4.90.4  Information Return Examinations and Penalties

Manual Transmittal

December 06, 2013

Purpose

(1) This transmits a revision of IRM Part 4, Examining Process, Chapter 90, Federal State and Local Governments, Section 4, Information Return Examinations and Penalties.

Material Changes

(1) This section is renamed to accurately reflect its content.

(2) 4.90.4.1 Overview has been revised.

(3) 4.90.4.2 Penalty Overview has been revised.

(4) 4.90.4.2.1 Minor editorial changes

(5) 4.90.4.2.2 Substantial revision to reflect the Small Business Jobs Act of 2010.

(6) IG Memo TEGE-04-1112-08.49 (FSLG Interim Memo #49) is incorporated here, in part.

(7) 4.90.4.2.3 Minor editorial changes to Trust Fund Recovery Penalty.

(8) 4.90.4.2.4 Deleted discussion of Promoter Penalties.

(9) 4.90.4.2.5 New subsection devoted to Promoter Penalties.

(10) 4.90.4.3 Deleted reference to IRP in the title.

(11) 4.90.4.3.1 Minor editorial changes. Deleted reference to Code and Regulations.

(12) 4.90.4.3.2 Deleted reference to 1996 legislation.

(13) 4.90.4.4 Deleted references to TREES and EOIC. New guidance offered for using RCCMS and WebETS.

(14) 4.90.4.5 Minor editorial changes.

(15) 4.90.4.5.1 Eliminated dollar amounts from old law.

(16) 4.90.4.5.2 Subsection substantially revised. Deleted references to TREES and EOIC. New guidance offered for using RCCMS and WebETS. The contents of an information return penalty case are listed. Payment options discussed. Interim Memorandum 49 is incorporated here, in part.

(17) 4.90.4.6 Backup Withholding discussion has been revised.

(18) Material from IG Memo TEGE-04-1112-08 (FSLG Interim Memo #49) has been incorporated.

Effect on Other Documents

This section supersedes IRM 4.90.4, Penalties, dated February 4, 2008, and incorporates IG Memo TEGE-04-1112-08.

Audience

This section contains instruction and guidance for all Federal, State and Local Governments compliance employees when dealing with Information Return Examinations and various penalties.

Effective Date

(12-15-2013)

Paul Marmolejo
Director, Federal State and Local Governments

4.90.4.1  (12-15-2013)
Overview

  1. This section provides information about:

    • Penalties

    • Information Return Examinations

    • Backup withholding

4.90.4.2  (12-15-2013)
Penalty Overview

  1. In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause, or other relief provisions provided in the IRM, must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations, and IRM 20.1, Penalty Handbook.

  2. Policy Statement 20-1 provides that the IRS administers a penalty system that is designed to:

    1. Enhance voluntary compliance

    2. Promote consistency in the application of penalties compared to similar cases

    3. Promote unbiased analysis of the facts in each case

    4. Promote the proper application of the law to the facts of the case

    5. Approve a reduction of otherwise applicable penalties or penalty waiver for a group or class of taxpayers as part of a Service-wide resolution strategy to encourage efficient and prompt resolution of cases of noncompliant taxpayers

    6. Ensure that penalties are used for their proper purpose and not as bargaining points in developing or processing cases

  3. To ensure consistency, the Service prescribes and uses one set of guidelines set out within the Penalty Handbook, IRM 20.1, which is to be followed by all compliance employees.

  4. Generally, relief from penalties falls into four separate categories:

    • Reasonable cause

    • Statutory exceptions

    • Administrative waivers

    • Correction of Service error

    See IRM 20.1.1.3 for guidance.

  5. Policy Statement 20-2 (IRM 1.2.20) provides that penalties and interest will not be asserted against Federal agencies or instrumentalities of the United States; therefore, if errors are found during these examinations, the Specialist should focus attention on assisting in the correction of the errors and gaining future compliance. Strong consideration should also be given to assessing backup withholding when issues arise related to failure to file or furnish Forms 1099.

4.90.4.2.1  (12-15-2013)
Assessment of Penalties

  1. FSLG will assess penalties only during examination activity. If delinquent returns are secured during a Customer Assistance or a Compliance Check activity, then the Specialist may assist the customer by explaining reasonable cause criteria.

  2. Reasonable cause must be considered and developed when issues arise during the examination concerning the assessment of penalties. Reasonable cause is discussed in IRM 20.1.1.3.

  3. If the taxpayer provides a valid reasonable cause argument, the Specialist must document his or her position and should not proceed with assessment of the penalty.

  4. If the Specialist determines that reasonable cause does not exist, then he or she should assess the applicable penalties. The Specialist’s consideration of reasonable cause must be fully documented in the case file.

  5. The Specialist should also focus on educating the entity about the errors and on gaining future compliance. FSLG maintains an ongoing effort to develop, monitor, and revise programs designed to assist taxpayers in complying with tax responsibilities in order to avoid penalties.

4.90.4.2.2  (12-15-2013)
Information Return Penalties

  1. The Small Business Jobs Act of 2010 increased the amounts of information return penalties (per document) for returns required to be filed on or after January 1, 2011. Calendar year maximums also increased. Penalties are also dependent upon the filer's average annual gross receipts. IRC 6721 provides for penalties for failure to file correct information returns. IRC 6722 provides for penalties for failure to furnish correct payee statements.

