primary return case file and the employment tax return case file. Indicate on both Forms 3198-A that the case files are related and should not be separated. Also indicate on the Form 3198-A attached to the primary return that there is a related employment tax examination.

  13. In cases where the returns must be separated for expediency of processing, e.g., the primary return has a short statute date, the Forms 3198 will state the reason the related return is being closed separately.

4.75.12.11  (07-06-2010)
Form W-4 Compliance Program

  1. IRC §§3401 and 3402 set forth the requirements for claiming an exemption and the withholding rules. Employers must comply with the W-4 requirements in accordance with Treasury Regulation §31.3402(f)(2)-1(g).

  2. Under IRC §6001 and Treasury Regulation §31.6001-5(a), employers are required to keep records of all remuneration paid to employees and make them available for inspection by authorized IRS personnel. When an employer is reluctant or refuses to permit an inspection of payroll records, advise them of their obligations under the Code and Regulations.

  3. Required filing check procedures must include certain compliance checks outlined below for every examination of an exempt organization.

  4. When these checks are not performed, the reasons must be indicated on Form 5773, EO Workpaper Summary Continuation Sheet..

4.75.12.11.1  (07-06-2010)
W-4 Compliance Techniques

  1. Withholding compliance procedures have changed. Examiners should no longer forward questionable Forms W-4 to the Fresno Compliance Center. The Withholding Compliance (WHC) program is worked in the Compliance Services Collection Operation (CSCO) at the Andover Compliance Campus. The Withholding Compliance program procedures are outlined in IRM 5.19.11.

  2. Publication 15, (Circular E), Employer’s Tax Guide, has been modified to notify employers that they are no longer required to send in questionable Forms W-4. The Andover Withholding Compliance unit issues "lock-in" letters to employers based on computerized analysis of Forms W-2 matched against tax liabilities on the Forms 1040. Those who fail to comply are forwarded to the Ogden Frivolous Return Program.

  3. The examiner should review only the most recent Forms W-4 on file with an employer. Using analysis of the Forms W-2 as provided by IRPTRR, identify those employees whose taxes withheld are less than 10% of the taxable wages, and those employees who had no withholding whatsoever. Sample the Forms W-4 for those employees to identify the marital status and number of exemptions. Prepare a workpaper recording the results of the sampling.

  4. In order to be exempt from withholding the employee must have had no taxable income in the previous year, expect to not have any in the current year and must also submit a new W-4 each year prior to February 15th.

  5. For those employees who claimed exempt, check the date of the signature. Advise the employer of their obligation to obtain a new Form W-4 (Publication 15, page 16, 2010 revision) if the Form W-4 is dated from an earlier year..

  6. Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to the employer, he or she indicates in any way it is false. An employee who submits a false Form W-4 may be subject to a $500 penalty. The employer may treat a Form W-4 as invalid if the employee wrote “exempt” on line 7 and also entered a number on line 5 or an amount on line 6. Invalid Forms W-4 can be recognized by:

    • Deletion of the language of the jurat.

      Example:

      Crossed out penalty of perjury statement above the signature.

    • Defacement of the certificate.

    • Any writing on the Form W-4 other than the entries requested.

  7. An employer who receives an invalid Form W-4 from an employee must take the following actions:

    1. Inform the employee that the Form W-4 is invalid.

    2. Request another Form W-4 from that employee.

    3. Until the employee furnishes a new Form W-4, withhold tax from the employee's wages at marital status single, with zero (0) allowances.

    4. If, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4.

  8. False Forms W-4 are subject to a civil penalty of $500 for each Form W-4. Secure copies of any false Forms W-4. Send a referral for each Form W-4 for which the penalty assessment is being requested. Submit these using the Form 9045, Withholding Compliance Referral Form. The form may be faxed to (978) 474-1326, with which copies of the Forms W-4 must be included.

4.75.12.12  (07-06-2010)
Information Returns

  1. Certain information returns are the primary input documents for computerized matching programs to detect potential unreported income and nonfilers. Policy Statement P-4-4 (see IRM 1.2) and these "Required filing check" provisions spell out EO’s responsibility to ensure the timely and correct filing of information returns.

  2. Examples of information returns include:

    1. Form W-2, Wage and Tax Statement;

    2. Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, and

    3. Various forms in the 1099 series.

  3. Group managers and reviewers are responsible for ensuring that examiners properly document their workpapers to reflect adequate coverage of information return issues.

