4.90.8  Examination Quality Measurement Standards

Manual Transmittal

December 13, 2013

Purpose

(1) This transmits a table of contents and text for IRM Part 4, Examining Process, Chapter 90, Federal State and Local Governments, Section 8, Examination Quality Measurement Standards.

Material Changes

(1) Editorial changes and corrections made from March 1, 2011 revision, which is now obsolete.

(2) 4.90.8.2 Standard 6, Element D is deleted. CPM prepares and issues the Notice of Determination of Worker Classification. Therefore, there is no need for this element.

(3) 4.90.8.2 Standard 7 Bullet list of standard time-frames revised to conform with IRM 4.8.3.

(4) 4.90.8.2 Standard 7, Element D revised to conform with IRM 4.8.3.

Effect on Other Documents

This section supersedes IRM 4.90.8, Examination Quality Measurement Standards, dated March 1, 2011.

Audience

This section contains instruction and guidance for all Federal State and Local Government compliance employees when dealing with quality measurement standards for examinations.

Effective Date

(01-01-2014)

Paul A. Marmolejo
Director, Federal State and Local Governments

4.90.8.1  (03-01-2011)
Overview

  1. This section discusses the quality measurement standards for examinations. These standards identify specific opportunities for improvement in quality and target root causes of deficiencies. They address each of the three Balanced Measures and were designed in conjunction with the existing Employment Tax Standards.

4.90.8.2  (01-01-2014)
Examinations

  1. Standard #1: AUDIT PLANNING Purpose: This standard measures whether all necessary steps were taken to set the groundwork for a complete examination:

    • Were internal documents reviewed?

    • Did the pre-plan identify significant potential issues?

    • Were initial interview questions prepared?

    • Were section 530 and collectibility considered?

    • Was contact made with the taxpayer regarding appointments and the availability of records?

      Key Element Definition
    A. Queries appropriate internal information sources This quality element measures whether internal information sources were adequately queried. All relevant internal sources of information should be queried and evaluated to obtain necessary taxpayer background information. A pre-audit workpaper should be used to document these actions and set the initial scope of the audit. If no return has been filed or is available, pre-audit activities are still applicable.
    B. Considers Section 530 This quality element measures whether Section 530 was considered in the audit plan. Section 1122 of the Small Business Job Protection Act of 1996 (HR 3448) clarifies that the first step in any case involving whether the entity has employment tax obligations as an employer is to determine whether the entity meets the requirements of Section 530. It is the responsibility of the Internal Revenue Service to address whether Section 530 is applicable. Publication 1976, Do you Qualify for Relief under Section 530?, should be given to the taxpayer.
    C. Considers collectibility, if applicable This quality element measures whether collectibility was considered. Specialists should consider financial activities because not all taxpayers lacking the means to satisfy additional tax liabilities will be identified. Specialists should be alert for indications that collectibility may be a factor to consider. Transcripts of accounts may also indicate collectibility issues. If collectibility is an issue in an assigned case, the Field Manager should be alerted as soon as the issue is discovered. Field Managers will make the final determination as to whether to survey the case or to limit the scope/depth of an examination. A tax return may be surveyed due to an absolutely uncollectible assessment or may be subject to a limited scope examination where there is lack of collectibility. However, returns should not be surveyed based solely on collectibility if a limited examination has the potential for developing a lead to other noncompliant taxpayers.
    D. Considers Letters and Memorandums of Understanding This quality element measures whether there was proper consideration of existing Letters and/or Memorandums of Understanding. During the initial planning stages of an examination, the Specialist can improve the overall quality of the examination and future compliance by ensuring proper consideration of existing Letters and/or Memorandums of Understanding.
    E. Plans Examination based on available data This quality element measures whether the audit plan was based on all available data. During the initial planning stages of an examination, the Specialist can improve the overall quality of the examination by considering data from all available sources. Information from any referrals contained in the file should be fully reviewed and the appropriate audit steps planned to determine the validity of that information. If any market segment data is available, the Specialist should obtain and review the data and plan the examination accordingly, taking into consideration guidance that has been given regarding issues, techniques, etc.
    F. Follows Power of Attorney processing requirements This quality element measures whether the Power of Attorney requirements were followed. When a Power of Attorney is representing the taxpayer, the Specialist should ensure that Form 2848 or Form 8821 is properly executed. Service personnel are prohibited from disclosing tax information of a confidential nature to any unauthorized person.
    G. Furnishes and explains initial required letters and publications This quality element measures whether all required letters and publications were furnished to the taxpayer and adequately explained. RRA 98 requires that the following information be provided in the initial appointment/confirmation letter that is mailed to the taxpayer:
    • Correspondence showing Specialist’s name, telephone number, and employee ID number