  2. Refer to IRM 4.23.9.12.5 for information return penalty rates.

  3. IRC 6723 provides for a penalty of $50 for each failure, not to exceed $100,000, to comply with other specified information reporting requirements.

  4. IRC 6724 addresses waiver/definitions and special rules. This section provides that penalties will not be assessed if the taxpayer has "reasonable cause" for failure to comply.

  5. IRM 20.1.7, Penalty Handbook, Information Return Penalties provides policies and procedures. Also, IRM 4.23.9.12 specifically discusses information return penalties.

  6. See the discussion in IRM 4.23.14.11 regarding statutes on information return penalties.

4.90.4.2.3  (12-15-2013)
Trust Fund Recovery Penalty

  1. The purpose of IRC 6672 is to encourage the prompt payment of withheld and other collected taxes and to provide the Service with a secondary source of collection in the event that these taxes are not paid. The withheld taxes are commonly referred to as "trust fund taxes" reflecting the Code's provision that such withholdings or collections are deemed to be a "special fund in trust for the United States." When the trust fund taxes are not paid by the employer, the Trust Fund Recovery Penalty may be assessed against the responsible persons for willful failure to collect and pay over the taxes.

  2. See IRM 4.23.9.13 for additional information and procedures concerning the Trust Fund Recovery Penalty.

4.90.4.2.4  (12-15-2013)
Preparer Penalties

  1. The Small Business and Work Opportunity Tax Act of 2007 amended IRC 6694 and 6695 to include any tax return preparer. Preparer penalties became applicable to employment tax returns filed on or after May 25, 2007.

  2. See IRM 4.23.17 and IRM 20.1.6 for guidance.

4.90.4.2.5  (12-15-2013)
Promoter Penalties

  1. Promoter penalty sections include IRC 6700 Promoting Abusive Tax Shelters, Etc. and IRC 6701 Penalties for Aiding and Abetting Understatement of Tax Liability.

  2. Refer to procedures in IRM 20.1.6 Preparer Handbook, Preparer, Promoter, Material Advisor Penalties.

4.90.4.3  (12-15-2013)
Compliance and Program Management (CPM) Classification Process

  1. A significant part of FSLG's compliance program is ensuring that government entities comply with wage and information return reporting requirements. This subsection provides information about this compliance program.

4.90.4.3.1  (12-15-2013)
Wage Reporting Compliance Program for Government Entities

  1. Employers must furnish the tax return copy and the employee’s copy of Form W-2, Wage and Tax Statement, to employees to report remuneration paid during the calendar year. The Form W-2 must show, among other information, 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 amounts of income tax and FICA tax deducted and withheld. The deadline for furnishing the forms to each employee, in most cases, is on or before January 31 of the succeeding year.

  2. In addition, the employer must file a copy of each form, along with the transmittal Form W-3, with the Social Security Administration. Generally, the deadline for this filing is on or before the last day of February following the calendar year for which the payments are made.

  3. The correct and timely reporting of employment taxes is the key to our voluntary compliance system as well as the cornerstone of the Social Security system. "Employment taxes" include income tax withholding, social security and Medicare taxes under the Federal Insurance Contributions Act, and unemployment taxes under the Federal Unemployment Tax Act. Studies show that the issuance of a Form W-2 greatly increases the likelihood that the income will be reported. Significant benefits can be gained from working with our customers to understand problems and practices unique to governments. Voluntary compliance will usually improve once the customer understands its tax obligations.

4.90.4.3.2  (12-15-2013)
Information Return Reporting Compliance Program for Government Entities

  1. Studies conducted by the Internal Revenue Service indicate there is widespread non-compliance by governmental entities that are required to file information returns. Studies also show that the issuance of a Form 1099 greatly increases the likelihood that the income will be reported.

  2. When Form 1099 is issued, it is included in the Information Reporting Program (IRP) matching process, thus facilitating verification that the income was reported and identifying taxpayers that fail to file Forms 1040. Information returns are an integral part of ensuring voluntary compliance.

4.90.4.4  (12-15-2013)
Information Return Examinations

  1. CPM may assign "Information Return Examinations" , which are limited in scope to a government's compliance with Form W-2 and/or Form 1099 requirements. Information Return Examinations will involve examination of the taxpayer's records related to compliance with information returns only; Form 941 will not be examined. Issues related to worker classification will not be addressed. (These examinations can be expanded to include Form 941 with managerial approval.)

  2. Information Return Examinations can be used, for example, when auditing a Federal or state agency that files Forms 1099 and/or W-2, but Form 941 is filed by a common paymaster.

  3. CPM will establish Information Return Examinations on RCCMS using activity code 520 and Type "Information Return Examination" .

  4. Examination opening procedures apply to Information Return Examinations. However, the Specialist must specify in the opening letter that the scope of the examination will be limited to examination of the information returns, but may be expanded to Form 941 at a later date.