4.75.12.12.1  (12-20-2004)
Form W-2

  1. The examiner should consider whether all items paid by the taxpayer have been properly included in the employees’ wages. This would include such items as bonuses and fringe benefits (both cash and noncash items). Examples are:

    • Nonaccountable automobile allowances

    • Corporate vehicles used for personal purposes

    • Employer provided life insurance in excess of $50,000

    • Did the employer provide prizes or awards?

    • Moving expenses over and above the actual move itself

    • Employer provided apartments for employees

  2. Review Forms W-2 for salary expense; note the highest paid employees. Determine if their compensation presents a potential inurement issue. When considering whether compensation is reasonable remember to consider employee benefits, personal use of assets owned by the exempt organizations along with personal expenses paid by the EO for travel, entertainment or other personal accounts. Ensure that these were properly reported on Form W-2.

4.75.12.12.2  (07-06-2010)
Form 1099

  1. IRC §§6041 through 6053 and Title 31, United States Code require that taxpayers report various types of payments to both the IRS and the recipients of the payments. These payments include such items as dividends, interest, rents, royalties, wages, and payments in the course of a trade or business.

  2. To ensure the timely and correct filing of information returns, examiners are required to ascertain whether all information returns required to be filed were filed by the taxpayer from the period of the return under examination to the most current period. The following minimum requirements are to be considered by the examiner:

    1. During the preplanning stages of the examination, the examiner should determine the potential filing requirements. Line items of the return are often indicative of an information return filing requirement, e.g., interest paid, subcontractors labor, rents, legal and accounting fees, advertising, etc.

    2. The examiner will use CFOL command PMFOL to determine if the taxpayer has filed information reports,

    3. The examiner should question the taxpayer regarding their internal procedures for information reporting and verify all reporting requirements have been met.

  3. Inspect retained copies of the Form 1099 series. These include Forms 1099-DIV, 1099-INT, and 1099-MISC. Review the procedures that the organization used to decide whether they should file information returns on payments made to independent contractors.

  4. Reconcile Forms 1099 issued to Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

  5. Form 1099 is not required for payments made to corporations (unless they are medical providers), nor are they required to be issued to exempt organizations, for payments less than $600.

  6. While examining disbursements, note the payments to individuals, proprietorships or partnerships for which no Form 1099 was filed. Obtain name, address, and social security number and make referral on Form 5666, if necessary.

4.75.12.12.3  (07-06-2010)
Form 8282

  1. Form 8282, Non-Cash Charitable Contributions Donee Information, is required to be filed by exempt organizations who sell, exchange, transfer, or otherwise dispose of charitable property within 2 years after the date of its receipt. A copy of the return must be given to the donor. Consider the assertion of the non-filing penalty provided in IRC sections 6721 and 6723 if the Form 8282 is not filed as required.

4.75.12.12.4  (07-06-2010)
Cash Payments Over $10,000

  1. Effective January 1, 1985, Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is required to be filed by any person who, in the course of carrying on a trade or business, receives more than $10,000.00 in cash in one transaction, or related transactions.

  2. Cash received as a charitable contribution is not subject to the reporting requirements of IRC §6050I.

  3. Form 8300 must be filed with the Internal Revenue Service by the 15th day after the date the reportable cash payment was received. A person may elect to report as one payment, several independently reportable payments received within a 15-day period.

  4. Inspect the taxpayer’s retained copies of Form 8300, along with the statements required to be furnished to an "identified person." See exceptions under IRC §6050I.

  5. The recipient of the cash payment must:

    1. Keep a copy of each Form 8300 for a period of five years from the date of filing;

    2. Furnish a written statement of each identified person on the Form 8300, showing the total amount of cash received during the year from that person(s);

      Note:

      This statement is not required to be in a particular form or format; a copy of Form 8300 may be used for this purpose if the identified person had only one transaction during the year.

    3. Furnish a copy of the written statement to the identified person on or before January 31 of the succeeding calendar year.

  6. Form 8300 must include the following information:

    1. Name, address and taxpayer identification number (TIN) of the person for whom the transaction was completed;

    2. Name, address, and TIN of the person conducting the transaction, if different from (6) a., e.g., an "agent" for a principal;

    3. Verification of identity (i.e., driver’s license, credit card or other similar ID). If aliens or non-residents, passport, alien ID card, or other official document showing foreign nationality or residence. If others, driver’s license, credit card, or other similar ID);

    4. Description of the transaction and method of payment, i.e., business reporting the transaction.

  7. A transaction subject to the reporting requirements of IRC §6050I is the underlying event precipitating the payer’s transfer of cash to the recipient. A reportable transaction may be, but is not limited to:

    1. Sale of goods or services;

    2. Sale or rental of property;

    3. Exchange of cash for cash; or

    4. Conversion of cash to a negotiable instrument.

  8. Interview the person(s) responsible for compliance with IRC §6050I. Generally, the person responsible for the filing of an EO return will also be responsible for filing Form 8300. During the interview, inquire as to:

    1. The names and titles of officers or employees who handle cash transactions and who may be responsible for filing Forms 8300;

    2. The responsible person’s knowledge of the reports and records required under IRC §6050I;

    3. The internal controls of the business with regard to cash transactions;

    4. The types of records maintained on transactions required to be reported on Form 8300;

    5. Whether or not the taxpayer has filed any Forms 8300;

    6. The procedures used to ensure that the information, such as the payer’s identity, contained in the report(s) was complete and correct.

  9. Inspect the cash receipts and sales journal, bank statements, and deposit slips to verify:

    1. Transactions involving cash receipts of more than $10,000;

    2. Consecutive or related transactions with total in excess of $10,000;

    3. Whether or not the currency transactions in excess of $10,000 were reported.

  10. Be alert to situations that may be an attempt to circumvent the reporting requirements of IRC §6050I, such as:

    1. A single transaction structured as multiple transactions of less than $10,000;

    2. Transactions in excess of $10,000 where large amounts of cash (under $10,000) are combined with small non-cash payments for purposes of avoiding the reporting requirements;

    3. A pattern or series of transactions of less than $10,000 conducted over a relatively short period of time by or for the same person.

  11. Submit Form 5666 or Form 5346 on unusual or questionable transactions discovered during an examination. Form 5666 or Form 5346 can be submitted on the "recipient" or the "identified person " , depending upon which party to the transaction is under examination when the questionable item is discovered. Prior to submitting Form 5666 or Form 5346, consider the following factors:

    1. Does the transaction appear to be an isolated incident, or one of many, which may have been unreported?

    2. Depending on the type of business, is it normal and customary for the business to conduct its transactions in cash?

    3. Is it reasonable for the business to receive large amounts of cash for any single transaction?

    4. Does the business pay its suppliers or vendors in cash, other than for petty cash type items?

  12. Refer to the final regulations for additional information and examples of reportable cash transaction under IRC §6050I.

4.75.12.13  (07-06-2010)
Employee Benefit Plan Returns

  1. If the examination of an organization reveals that the organization maintains an employee benefit plan, the examiner must conduct certain inspections of the benefit plan(s) in order to ensure compliance with all employee plan requirements. The examiner should:

    1. Become familiar with the working provisions of the plan with particular emphasis on the operations as reflected in order to get background information;

    2. Note any transactions between the plan and the organization;

    3. Interview the responsible official with respect to transactions between the plan and the organization;

    4. Determine if Form 5330 is required (see IRC §4975);

    5. Inspect Form 5500 series return in order to determine if it was filed correctly;

    6. Develop the facts and information necessary for the preparation of Form 4632-A, Employee Plans Referral Checksheet;

    7. Carefully review any unusual transactions encountered during the investigation with respect to other taxpayers involved;

    8. Consider the amount of deferred compensation in developing excessive compensation issues.

  2. Determine the type(s) of retirement plan(s) maintained by the organization. Complete Form 4632-A for each plan to determine whether a referral should be made to Employee Plans.

    1. If all answers circled are in the left column, referral of the plan to Employee Plans (EP) is not required. In such cases, Form 4632-A will be associated with the Form 5772, EO Workpaper Summary, and will satisfy the required filing check procedures;

    2. If any answers in the right column of Form 4632-A are circled, referral to EP is required. Form 4632 (Employee Plans Referral) is used to refer cases to EP. Attach copies of Form 4632-A and Form 5500 for each plan referred. Submit to Classification in duplicate to forward to EP. See Exhibit 4.75.12-2 for a sample Form 4632-A, Employee Plans Referral Checksheet;

  3. If an organization has a profit sharing plan exempt under IRC 401(a), determine the affect on the organization’s exempt status. Also, submit referral to Classification to forward to EP for IRC 401(a) consideration.

  4. For examinations of employee welfare benefit plans exempt under IRC 501(c)(9), (c)(17), (c)(20), and IRC120 review plan documents and complete Form 6212-B, Examination Referral Checksheet B. If any item on Form 6212-B is checked in the right hand column, you must forward the form to the appropriate Pension and Welfare Benefits Administration of the Department of Labor (DOL) The case should not be closed until the earlier of receipt of response from DOL, or 20 workdays after the date of submission of the document to DOL.

  5. Determine if fringe benefits are taxable wages. Review the chart of accounts for more obvious employee benefits. Secure a copy of the personnel department’s employee benefits and executive benefits procedures.

