Part 4. Examining Process

Chapter 90. Federal, State and Local Governments (FSLG)

Section 5. Case Selection Procedures

4.90.5  Case Selection Procedures

4.90.5.1  (05-01-2010)
Overview

  1. This section discusses procedures for ordering casework, case selection criteria, and the preparation and establishment of case files for FSLG Specialists.

  2. Compliance and Program Management (CPM) will gather employment tax return information on government entities through the Return Information Case Selection (RICS) system. This information will be used to identify entities for compliance checks and examinations.

  3. Cases are selected based on general selection criteria.

4.90.5.2  (07-31-2007)
General Classification Guidelines

  1. Classification is the process of determining whether a return should be selected for compliance activities, what issues should be the primary focus of the compliance activity, and the type of compliance activity that should be conducted.

  2. Compliance activities related to government entities can be politically sensitive. Therefore, the process for selection of cases for compliance activities will be structured to avoid the appearance of bias. To the greatest extent possible, the classification process should provide an internal control structure that includes:

    • Checks and balances to ensure that no one person has the authority and ability to initiate compliance activities, and

    • Objective case selection criteria that will be used by CPM when classifying cases for compliance activities.

  3. Compliance activity casework is defined as one-on-one contact with customers. Customer assistance, compliance checks, information return examinations, and employment tax return examinations are all considered compliance activity casework.

  4. All cases should be classified by CPM to ensure that adequate internal controls are maintained; the classification procedures that follow provide checks and balances to minimize the potential personal influence of any one employee over the initiation of compliance activities. An exception applies to customer assistance cases, which may be generated either within the group or may be recommended by CPM based on case selection criteria.

  5. FSLG Classification will provide various services to the Field Managers. These include:

    • Filling orders for cases

    • Recommending types of compliance action (customer assistance, compliance check, information return examination, or employment tax return examination)

    • Reviewing and classifying returns

    • Establishing cases on the Audit Information Management System (AIMS)

    • Establishing cases on the TE/GE Reporting Compliance Case Management System (RCCMS)

    • Processing claims

4.90.5.3  (07-31-2007)
Ordering Cases

  1. Field Managers should submit orders for compliance cases using the FSLG Compliance Work Request. The request should provide the grade level, location by state, and any other specifications that the manager wants CPM to consider when selecting case work, such as the number of each type of case (compliance check or examination). The orders will be sent directly to CPM Classification with a copy to the CPM Manager.

  2. Turnaround time from the date of the order to the date of delivery is projected to be 120 days plus mail time. The turnaround times are based on RICS and RCCMS. If CPM is unable to fill the order within the agreed time, CPM will notify the Field Manager and make alternative arrangements.

4.90.5.4  (05-31-2006)
Establishing Cases by Type

  1. The way a case is established by CPM will vary depending upon the type of compliance activity that is recommended.

4.90.5.4.1  (07-31-2007)
Customer Assistance Cases

  1. Customer assistance cases are established on RCCMS using MFT 99 with an Activity Code 506 for the period(s) involved. Specialists will charge time on WebETS to activity code 506. Customer assistance cases are discussed in IRM 4.90.2.

4.90.5.4.2  (07-31-2007)
Compliance Check Cases

  1. Compliance checks are established on RCCMS using MFT 99 and activity code 587 for the year to be checked. Specialists will charge time on WebETS to activity code 587. Compliance check cases are discussed in IRM 4.90.3.

4.90.5.4.3  (05-31-2006)
General Examinations

  1. For all other examinations, CPM will establish all appropriate quarters on AIMS and RCCMS. Generally, this will include all quarters for the most current year, but it may vary for claims and referrals.

4.90.5.5  (05-01-2010)
Case Files

  1. CPM will prepare case files before cases are sent to the field. These case files will include information that is helpful to the Field Manager and Specialist. Although the information CPM provides will vary based on the type of compliance activity that is recommended, case files will generally include the following:

    1. RICS returns for the quarters under audit. This applies only to general examinations.

    2. Background information used to determine that a compliance activity is necessary.

    3. Information that CPM possesses relating to Section 218 agreements, Form SS-8 (Determination of Worker Status) determinations, customer assistance case files, compliance check case files, CP 2100, closing agreements, Letters /Memorandums of Understanding, etc.