    • Publication 1 and Notice 609

    Consider the optional use of Letter 3850-X or 3850-Y. The initial interview is an important part of the examination process. The first few minutes should be spent explaining the process and the taxpayer’s rights. The taxpayer’s receipt of Publication 1 will be confirmed and specifically noted in the workpapers. (Publication 1 fulfills the requirement in IRC 7521(b) that taxpayers be informed of the process and their rights under such process at or before the initial interview.) If the taxpayer has not received Publication 1, furnish the publication before proceeding with the initial interview. Several other provisions in IRC 7521 affect taxpayer interviews. RRA 98, Section 3417 added IRC 7602(c), which affects the audit planning. If it is determined that there may be a need to contact any third parties to complete the examination, the Specialist is required to provide the taxpayer with a copy of Publication 1 before any third-party contact is made. Use of Form 12180, Third Party Contact Authorization Form and/or use of Form 12175, Third Party Contact Report Form should be documented in the case file (or a copy should be retained in the file). Form 12180 and Form 12175 applies to contacting third parties, including those contacts made through summons procedures.
    H. Issues initial request for information that is clear and concise This quality element measures whether the initial Information Document Request (IDR) was clear and concise. During the initial contact, Specialists will request the information and/or documents needed to perform the examination. Specialists will prepare the IDR and mail it to the taxpayer with the initial contact letter. The IDR may be discussed with the taxpayer during the initial telephone call. The IDR will include requests for documents needed to support issues determined during the pre-contact analysis (pre-plan) of the examination, as well as items identified during the initial telephone contact with the taxpayer. The IDR should list the specific records, information, and documents the taxpayer should have available at the initial appointment. The IDR should be phrased in terms that are understandable to the taxpayer and specify the time period applicable to the requested records. The IDR must always include the date the requested information is to be submitted, or indicate that the records be made available at the initial appointment. Specialists may have access to pro forma requests that include a list of items commonly requested for examinations. Use of pro forma requests is acceptable; however, the pro forma IDR should be modified/tailored to the particular returns being examined. The Specialist should be careful not to use a "shotgun " approach and request everything on the list if some of the items may not be relevant to the returns under examination.
    I. Shares audit plan with the customer/ representative This quality element measures whether the audit plan was shared with the taxpayer/representative. When initial contact is made with the taxpayer, by telephone or by mail, the Specialist must tell the taxpayer which returns are being examined and the tax period(s) involved. The Specialist should generally discuss the issues that were selected in the pre-plan. The taxpayer must also be made aware that additional issues may arise depending on the information obtained during the examination. As soon as additional issues are identified, the taxpayer/ representative should be notified to avoid any unnecessary delays in the time span of the examination process. Sharing issues with the taxpayer will decrease audit time and let the taxpayer know the purpose of the examination.
    J. Determines correct statute expiration date This quality element measures whether the proper steps were taken to determine the correct statute expiration date. Prior to initial contact with the taxpayer, the correct statute expiration date should be verified by any of the following methods:
    1. Confirming the statute date that appears on the classification sheet.

    2. Securing the original filed return with the official date receipt acknowledgement from the Campuses.

    3. Securing a BMFOL/ANMF transcript that confirms the actual filing date.

    4. If none of the above are determinative, use the earliest possible statute date based on the due date of the return.

  2. Standard #2: AUDIT SCOPE Purpose: This standard measures whether the examination was conducted within the appropriate examination scope. This standard also measures whether the Specialist considered and included in the examination: worker classification, all filing/compliance requirements, all related returns, large, unusual and questionable (LUQ) items, and all multi-period returns.

      Key Element Definition
    A. Considers all "large, unusual, and questionable (LUQ)" items This quality element measures whether all large, unusual, or questionable items were considered. All LUQ income, deduction or credit items were considered -- such as accounts with unusual titles or unusual amounts or with large unexplained differences between beginning and ending balances. Specialists are responsible for determining which LUQs need to be addressed. The case should contain explanations in the workpapers for any LUQ items appearing which were not examined. If assistance is needed they should discuss the matter with their Field Manager and/or seek assistance from CPM.
    B. Maintains appropriate scope This quality element measures whether the scope of the examination should have been limited or expanded to the point that all significant items were properly considered for determining the correct tax liability. The scope of an examination may be affected by requirements for specific types of cases such as non-filers, Accounts Receivable Dollar Inventory (ARDI), bankruptcy, or other specific criteria. The Field Manager must approve and document in the case file .all limited scope examinations. See IRM 4.23.3.8.3.
    C. Considers/ includes multi-period returns in the examination, where warranted This quality element measures whether multi-period employment tax returns were considered and included in the examination. The case file should document whether prior and subsequent period returns were considered for examination potential. Prior and subsequent period returns -- which contain the same or correlative issues as in the year(s) examined -- should be considered and pursued when appropriate. In addition, any adjustments in favor of the taxpayer must be considered.
    D. Considers all filing/ compliance requirements This quality element measures whether all filing and compliance for requirements were considered. Limited scope examinations do not eliminate the need to rate this standard. There are still certain filing checks that should be conducted. Required filing checks should include verification of the required filings and compliance on the following returns:
    1. Employment tax

    2. Excise tax

    3. Withholding at the source

    4. Pension plans

    5. Bonds

    6. International issues

    An INOLES will list all of the taxpayer’s known filing requirements. Specialists should verify whether information returns, such as Forms 1099 and 1042-S , were filed and issued when appropriate. All delinquent returns should be solicited (including information returns). This element also considers analyzing return information and, when warranted, the pick-up of related, prior, and subsequent year returns. These examinations, including limited scope examinations, should include checks for the filings of required information returns. Specialists are responsible for determining whether the taxpayer is subject to filing requirements and whether the forms were filed timely and accurately.
    E. Considers classification of workers This element measures whether worker classification was considered. For Federal tax purposes, there are two worker classifications. A worker is either :
    • An employee of the service recipient, or

    • An independent contractor.

    In employment tax examinations, worker classification should always be considered. This is an important issue and has the potential to change the tax responsibilities for the entity and the workers.

  3. Standard #3: PROBES FOR UNREPORTED EMPLOYMENT COMPENSATION, WITHHOLDING, AND TAXABLE FRINGE BENEFIT ISSUES Purpose: This standard measures whether appropriate probes were applied and completed to establish that substantially all taxable compensation items were reported. In addition, this standard measures whether the Specialist properly considered fringe benefits.