  5. An information return penalty case may be appropriate for these cases. See IRM 4.90.4.5.

  6. If the taxpayer failed to file Forms 1099 and/or W-2, delinquent returns should be secured and processed following procedures outlined in IRM 4.90.12.11.3.

  7. To close the case, the Specialist will draft a closing letter to explain the findings. The letter should also state that the scope was limited to examination of the information returns.

  8. If the examination is expanded to an examination of Forms 941 or 945, then the Specialist will complete the ESTABLISH steps for the RCCMS activity to establish the appropriate periods and notify the taxpayer that Forms 941/945 are under examination. Use source code 95. If more than one year is opened, use source code 95 for all quarters of one year, and source code 40 for all quarters of the next year.

  9. Time expended on Information Return Examinations will be entered on WebETS using activity code 520.

  10. The Information Return Examination will be closed using disposal code 303 if an advisory is issued, or 801 if no advisory is issued.

4.90.4.5  (12-15-2013)
Information Return Penalty Case (Civil Penalty Case)

  1. This subsection discusses the computation of information return penalties and the preparation of an information return penalty case, sometimes referred to as a civil penalty case. This procedure applies when a Specialist is examining Form 941 and determines that information return penalties should be applied, as well as when a Specialist is conducting an Information Return Examination discussed in IRM 4.90.4.4.

4.90.4.5.1  (12-15-2013)
Computation of Information Return Penalty

  1. To compute the appropriate information return penalty as it relates to IRC section 6721, 6722 or 6723, multiply the number of violations in each penalty category by the dollar amount associated with the appropriate category.

    Note:

    Assess only one penalty per return or payee statement. Assess the largest penalty applicable to that return or statement. When appropriate, use the penalty reference number that identifies all violations that apply to the return.

4.90.4.5.2  (12-15-2013)
Information Return Penalty Case Processing Procedures

  1. During an employment tax examination, a Specialist may determine that information return penalties should be applied. The Specialist must prepare an information return penalty case. The Specialist will complete the ESTABLISH steps to establish a new activity on RCCMS using activity code 520 and Type- "Information Return Penalties" . Use source code 50. Managerial approval is necessary. It is not controlled on AIMS. Information return penalty cases are fully electronic.

  2. The information return penalty case will be entered on WebETS using activity code 520. The time spent reviewing books and records to determine whether taxpayers are in compliance with various filing requirements should be charged to the employment tax case. Time spent calculating and preparing the penalty case will be charged to the penalty case.

  3. An information return penalty case should include the following:

    • Form 3198-A

    • Form 3645

    • Form 8278

    • Form 9984

    • Form 3244-A (if payment received)

    • Form 4318-A

    • Form(s) 886-A

    • Any other workpapers

    Use the RCCMS Naming Convention for all files. All file names should begin with CIVPEN. Do not provide Forms 3645 or 8278 to the taxpayer. Provide penalty calculations on Form 886-A. Provide penalty calculations on Form 886-A, to include a complete list of payees, TINs, and amounts that went unreported for each period in question. See IRM 4.23.8.11 for general guidance concerning Forms 8278, 3645, and 886-A.

  4. The information return penalty case will generally be closed concurrently with the employment tax case. On RCCMS the penalty case is closed using disposal code 802.

  5. The information return penalty case file will be closed out of the group and submitted to CPM via RCCMS. CPM will then forward the case to the GE Closing Unit for closure as needed.

  6. Payments of information return penalties that are secured by the Specialist will be processed in the same way as other advanced payments. See IRM 4.90.12. The original Form 3244-A with the payment should be forwarded via a separate Form 3210 for processing. A copy of Form 3244-A should be included in the RCCMS case file. Taxpayers have the option to pay deficiencies and penalties using EFTPS (Electronic Federal Tax Payment System). Although not required, EFTPS streamlines payment processing.

  7. The statute of limitations related to information returns normally ends February 28 rather than April 15. See IRM 4.23.14 and IRM 20.1.7.8 for discussions regarding statutes on information return penalties.

4.90.4.6  (12-15-2013)
Backup Withholding

  1. IRC Section 3406 requires a payer to withhold income tax from reportable payments to recipients if:

    1. The payee fails to furnish a TIN to the payer in the manner required;

    2. The Secretary notifies the payer that the TIN furnished by the payee is incorrect;

    3. There has been a notified payee underreporting described in IRC 3406(c) ;or

    4. There has been a payee certification failure described in IRC 3406(d).

  2. Payments that may be subject to backup withholding include interest, dividends, rents, royalties, commissions, non-employee compensation, and other payments including broker proceeds and barter exchange transactions, reportable gross proceeds paid to attorneys, and certain payments made by fishing boat operators.

  3. Payers will be held liable for the payment of any backup withholding required to be deducted and withheld under IRC 3406. In rare cases, the Trust Fund Recovery Penalty could apply to backup withholding adjustments. Federal agencies and instrumentalities of the Federal government are not exempt from backup withholding requirements, as these requirements do not constitute a penalty.

  4. Procedures to assess backup withholding can be found in IRM 4.23.8.13.

  5. Procedures for granting relief from backup withholding tax under IRC 3402(d) can be found in IRM 4.23.8.4.2.


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