    4. IDRS files, including AMDISA (to verify that there is no current examination), INOLES (entity information), and any other IDRS prints that CPM believes will assist the Specialist based on the type of compliance activity recommended.

4.90.5.6  (06-30-2007)
Sources of Casework

  1. Cases are selected based upon prescribed criteria for various sources of work. General case selection criteria apply to all sources of work, and additional criteria are applied depending on the source of work.

  2. Cases may be selected from many sources, including but not limited to the following:

    1. Form 941/943/944 Data Base (RICS)

    2. Form 1099 Data Base (UIR File/PMFOL/Backup Withholding Tapes)

    3. Internal/External Leads/Referrals

    4. Form SS-8 Determinations

    5. Claims (Medical Residents, Section 403(b), Other)

    6. CAWR (Combined Annual Wage Report)

    7. Closing Agreements/Letter/Memorandums of Understanding

    8. Section 218 Initiative Follow-up

4.90.5.6.1  (05-31-2006)
General Case Selection Criteria

  1. All factors below will be considered for all sources of work. In addition to these factors, specific statistical criteria will be considered. CPM will recommend a type of compliance action (i.e., customer assistance, compliance check, or examination) based on results of the application of the criteria.

  2. Factors related to customer's tax history:

    • Nonfiling History

    • Prior Closing Agreements

    • Prior Customer Assistance provided

    • Prior Audit

    • Timeliness of current payroll tax deposits

    • Significant decrease in wages and tax deposits compared to prior and current tax periods

    • Prior collection activity

  3. Factors related to impact on the market segment:

    • Size of the entity and number of affected employees

    • Number of other entities in the market segment affected

    • Impact of issue on sub-segments (i.e., fire, police, schools, etc.)

  4. Factors related to potential deficiency:

    • Materiality of the potential tax due

    • Adjustment offset by a previously filed claim

    • Adjustment in the current tax period resulting in a minimal tax increase

    • A change in the taxable/non-taxable treatment of an issue due to a legislative change or a Supreme Court case decision

  5. Factors related to impact of enforcement on public services

    • Effect of collection of liability on employer's ability to provide public services

    • Effect on employer’s resources to participate in examination.

  6. Circumstances related to economic conditions and legislative actions.

4.90.5.6.2  (05-31-2007)
Form 941/943/944 Database (RICS)

  1. CPM will gather employment tax return information on government entities through the RICS system. This information will be used to identify entities for indirect and customer assistance as well as examinations.

  2. Cases are selected based on general case selection criteria.

4.90.5.6.3  (05-31-2006)
Form 1099 Databases (Unmatchable Information Return Report (UIR)/Payer Master File/Backup Withholding Tapes)

  1. The UIR file contains information returns (Forms 1099) that could not be associated with any filed return. This may be due to an error with the taxpayer identification number and/or the taxpayer’s name. The Specialist may identify an internal systemic problem that has created the unmatchable forms. If the UIR report shows a high number of unmatchable information returns, the Specialist should request an extract of the entity’s UIR file. The extract will show payment information for each unmatchable information return. The most current extracts are usually available in March of the year following the year in which the documents are filed. The Unmatchable Form 1099 Database (UIR File) contains information on entities that have filed incorrect Forms 1099 that resulted in a mismatch (no SSN or incorrect SSN).

  2. The PMF Transcript will show the type, number and amount of information returns properly filed. This data, as well as the total dollar amount of the Forms 1099, can be obtained on IDRS using the command code PMFOL. If the actual documents need to be viewed, they can be secured using the command code IRPTR. This provides a printout of all of the Forms 1099 and W-2 issued by that entity. This command may generate a large amount of data.

  3. A high volume of unmatchable information returns per the UIR, and/or a low number of filings per the PMF, may indicate a problem. These Forms 1099 may be subject to either backup withholding of income tax and/or penalties.