      Key Element Definition
    A. Uses appropriate probes for the type of Government Entity under examination This quality element measures whether employment tax returns and related returns were considered as a balanced unit in determining whether or not all wages, employment taxes, and withholding were reported. Specialists should consider:
    • The type of records maintained by the taxpayer,

    • The information gathered during the interview, and

    • Internal controls.

    The existence of cash and non-cash payments for services must also be investigated. Evaluating internal control systems will assist Specialists in establishing the accuracy and reliability of the taxpayer's books and records. Additionally, evaluating internal controls should be part of the decision-making process when selecting the appropriate audit techniques. The Specialist must document whether internal controls were evaluated.
    B. Completes probes appropriately Techniques used to complete this element will vary with the nature and complexity of the books and records. The analysis may include reviewing journals, ledgers and unusual adjusting entries. Compensation probes may include in-depth analysis of information return documents reconciled to cash disbursements. A limited analysis might include inspecting prior year returns, and reviewing required filing checks and specific item methods to develop and resolve questionable unreported compensation issues. Probing for these payments should also include a thorough initial interview and follow up interview if needed.
    There is no "magic list" to adequately analyze the taxpayer's level of compensation. However, there are basic aspects of compensation that should be considered.
    • The taxpayer’s market segment practices -- Has the reported activity been subject to market segment compensation issues?

    • The taxpayer’s financial history -- Information regarding asset acquisitions and dispositions, expansions and contractions of operations, and three-year comparisons can help to identify patterns, trends, or long term compensation issues.

    • The taxpayer’s economic environment -- The unique characteristics of the taxpayer’s market segment should be considered. The taxpayer’s compensation or labor expense may not be consistent with comparable government entities in the area. It is important that the Specialist understand operations, technical issues, and typical patterns of non-compliance specific to the market segment.

    • The taxpayer’s potential for unreported compensation payments (i.e. non-qualified deferred compensation, misclassified costs, etc.).

    The key steps in the analysis of a taxpayer’s level of compensation activity are built upon a universe of financial information about the taxpayer. What is significant in one analysis may not be valuable in another. Compensation inquiry is dependent upon the specific facts and circumstances of each examination.
    C. Completes probes for taxable fringe benefit issues This element measures whether probes were completed in order to identify any taxable fringe benefit issues. The definition of wages, in addition to salary, includes other benefits, or "perks" , that are offered to employees in exchange for services rendered. It is these benefits or items, paid in addition to the employees’ regular salaries, that may cause the greatest audit challenge during an employment tax exam. Fringe benefits may be a significant form of compensation. Each examination must include a review of the taxpayer’s policies and procedures regarding fringe benefits as required by IRM 4.23.5.11.

  4. Standard #4: AUDIT TECHNIQUES Purpose: This standard measures whether the issues examined were completed to the extent necessary to provide sufficient information to determine the correct tax liability. The depth of an examination is determined through inspection, inquiry, interviews, observation, and analysis of appropriate documents, ledgers, journals, oral testimony, etc., to ensure full development of the relevant facts concerning issues of merit. Interviews provide information not available from other documents. A properly planned and executed interview will provide an understanding of the taxpayer’s financial history, operations, and accounting records. Specialists from outside FSLG should be consulted when expertise is needed to ensure proper development of unique or complex issues.

      Key Element Definition
    A. Conducts appropriate interviews This quality element measures whether appropriate interviews were conducted. The case file should reflect in-depth and planned interviews throughout the examination. Questions should be sufficient to give a clear understanding of the taxpayer’s operations. Information should be secured on large, unusual or questionable (LUQ) items. Follow-up questions should be asked to clarify questionable areas. The person interviewed should have sufficient knowledge and be able to answer questions in a factual context for the area(s) of interest. Information should be developed to the fullest extent necessary in light of the type of entity/return and facts and circumstances involved. Interviews should be used to obtain information needed to make informed judgments about the scope and depth of the examination and correctly resolve issues. Interviews are used to develop information and establish evidence. The case file should record that an appropriate interview was conducted. Limiting the scope of an examination does not generally eliminate the need to conduct an interview.
    B. Requests only necessary information This quality element measures whether only necessary information was requested. To decrease the taxpayer’s burden, the Specialist should only request the relevant and necessary information to resolve the issue(s) or areas under consideration. Requests for information should bear a close relationship to the Specialist’s audit plan. Documents should not be requested, and questions should not be asked, unless there is a direct need for the information.
    C. Issues follow-up Information Document Requests that are clear and concise This quality element measures whether follow-up requests were effectively and properly used. To decrease the taxpayer’s burden, the Information Document Request (IDR) should be clear, concise, and legible, and include the method, due date and place that the information is be received. An IDR should:
    • Be sufficiently detailed,

    • Be properly completed, dated and include the due date for the information requested, and

    • Indicate the manner in which the taxpayer should return the information.

    D. Uses appropriate examination techniques This quality element measures whether:
    • Appropriate examination techniques were applied based on the taxpayer’s responses to the interview questions and the analysis of the taxpayer’s books and records.

    • Proper sampling techniques were used.

    • Proper source documents were requested.

    • Alternative methods were used to obtain information when appropriate.

    If the Specialist determines that the assistance of a Computer Audit Specialist (CAS) is necessary, the request for CAS assistance should be made early in the examination process. The Specialist may find it necessary during the course of an examination to obtain information that is not readily available from the taxpayer. Therefore, third-party contacts should be considered as an appropriate examination technique. The Specialist should consider using summons procedures to obtain information that the taxpayer is not willing to provide. This action must be discussed with and approved by the Field Manager.
    E. Develops identified issues properly This quality element measures whether issues were properly developed. The case file should indicate that the Specialist gathered pertinent facts and data. The following key aspects of developed issues include:
    • Only relevant information is gathered for identified issues

    • Issues are not overdeveloped or underdeveloped

    • Taxpayer’s oral testimony was considered as appropriate

    • Steps taken to reach conclusions were fully documented. It is difficult to determine whether an issue is fully developed without complete documentation.