    1. In some cases the employee’s handbook given to a new employee provides a partial list of benefits and forms of compensation.

  6. Complete Form 4632-A for each plan for which a deduction is claimed. Form 4632-A will remain in the case file. See Exhibit 4.75.12-2 for a sample of Form 4632-A.

  7. The completion of Form 4632A will assist in the preparation of Form 4632, Employee Plans Referral, if necessary. See Exhibit 4.75.12-3 for a sample of Form 4632, Employee Plans Referral.

  8. If it is concluded that a referral is warranted due to other issues or circumstances not covered by Form 4632-A, the referral may be accomplished by a narrative explanation of the particular issues or circumstances.

4.75.12.14  (07-06-2010)
Political Organization Returns (Form 1120-POL)

  1. IRC §527 explains the extent to which political organizations are taxed. Basically, only the political organization’s income from investments, less the expenses directly attributable to such income including a specific deduction of $100.00, is taxed at the highest corporate rate. Neither the net operating loss deduction or the special deductions allowed for corporations are allowable pursuant to IRC §527(c).

  2. An IRC §501(c) organization, on the other hand, is taxed under IRC §527 on the lesser of the amount expended for political purposes "exempt function" activities, or the organization’s net investment income.

  3. Net investment income, for purposes of IRC §527(f), means the gross amount of interest, dividends, rents, royalties, plus the excess (if any) of gains from the sale or exchange of assets over the losses from the sale or exchange of assets, over the deductions directly connected with the production of this income. To avoid double taxation (and double deductions), IRC §527(f)(2) provides that income and deductions taken into account for purposes of the tax on unrelated business income of IRC §501(c) organizations under IRC §511 are not to be included as either income or deductions in determining net investment income under IRC §572(f).

  4. For purposes of IRC §527, expenditures for "exempt function" (political) purposes, are expenditures for the purpose of influencing the outcome of an election to public office. Political expenditures do not include any expenditures for the purpose of influencing legislation regardless of whether those "lobbying" expenditures are for germane lobbying, non-germane lobbying, or grass roots lobbying.

  5. Ascertain whether a separate segregated fund described in IRC §527(f)(3) is maintained by the organization. Also, determine if the organization has expended any amount from its funds during the taxable year directly (or through another organization) for an exempt function under IRC §527(e)(2). If so, a Form 1120-POL may be required. Check the minutes and other correspondence files for indications of political contributions. Also check disbursements for possible political expenditures.

  6. Compare the amount of political expenditure per Form 990, Part IV, Question 81 (pre-2008 version) to the amount of political expenditures on Form 1120-POL. Also, reconcile the investment income and expenses per return with those reported on the Form 1120-POL. If adjustments are present, secure the return.

  7. If the IRC §501(c) organization has $100 or less net investment income, no return or tax is due from the 501(c) organization under IRC §527 regardless of the amount of its political expenditures.

  8. See IRM 4.76.30 for additional technical guidance on examinations involving political organizations.

4.75.12.15  (12-20-2004)
Tax Exempt Bonds

  1. Tax Exempt Bond required filing check guidelines are currently under development and will be incorporated into this IRM when completed.

Exhibit 4.75.12-1 
Returns Within the Jurisdiction of TEGE Exempt Organizations

Form(s) Description
990 Return of Organization Exempt from Income Tax
   
990-T Exempt Organization Business Income Tax Return
   
990-PF Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation
   
990-BL Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons
   
1041 U.S. Fiduciary Income Tax Return (when filed by 4947(a)(1) and (a)(2) trusts)
   
1041-A U.S. Information Return--Trust Accumulation of Charitable Amounts (when filed by 4947(a)(2) Trusts)
   
   
1065 U.S. Partnership Return of Income (when filed by section 501(d) religious and apostolic organizations)
   
1120 U.S. Corporation Income Tax Return (when filed by a private foundation whose exemption has been revoked)
   
1120-POL U.S. Income Tax Return For Certain Political Organizations
   
4720 Return of Certain Excise Taxes on Charities and Other Persons under Chapters 41 and 42 of the Internal Revenue Code
   
5227 Split-Interest Trust Information Return
   
940, 941, 942, and 943 Employment Tax Returns (relating to the employment tax liability of organizations under the jurisdiction of EO, and also including Form CT-1 and CT-2)
   
945 Annual Return of Withheld Federal Income Tax

Exhibit 4.75.12-2 
Form 4632-A, Employee Plans Referral Checksheet

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Exhibit 4.75.12-3 
Form 4632, Employee Plans Referral

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