  4. The backup withholding tapes are a listing of the entities that were found to have issued information returns to TINs that were incorrect, missing or did not match with the name. These entities are given notices by the service center that detail each mismatch found with instructions on what to do to correct the problem. If a correct TIN is not secured from the payee within 30 business days of the notice, the entity must begin backup withholding on payments made to that payee. If the payer no longer makes payments to the payee, the payer is required to continue trying to make contact to secure the correct TIN. If the correct TIN is not secured, information on attempted contacts should be retained by the payer.

  5. Cases selected using these sources support the IRP Compliance Program. Work on these cases will consist primarily of compliance checks. Customer assistance and information return examinations may also be appropriate in certain circumstances.

  6. UIR/PMFOL/Backup Withholding Case Selection criteria:

    1. Percentage of mismatched Forms 1099

    2. Number of forms 1099 filed

    3. General case selection criteria

    Note:

    Generally, cases will be selected from the pool of entities having the highest percentage of incorrect Forms 1099 filed, regardless of the total number of forms filed. This policy is intended to cover all market segments and to identify situations where the customer was liable for filing many more Forms 1099 but did not.

4.90.5.6.4  (05-31-2006)
Combined Annual Wage Report

  1. Combined Annual Wage Reporting (CAWR) is a BMF program matching the totals from Forms W-3, Forms W-2 and Forms 941, 943, or 944. BMF generates out-of-balance cases to a Tier II system for processing at the SB/SE campuses. Notification of the out-of-balance condition (mismatch) is sent to the taxpayer. There are two versions of this program:

    1. CAWR - There appears to be tax due because the Forms W-3 and/or Forms W-2 amounts are greater than the Form 941, 943, or 944 amounts.

    2. SSA-CAWR - SSA notifies IRS that the employer did not file the appropriate number of Forms W-2. SSA has contacted the taxpayer at least twice, and the situation has not been resolved. IRS pursues these cases by contacting the taxpayer and requesting the missing forms, explain the cause of discrepancy, or make a Form 941, 943, or 944 adjustment. If the employer does not provide an explanation or provide the missing forms, a penalty assessment is made for failure to file information returns.

  2. Cases selected using this data support the Wage Reporting Compliance Program. Work on these cases will consist primarily of compliance checks. Customer assistance and information return examinations may also apply in certain circumstances.

  3. CAWR case selection criteria:

    1. Amount of tax discrepancy

    2. General case selection criteria

  4. SSA-CAWR case selection criteria:

    1. All cases referred by SSA and sent to the Tier II system

    2. Adherence to the Settlement of the lawsuit filed by the National Committee to Preserve Social Security and Medicare requires that all of these cases be worked

4.90.5.6.5  (05-31-2006)
Form SS-8 Determinations

  1. CPM staff will request Form SS-8 determination case files for government entities. Cases selected will only include cases where an SS-8 determination site determined that an individual or class of workers are employees and not independent contractors.

  2. The following case selection criteria will be applied:

    1. Number of employees in class per Form SS-8

    2. General case selection criteria

4.90.5.6.6  (05-31-2006)
Internal/External Leads and Referrals

  1. Leads from field FSLG offices will be referred to CPM for consideration of examinations. Internal referrals may also be received from other operating divisions and functions (i.e., Governmental Liaison and Disclosure, Taxpayer Advocate Service, Wage and Investment, TEGE Counsel, etc.). The FSLG Referral Form or other referral forms may be used by internal or external stakeholders. All referrals will be reviewed by a Referral Classification Panel. See IRM 4.90.6 for referral selection procedures.

  2. General Case Selection Criteria will be applied to Internal Leads and Referrals.

4.90.5.6.7  (05-31-2006)
Claims

  1. The Ogden Service Center (OSC) will follow procedures in IRM 21 for selection of employment tax claims for examination. FSLG Claims selected for examination by OSC will be forwarded to CPM Classification for further screening.

  2. Claims should be processed within 30 days of receipt in CPM. Claims will be worked in CPM Classification to the extent possible. For example, claims needing only minor clarifications will be worked in CPM Classification. Claims that will be disallowed or that need development or examination will be established on AIMS and RCCMS and forwarded to the appropriate groups.

    Note:

    The only claims that cannot be surveyed are those requiring Appeals consideration or Joint Committee cases.