    F. Recognizes and properly develops fraud indicators This quality element measures whether fraud indicators were recognized and properly developed. All aspects of fraud are addressed in this key quality element. However, computation of the fraud penalty is considered separately under element 5E (computes tax, penalties and interest correctly) The "badges of fraud" can be divided into two categories: affirmative indicators and affirmative acts. Further development of these badges assists the Specialist to establish firm indications of fraud. When initial badges of fraud are uncovered, Specialists should initiate a discussion with the Field Manager and develop an action plan as soon as possible to document firm indications of fraud. The plan should be a joint effort of the Specialist, Field Manager, and when needed, the Fraud Coordinator. Common employment tax fraud cases result from:
    • Willful failure to file a return (IRC 7203),

    • Willful failure to pay tax owed (IRC 7203),

    • Fraud and false statements (IRC 7206), or

    • Failure to collect and deposit taxes into a trust fund account (IRC 7512 & 7215).

    IRM 4.90. 15 provides additional guidance on fraud.

  5. Standard #5: WORKPAPERS AND REPORTS OF FINDINGS Purpose: This standard measures the documentation of the audit trail, audit techniques used, procedures applied, and overall case activity. The documentation should include, but not be limited to, the procedures applied, audit tests performed, information obtained, and conclusions reached during the examination. Workpapers are necessary for preparing a concise, accurate, and professional report. IRM 4.90.9 provides additional information about workpaper preparation. Reports are needed to summarize the written presentation of audit findings in terms of content, format and accuracy. All necessary information is contained in the report so that there is a clear understanding of the reason for each examination adjustment.

      Key Element Definition
    A. Prepares workpapers that are legible, concise and organized This quality element measures whether workpapers were prepared correctly. The workpapers should be clear, concise, and legible. Every workpaper should be appropriately labeled and include the date completed and the Specialist’s initials. The Specialist should organize and index the workpapers so they easily tie into Form 4318-A. Workpapers may include correspondence with the taxpayer, supporting documents, and Information Document Requests. Workpapers are very important. Workpapers serve to effectively explain the areas covered by the examination. Numerous internal customers may be accessing the file long after the Specialist has closed the case. The workpapers should be organized, numbered and labeled so that information can be easily found. The workpapers are considered to be organized and legible if review of the case is not hindered due to the quality of the presentation.
    B. Documents Activity Record This quality element measures whether the activity record was appropriately documented. The activity record should summarize the case history, including examination activities and delays encountered during the examination. The activity record must be used to reflect any action taken on the case, regardless of who is taking the action (e.g. Specialist, Field Manager, Management Assistants, Reviewers, etc.). Documentation should include the date, time charged and a brief explanation of each activity or contact. It is important to accurately record activity as well as inactivity on cases (e.g., details, training, extended leave, etc.). Information recorded includes, but is not limited, to:
    • Work performed prior to, during, and subsequent to taxpayer contact

    • Research activities

    • Date, time, and place of appointments

    • Date that a tour of the site occurred

    • Brief summaries of telephone conversations

    • Contacts with taxpayers, representatives and third parties

    • Causes for any delays in completing the examination

    • Collateral requests and referrals

    • Dates of requests for internal source information (i.e. CFOL)

    • Field Manager involvement (informal discussions about case development and quality, in-process case reviews, on-the-job-visitations, workload reviews, discussions with the representative or taxpayer, closed case reviews)

    • Report writing activity

    • Actions with respect to statute dates

    • Date case closed to Field Manager

    • Subsequent actions (Management Assistants, Reviewers, etc.)

    C. Adequately documents workpapers to show the audit trail, research conducted, techniques applied, and conclusions reached This quality element measures whether workpapers adequately document the audit trail, research results, techniques and conclusions. The workpapers should show the facts, procedures applied, audit techniques used, management involvement, applicable law, conclusions, and proposed adjustments. The workpapers should be logically presented so that anyone can easily determine what audit steps were taken. They are the written records that provide the support for the Specialist’s conclusions and/or report. Workpapers document the tests performed, procedures applied, and conclusions reached in the examination. They reflect the information gathered during the examination and support the results. Workpapers are to include only relevant information that add value to the case and make it easy to follow the audit trail. If superseded workpapers are included in the file, they must be clearly marked as such. Photocopies of taxpayer documents should not be included in the file unless they add material value. Workpaper adjustments must agree with Form 4318-A and audit reports.
    D. Prepares report/ closing letter that appropriately reflects conclusions in workpapers This quality element measures whether applicable report writing procedures were followed. The definition of "audit report" includes all documents representing examination results including closing letters. Reports should present all information necessary to ensure clear understanding of the adjustments and demonstrate how the tax liability was computed. If the report is written in a form that distracts from the content, creates ambiguities as to the meaning, or raises credibility issues, then its quality or usefulness is hindered. Therefore, this key element requires the use of correct grammar. All aspects of the no-change procedures, including issuance of a no-change report to a representative when the taxpayer is not present, will be evaluated as part of this key quality element. All audit reports should be properly prepared, signed, and dated. Executed agreement forms should be date-stamped when received by the IRS. All penalty notices must include the name, IRC section, computation and schedule attached to the report as required by IRC 6751. The examination report is the record of findings and recommendations regarding the investigation of a taxpayer’s tax liability. It is the document that reviewers will use to determine whether the Specialist has properly developed a case and has correctly applied the law to the facts in the particular case. Also, it may become the evidence that the Government will rely on if the case goes to litigation. Since the taxpayer ordinarily receives a copy of the report, it serves as a formal presentation to the taxpayer of the Specialist’s findings and recommendations. Preparing an examination report is a key element in a Specialist’s duties and responsibilities. The examination report should be clear, concise, and to the point. All adjustments must be properly explained and supported by appropriate references to applicable laws, regulations, court decisions, and rulings on which the Specialist based his/her findings. The definition of "audit report" includes all documents that present the examination results. It is appropriate to evaluate unagreed reports, no-change procedures, Classification Settlement Program (CSP) closing agreements, transmittal letters, informant claims, and agreed reports. Reports are to be prepared in accordance with report writing procedures found in IRM 4.90.9.
    E. Computes tax, penalties and interest correctly This element concentrates on mathematical computations. The tax computation, including penalty and interest computations, in the audit report and workpapers should be correct. Materiality should also be considered.
    F. Follows appropriate case closing procedures This quality element measures whether appropriate case closing procedures were followed.