  3. Claim Case Selection Criteria:

    1. Special project cases (i.e., medical residents claims, Section 403(b), etc.)

    2. Claims involving nationally coordinated issues will be coordinated by CPM

    3. Amount of claim

    4. General case selection criteria

4.90.5.6.8  (05-31-2006)
Section 218 Initiative Follow-up

  1. This source of casework is derived from the former national/district Section 218 Initiative. CPM will screen this information and select inventory for each area. The work consists of following up on contacts made by prior districts. The cases selected will focus on contacts where " focused outreach" was conducted or an examination was recommended, but not started.

  2. The issues for follow-up are not necessarily limited to compliance with Section 218; any employment tax or information return issue may be included. The follow-up may consist of any type of contact (i.e., customer assistance, compliance check or examination).

  3. Section 218 Initiative Follow-up Case Selection Criteria are as follows:

    1. Compliance with prior District offer to comply

    2. Cases recommended for examination by District

    3. General case selection criteria

4.90.5.6.9  (05-31-2006)
Closing Agreement/Letter/Memorandum of Understanding

  1. This source of work is based on following up on existing Closing Agreements, Letters of Understanding (LOU), and Memorandums of Understanding (MOU) with customers for compliance. LOUs and MOUs are usually pre-filing agreements for compliance as a result of customer assistance. The closing agreements may be either pre-filing or post-filing agreements. The source of work also includes the Classification Settlement Program (CSP) agreements for worker classification.

  2. Closing Agreement, MOU, and LOU Case Selection Criteria:

    • Compliance with closing agreement provisions

    • Cases recommended for examination by FSLG CSP Coordinator (CSP closing agreements only)

    • General case selection criteria

4.90.5.7  (05-01-2010)
Compliance Project Guidelines and Procedures

  1. FSLG will deploy the strategic planning process to select unique projects for inclusion in each year's work plan. Projects are distinguishable from general casework by their targeted purpose. Projects serve several purposes:

    • Address areas of known non-compliance through enforcement, guidance, or education

    • Gather information about an emerging issue to develop a strategy to address the issue

    • Measure the overall compliance level of the segment or customer group

    • Answer specific questions about a market segment

4.90.5.7.1  (05-01-2010)
Compliance Projects

  1. A compliance project is designed to address an identified issue, which may or may not be associated with a particular market segment. This type of project is intended to correct a known area of non-compliance through examinations, compliance checks, or educational programs. Those that involve examinations typically include returns screened for the presence of the targeted issue.

  2. The nature of the issue and information available on the issue will frame how the project is designed. The issue may be one that is directly identifiable in an inspection of a return. The Return Inventory Classification System or other internal databases will be used for all compliance projects that base selection on return information or generic population criteria. Other sources and methods will be utilized when they are appropriate. Outside sources may include other operating divisions, other governmental agencies, the Internet, and external stakeholders.

4.90.5.7.2  (05-01-2010)
Market Segment Studies

  1. A market segment study is intended to establish an accurate profile of the FSLG population. This profile will include a risk assessment of non-compliance, identification of educational and outreach needs, and assist planning for future compliance. These studies are typically used to determine a compliance baseline and to develop recommendations to address identified areas of non-compliance. The baseline compliance information will be used to consider how best to address the issue (outreach, compliance check, or examination). The entities selected for the study are generally chosen using statistical sampling techniques. Success is measured by completion of the project and by arriving at an accurate determination of the compliance level, rather than traditional audit result measurements.

4.90.5.7.3  (05-01-2010)
Procedures

  1. There are three phases for Compliance Projects or Market Segment Studies:

    1. Development Phase

    2. Implementation Phase

    3. Analysis and Closure Phase

4.90.5.7.3.1  (05-01-2010)
Development Phase

  1. The development phase begins the date the project is assigned. It ends when the project is ready for implementation (e.g. when examination cases are sent to the field, compliance check letters are mailed, the project is abandoned, etc.) As part of this phase, CPM will prepare a project proposal for approval of the Director, FSLG. For this proposal, CPM should consider all of the following actions:

    1. Prepare a preliminary action plan. The plan represents an outline of the project. It lists all of the generic steps to develop and implement the project.