  6. Standard #6: APPLICATION OF LAW AND POLICY Purpose: This standard measures whether the conclusions reached were based on a correct application of the tax law and policy. It includes consideration of applicable law, regulations, court cases, revenue rulings, etc. to support technical/factual conclusions, including penalties. The standard measures whether:

    • The Specialist performed adequate research to make accurate examination determinations,

    • The Specialist considered Section 530 of the Revenue Act of 1978, as well as the Classification Settlement Program (CSP) in evaluating any potential issues.

      Key Element Definition
    A. Conducts appropriate research This quality element measures whether research conducted by the Specialist was appropriately completed. Federal tax law is constantly changing; therefore, the Specialist should conduct appropriate research to resolve an unfamiliar issue. Time spent on research should be commensurate with the complexity of the issue. Research includes, but is not limited to, the Internal Revenue Code (IRC), Income Tax Regulations (Regs), Internal Revenue Manual (IRM), court cases, and Revenue Procedures and Rulings.
    B. Applies provisions of Section 530 of the Revenue Act of 1978 correctly This element considers whether the case file reflects a thorough consideration of Section 530 with regard to worker classification issues. If it is determined that Section 530 is applicable, then only the employer’s employment tax liability is eliminated, not the worker’s. Section 530 is a relief provision that should be considered as a first step in any worker classification issue. The legislative history indicates that Section 530 is to be "construed liberally in favor of taxpayers." Also, the taxpayer does not have to claim Section 530 relief for it to apply; the Specialist should explore its applicability.
    C. Considers CSP agreement This element measures whether the case file reflects a justifiable explanation of why the Classification Settlement Program (CSP) was or was not offered. If the taxpayer does not meet the relief provisions of Section 530, the Specialist will then determine whether the workers in question are independent contractors or employees. The issue of worker classification should be resolved with reference to the three areas of control:
    1. Behavioral control,

    2. Financial control, and

    3. Relationship of the parties These facts are used to determine whether the entity has a right to direct and control the details of the performance of its workers.

    If the Specialist determines that no worker classification issue exists, the CSP procedures will not apply. However, if a reclassification issue does exist, then the Specialist will determine whether CSP applies (IRM 4.23.6). When CSP applies—
    • The examination will be limited to a single year.

    • The assessment will be made for the latest audit year.

    If an adjustment is warranted due to the workers being reclassified and the taxpayer has filed all required Forms 1099, the Specialist will then determine the appropriate CSP offer. After obtaining Field Manager approval of the Settlement Memorandum (IRM 4.23.6.15), the Specialist will advise the taxpayer of CSP policy and make a CSP offer. The CSP program is available to Federal, State and Local government employers whose employees are not covered under a Section 218 agreement.
    D. Reserved Reserved
    E. Interprets and applies law properly This quality element measures whether the case file reflects a correct interpretation, application and explanation of the law based on the facts and circumstances of the examination. This quality element evaluates the correctness of technical and factual conclusions. The law should be evaluated based on the facts of the case. This key quality element includes the evaluation of primary and alternative positions. In employment tax examinations, there are a number of different tax rates that may be used depending on the facts and circumstances of the case. It is the Specialist’s responsibility to select and apply the correct tax rate for the given situation.
    F. Considers and applies penalties as warranted This element measures whether all applicable penalties were properly considered and applied. The case file should include an explanation that supports the decision as to whether all applicable penalties were asserted. The responsibility for the assertion of penalties lies with the Specialist and should be considered whenever additional tax is assessed or abated. The IRM outlines general expectations for the development of penalty issues including interviewing taxpayers to solicit explanations for audit adjustments, making third-party contacts, referrals, and managerial involvement. IRC 6751 requires written managerial approval for all penalties except those imposed by IRC 6651, failure to file tax return or to pay tax, or other penalties automatically calculated through electronic means.
    The "approval requirement" of IRC 6751 is considered in the evaluation of this quality element, except as noted below in the case of the fraud penalty. All aspects of fraud penalties are addressed separately under key quality element 4F – Were indications of fraud properly pursued and developed? The case file should be documented with sufficient explanation to support the decision whether or not to assert any penalties. The workpapers should fully document the consideration, development and assertion or non-assertion of all applicable penalties.

  7. Standard #7: TIMELINESS Purpose: This standard measures time usage and timeliness of actions throughout the examination process. This standard also measures the Specialist’s timely response to taxpayer communications, timely managerial involvement, and overall effectiveness of use of time relative to issue complexity. Timeliness is an essential element of a quality examination. This standard breaks down the examination process into its components and provides time-frames in which each part/action should be initiated, followed-up on, and/or completed. It is important to track delays in the examination process. Sometimes there are reasonable explanations such as training. Regardless of the reason, delays should be noted. It is important for trends to be tracked to properly respond to stakeholders such as Congress or taxpayer advocacy groups. Federal State and Local Governments (FSLG) Quality Measurement System uses a recommended national standard of time measurement. These standards are considered maximum allowable time-frames when the case does not document reasons for a delay or extended periods of inactivity. All days are calendar days, except for responding to telephone calls. In this instance, business days are used. It should be noted that any requirements for expedited processing will take precedence over the standard time-frames indicated below. See IRM 4.8.3.

    • 45 days to start the examination (first action to first appointment)

    • 45 days between significant activities

    • 10 days for agreed or no-change closures-from the date the report is received or the date the no-change determination is communicated to the taxpayer to the date the case is closed from the group

    • 20 days for unagreed case closures-from the date the 30 day letter defaults or the date the request for Appeals conference is received to the date the case is closed from the group

    • 1 day (next business day) to return telephone calls to the taxpayer/representative

    • 14 days to respond to correspondence from the taxpayer/representative

      Key Element Definition
    A. Starts the examination within a reasonable time-frame This quality element measures whether the examination started within 45 calendar days from the date that the Specialist first contacted the taxpayer or exercised significant activity on the case. Examinations should generally be initiated within 45 days after this first contact. The "first contact" is not necessarily the first occasion time can be charged to the case. "First contact" is considered to have occurred when the Specialist has made initial examination contact with the taxpayer or the Specialist has done substantial work on the case. If the case was initiated as a compliance check that has been converted into an examination, the starting point of this time-frame is the point of notification of exam. This time-frame does NOT include time charged to a compliance check. The initial taxpayer contact can be either a written or oral communication. If the case involves a pre-contact analysis, then the time-frame will start from that date. The taxpayer, representative, Specialist or Field Manager may cause delays. Extended or repeated delays in initiating the examination should be brought to the attention of the manager to determine whether other action should be taken. To reduce burden on taxpayers, Field Managers should consider reassignment when a Specialist will be on an extended detail, leave, etc. If the manager does decide to reassign the case, the 45 days does not start over at the time the case is reassigned to the second Specialist.
    B. Takes significant actions timely Specialists are expected to take significant "action" to move cases towards completion at least once every 45 days. All employees should make every effort to promptly process and close cases and resolve each examination case in a manner that promotes voluntary compliance. The term "significant activity" includes any activity in which the Specialist performs substantial work that moves the case towards closure. This does not include phone calls to cancel or change appointments. It does, however, include phone calls if issues are discussed that help move the case towards closure.
    C. Acts timely to protect statute of limitations This quality element measures whether appropriate actions were taken timely to protect the statute of limitations on all key and related returns. Consents to extend the statute of limitations should be correctly prepared and timely secured. The appropriate parties must execute all extensions. Form 895 procedures should be followed and statute dates updated on AIMS. If a statute expiration date is within 240 days, the case file should be placed in a red folder. This key element will evaluate four separate components associated with statute of limitations protection. These are:
    1. Preparation, solicitation, and processing consents timely

    2. Preparation of contents properly

    3. Adherence to Form 895 procedures

    4. Case closure in accordance with statute control procedures

    D. Closes case timely This quality element measures whether case closing activity was completed timely. Case closing activity should be completed within specific recommended time-frames for agreed, no-change, and unagreed case closures. The activity record is the main source of information for determining closure dates. Agreed cases should be closed within ten calendar days from the date the report was received by the Service. No-change cases should be closed within ten calendar days from communication to the taxpayer. Unagreed cases should be closed within twenty calendar days from the date the request for Appeals conference is received or thirty day default period, whichever is earlier.
    E. Spends time on the examination that is commensurate with the complexity of the issues This quality element measures whether the time spent on the examination was commensurate with the complexity of the issues. Examination activity should be commensurate with the time charged to the case. Factors to consider in determining appropriate use of time are:
    • Issue complexity and potential of adjustment,

    • Condition of the books and records,

    • Taxpayer and/or representative cooperation,

    • Documentation in the case file to support time charged,

    • Other problems that affect time applied on the case.

    F. Time span of examination is reasonable This quality element measures whether the time span of the examination was reasonable. Time span refers to months in process. The case file must be documented to substantiate the time span. Factors to be considered in determining the appropriate time span of the examination include:
    • Complexity and potential of the issue

    • Use of specialists and submission of referrals

    • Delays and postponements

    • Documentation in the case file to support the span of the examination and any problems

    The time span to be evaluated is from the first action on the case by the Specialist until the case is closed from the group. A determination must be made as to whether the time span is appropriate for the actions taken.

  8. Standard #8: CUSTOMER RELATIONS/PROFESSIONALISM Purpose: This standard measures whether the taxpayer’s needs were promptly addressed, professional communications were used, and taxpayer’s rights were respected. To promote quality customer relations with the taxpayer, the IRS has pledged to provide service that will make filing easier, provide assistance with filing their returns , and to provide prompt, professional, and helpful treatment in cases where additional taxes may be due. Quality customer service means adopting business practices that make compliance easier and ensuring tax laws are applied fairly while observing the rights of each taxpayer. Truthful, helpful, and timely communication is critical to establishing an honest and effective relationship with the taxpayer. In our interactions with the taxpayer, we should ensure that our communications are both professional and courteous. The Specialist should work with the taxpayer’s representative when authorized to do so, and keep the taxpayer informed throughout the process. Field Managers will become involved as it becomes necessary (or when asked to do so) to avoid any unnecessary delays or problems. The Specialist should always maintain the taxpayer’s rights as the top priority and ensure privacy and disclosure requirements are properly followed.