    2. Gather information from available sources, including operating division databases, TE/GE management reports, IRS Statistics of Income, publications and trade journals, other government agencies, the IRS intranet site, the Internet, advisory and oversight groups, and external stakeholders. The development of the methodology can include examinations, compliance checks, educational initiatives, developing training material, or drafting technical guidance to both the field and the public. This information should be used to develop and modify the project methodology.

    3. Estimate resource needs, including hours to be expended by employee type.

    4. If necessary, request technical assistance from other operating divisions. The request should include the type of expertise needed , the length of the assignment, and estimated hours needed.

    5. Develop the RICS queries necessary to identify the entities subject to potential selection in the project. Samples should be taken from the largest possible population, preferably nationwide. CPM may also determine that a stratified sample may be more appropriate. Prior to pulling project returns and assigning them to the groups, CPM should pull a small sample of the returns in order to validate the developed criteria. TE/GE Research and Analysis may be consulted for assistance with RICS in questions including defining the population, sample size, drawing random samples, and related issues.

    6. Create an action plan. At a minimum, the following steps should be included:
      --A projected start date for each phase (development, implementation, analysis)
      --A projected completion date for each phase
      --A short description of each necessary action; each action should include the responsible person along with estimated starting/completion dates for each action

    7. Prepare the project proposal and obtain the Director's approval.

    8. Identify the type of data to be collected and determine how project data will be analyzed. CPM will consider methods for collecting compliance and demographic data, based on available data sources, resource limitations, and external stakeholder input. For market segment studies, the team should collect as much information as necessary to provide a complete profile of the market segment.

    9. Development of check sheet questions or questionnaires.

    10. Survey non-examined closures. Non-examined closures have great impact on a statistical sample. Generally, the Director should approve all non-examined closures.

4.90.5.7.3.2  (05-01-2010)
Implementation Phase

  1. The implementation phase begins on the date the project activities commence and ends when the core activities conclude. CPM should take the following actions, as necessary:

    1. Establish controls, build case files, and assign cases to groups.

    2. Prepare a project guidance memorandum on working the project cases.

    3. Arrange for qualified individuals to provide any needed specialized training.

    4. Maintain contact with managers throughout the project.

    5. Provide full technical and procedural support to Specialists for the life of the project.

    6. Involve Field Managers in monitoring project inventory. The Field Managers must be involved in issue development and case processing to ensure timely case closure.

    7. Input data as received and conduct an initial analysis. Preliminary results could indicate that a project needs to be expanded, modified, or discontinued. Project modification or termination requires the Director's approval.

    8. Maintain the following historical project records:
      --Project proposal (original and amended)
      --The original RICS query describing the population/sample
      --Listing of project cases (examinations or compliance checks)
      --Project log, including actions taken, meeting minutes, action plans
      --Check sheets and instructions provided to Specialists
      --Internal correspondence to managers and Specialists (including E-mail and memoranda)
      --Monitoring reports
      --Final approved executive summary, final report, and communication plan

4.90.5.7.3.3  (05-01-2010)
Analysis and Closure Phase

  1. This phase begins when all data has been collected. The beginning date may vary depending on the project type: when all of the check sheets are received, when all examinations are closed, when subsequent returns are pulled to begin compliance analysis, or when the response to requested actions are completed. CPM should take the following actions, as necessary:

    1. Analyze results and make recommendations.

    2. Develop the project closure strategy. The strategy is dependent on the facts, circumstances, and project analysis. CPM will decide whether to continue, discontinue, or make the project part of the annual work plan as regularly occurring casework.

    3. Analyze the results, prepare the report and submit when substantially all cases have been closed, but no later than six months after the project completion date. If necessary, an interim report may be issued. The report should address the objectives, data gathering methods, data analysis, limitations, deviations, findings, impact on resources, project critique, and recommendations. The report should not include any taxpayer information, law enforcement criteria and examination tolerances. Recommendations may call for a variety of activities such as:
      --Issuing guidance
      --Educational letters
      --Follow-up examinations in future years
      --Follow-up studies to measure compliance
      --Proposing legislative changes
      --Training
      --Converting the project to regular casework
      --Recommending no future action if issues were not found

    4. Submit the final report to the Director, FSLG, for approval.


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