      Key Element Definition
    A. Addresses all taxpayer/ representative concerns with the IRS This element measures the Specialist’s effective interaction with the taxpayer/representative in resolving overall questions concerning the IRS. One of the underlying principles of "One-Stop Service" is that the Specialist will exhibit diligence in the resolution of all taxpayer requests for service, whether expressed or implied. The Specialist should recognize and fulfill any implied or expressed needs of the taxpayer. The Specialist should take appropriate steps, including follow-up actions necessary to reach a satisfactory conclusion to the examination. A taxpayer’s implied need is a problem noted by the Specialist during the examination. The Specialist should communicate this problem to the taxpayer and suggest possible solutions. For example, transcripts of the taxpayer’s account indicate a tentative deposit credit on a prior quarter’s account. The Specialist should notify the taxpayer of the situation and offer additional procedural support. An expressed need is a direct question from the taxpayer. An example of a taxpayer’s expressed need would be a question regarding the post-audit process. The case file should indicate any explanations or discussions between the taxpayer and the Specialist and the conclusion reached regarding the question.
    B. Considers closing agreement/ CSP This element measures whether the Specialist followed the procedures of closing agreements or the Classification Settlement Program. Closing agreements are authorized by IRC 7121. Procedures are contained in IRM 8.13.1. Classification Settlement Program procedures are contained in IRM 4.23.6. CSP procedures apply only to worker classification issues.
    C. Considers partial agreement This element measures whether a partial agreement was solicited in all unagreed cases. The Specialist should explain to the taxpayer the advantages of resolving issues at the lowest possible level, versus waiting until the entire case is settled in Appeals. The case file should document any discussions with the taxpayer regarding partial agreements.
    D. Solicits payment and/or discusses alternative payment methods This element measures whether full payment was solicited. In the event full payment is not possible, the case file should be documented and indicate whether the Specialist discussed alternative payment options available. As part of the post-audit process, the Specialist should communicate payment and refund procedures to the taxpayer.
    E. Interacts and corresponds with the taxpayer/ representative in a courteous and professional manner This element measures whether all communications with the taxpayer not only addressed issues raised during the examination process, but also were professional and courteous. Any case file documentation, such as the activity record, correspondence, Information Document Request(s), interview notes, and workpapers should reflect a courteous and professional tone and appearance. The workpapers contain facts gathered, evidence considered, and pertinent conclusions reached. Inflammatory comments and assumptions should be avoided at all times. The correspondence in the case file should communicate the Specialist’s message in a clear and concise manner using correct grammar, spelling, and punctuation. Machine-generated forms are preferred to handwritten or photocopied forms and documents. Terms used are specific, clear and easily understandable by the taxpayer. All correspondence and Information Document Requests should include the required employee identification per RRA 98. Required employee identification is defined as Specialist’s name, telephone number and employee ID number.
    F. Discusses findings and recommendations with taxpayer/ representative This quality element measures whether examination findings were discussed with the taxpayer or the representative. The Specialist should work with the taxpayer and representative, when authorized to do so, and keep them informed throughout the examination process. Once a Specialist has reached conclusions on the issues addressed, the findings must be communicated to the taxpayer and/or the authorized representative. An overassessment or a no-change case is generally not controversial and, in most instances, will not require a formal closing conference. Agreed cases, with no documentation in the file indicating that a closing conference was held, will presume that the Specialist adequately explained the results to the taxpayer and/or representative. On unagreed cases, the Specialist should consider any additional facts provided by the taxpayer before the case is closed from the group. Deficiency and claim disallowance cases are more likely to be disputed and a closing conference is a good forum for addressing any unresolved differences. The file should also indicate whether the Specialist kept the taxpayer and/or representative informed on the findings throughout the examination . Adequate case documentation is important in all of these circumstances. In addition, the case file should indicate whether oral or written issues and concerns were responded to in an appropriate and timely manner.
    G. Keeps taxpayer/ representative apprised of the status of the case throughout the examination This element measures whether the taxpayer and/or representative were kept apprised of the status of the examination. The taxpayer/representative should be kept informed on the progress of the case. This can be accomplished by oral communication documented in the activity record and/or written correspondence sent to the taxpayer/representative. Although the Specialist is obligated to observe the authorized power of attorney, taxpayers should be kept informed of all stages of the examination. Simultaneous communication to the taxpayer and representative will satisfy this requirement. The Specialist should send a copy of any correspondence, discussion briefs, reports and/or other material to the taxpayer at the same time it is sent to the representative. It should be noted that this is appropriate only for written communications. It is not necessary for the Specialist to inform the taxpayer of any oral communications held with the representative.
    H. Provides adequate consideration to the taxpayer's/ representative's scheduling/time needs This quality element measures whether the taxpayer/ representative’s scheduling/time needs were adequately considered. Specialists should attempt to schedule the initial appointment and any follow-up appointments at a time that is agreeable to the taxpayer and/or representative. This helps to reduce the number of rescheduled appointments and avoid case delays.
    I. Maintains appropriate managerial involvement This element measures whether there was appropriate managerial involvement throughout the examination process. Managerial involvement in the examination may be necessary at any time, from the planning stage to the final steps of resolving unagreed issues. Field Managers should be involved when it becomes necessary (or when asked to do so) to avoid delays or problems. The manager’s assistance will serve to promote good customer relations. Specialists should not wait for the examination to become a problem before they request managerial assistance. Field Managers should be proactive to avoid problems. The Field Manager’s involvement should always be documented.
    J. Advises the taxpayer/ representative of all rights This element measures whether the taxpayer and/or representative were advised of all their rights. The Specialist is required to provide and briefly explain the taxpayer’s rights as outlined in Publication 1 (Your Rights as a Taxpayer) and Notice 609 (Privacy Act), and answer any questions the taxpayer or the authorized representative may have regarding these items. The activity record should document the Specialist’s discussion with the taxpayer or representative when the initial contact is made. If the examination was the result of a compliance check, the Specialist was required to provide written notification that the compliance check is completed or is being expanded into an employment tax examination within 30 days of the initial visit. The publications and notices above are to be included with the written examination notification. Publication 1976 must be provided before initiating any worker classification examination. Each time a report is issued (including a 30 day letter), the taxpayer/representative will be advised of appeal rights and provided with Publication 1 and Publication 3498 (The Examination Process). The activity record should document that the taxpayer or representative was advised of their appeal rights and any responses received. If consent to extend the statute of limitations is solicited, the Specialist must document that the taxpayer was provided with Publication 1035 (Extending the Tax Assessment Period) and Letter 907. The Specialist must document explanations of interest-free provisions, Federal income tax withholding abatement procedures (if applicable), and Appeals procedures.
    K. Observes Privacy Act and disclosure laws This quality element measures whether all Privacy Act and disclosure laws were observed. The "Declaration of Privacy Principles" serves as an important guide to protect taxpayer privacy and safeguard confidential taxpayer information. The Privacy Principles can be found in IRM 11.3.14.
    L. Follows third-party notification procedures This quality element measures whether the Specialist followed the procedures described in IRM 4.90.12.14. A third-party contact has been made when an IRS employee contacts a person other than the taxpayer and asks questions about a specific taxpayer with the respect to the determination or collection of that taxpayer’s tax liability. The reviewer should consider the Specialist’s use of Publication 1, Form 12175, and Form 12180.
    M. Follows Supplemental Worker Notification (Notice 989) procedures This quality element measures whether the guidelines contained in IRM 4.23.10.10 were considered in all examination cases in which the taxpayer erroneously treated workers as independent contractors. The Specialist is responsible for assisting the employer in advising the employees of the change in their employment status and the effect on their tax obligations.
    N. Validates and identifies all related entities with TIN and filing requirements and compares to IDRS; corrects any inconsistencies During the examination, the Specialist should identify all the Government Entity’s related entities, the TINs and the filing requirements. The Specialist should then compare this information to IDRS to validate the filing requirements. The Specialist will ensure that inconsistencies are corrected on the Master File. If the filing requirements are current on IDRS, the customer will receive a benefit because erroneous notices will be prevented.

4.90.8.3  (03-01-2011)
Direct Feedback Process

  1. The direct feedback process will be used as an educational tool for providing technical and procedural guidance directly from the EQMS reviewer to the Specialist. The goal is to improve the overall quality of examination cases by providing direct feedback on an individual case basis. The EQMS reviewer will provide confidential feedback to Specialists via secured E-mail. If Specialists wish to rebut any feedback received, they may either return the E-mail with their comments directly to the reviewer or request a one on one discussion with the EQMS reviewer. Management will not be included in the feedback process with the exception of commendatory feedback. In the case of commendatory feedback on cases exhibiting exceptional quality, the Specialist's Field Manager will also receive a copy of the feedback E-mail sent to the Specialist.

  2. Not every case selected for EQMS review will result in direct feedback. A case would first have to be part of the EQMS sample. Errors within a selected case may not be of sufficient magnitude to justify the need for feedback. If the Specialist wishes direct feedback, the following statement should be entered in the activity record: "I would like direct feedback if this case is selected for EQMS review."

  3. In determining whether or not to prepare a feedback memorandum, the EQMS reviewer will adhere to the Examination Quality Measurement standards in this section. By adhering to these standards, all parties will have a pre-determined expectation as to what constitutes a quality examination. EQMS reviewers will critique a case in the context of its overall quality and will only provide commentary on substantive items. EQMS reviewers will use their expertise, experience, and good judgment to determine whether or not items are deemed significant enough to warrant preparation of a feedback memorandum. The actual EQMS input form and scores will not be a part of any feedback.

  4. Examples of items that may warrant direct feedback include:

    • All available data was not used to prepare the audit plan (e.g. referrals, RICS queries, 218 Agreements)

    • Documentation that worker classification issue was considered

    • Compensation probes were not completed appropriately

    • Issues were underdeveloped or overdeveloped

    • Computations in the workpapers or report were not correct

    • Consideration of the Classification Settlement Program

    • Taxpayer was not advised of all rights

    • Case closing was not within recommended time frames

  5. The feedback memorandum will identify the entity's name, its EIN, the tax periods, and the date the case was closed from the group. It will describe the substantive items, the EQMS standard(s) involved, and guidance on how to improve the quality of future cases. If the memorandum is completely commendatory in nature, it will fully describe the commendatory item(s).

  6. CPM will follow these procedures to assure the intended recipient is the only person with access to the feedback memorandum:

    • After the EQMS reviewer prepares the memorandum, it will be sent to the CPM Manager for approval via secured E-mail. This step will ensure that a memorandum is issued for items that are pertinent to enhancing case quality and creating improvement opportunities (including commendatory feedback). The Specialist's name will not be included.

    • Once the memorandum is approved by the CPM Manager, it will be returned to the EQMS reviewer by secured E-mail.

    • The EQMS reviewer will send the memorandum to the Specialist via secured E-mail.

    • The Field Manager will not receive a copy of the memorandum unless it is commendatory in nature. In commendatory situations, the EQMS reviewer will send the memorandum via secured E-mail to the Specialist as well as to the Specialist's Field Manager.


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