- 4.10.5 Required Filing Checks
- 184.108.40.206 Overview
- 220.127.116.11 General Guidelines
- 18.104.22.168.1 Filing Verification
- 22.214.171.124.2 Internal Sources of Information
- 126.96.36.199.3 Assessing Audit Potential: Area of Expertise
- 188.8.131.52.4 Case File Documentation
- 184.108.40.206.5 Closing Prior, Subsequent and Related Return Cases
- 220.127.116.11.6 Returns Not Filed
- 18.104.22.168 Prior and Subsequent Returns
- 22.214.171.124.1 Analysis of Prior and Subsequent Returns
- 126.96.36.199.2 Examination of Prior and Subsequent Returns
- 188.8.131.52 Related and Spin-Off Returns
- 184.108.40.206.1 Analysis of Related and Spin-Off Returns
- 220.127.116.11.2 Examination of Related and Spin-Off Returns
- 18.104.22.168 Employment Tax Returns and Other Withholding Taxes
- 22.214.171.124.1 Analysis of Employment Tax Returns
- 126.96.36.199.2 Examination of Employment Tax Returns
- 188.8.131.52.3 Worker Classification Issues
- 184.108.40.206 Information Returns
- 220.127.116.11.1 Analysis of Information Returns
- 18.104.22.168.2 Information Return Penalties
- 22.214.171.124.3 Backup Withholding
- 126.96.36.199 Information Returns and Forms Involving Foreign Entities
- 188.8.131.52 Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business
- 184.108.40.206 Report of Foreign Bank and Financial Accounts (FBAR)
- 220.127.116.11 Excise Tax Returns
- 18.104.22.168 Pension Plan Returns
- 22.214.171.124 Gift (and Generation-Skipping Transfer) Returns
- 126.96.36.199 Health Coverage Information Returns
- 188.8.131.52 Form 5346, Examination Information Report
- Exhibit 4.10.5-1 Pro Forma Employment Tax Check Sheet
Part 4. Examining Process
Chapter 10. Examination of Returns
Section 5. Required Filing Checks
June 13, 2017
(1) This transmits revised IRM 4.10.5, Examination of Returns, Required Filing Checks.
This section outlines responsibilities for verifying the filing of required returns by the taxpayer and assessing the audit potential of these returns.
(1) Minor editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary.
(2) Significant changes to this IRM are listed below:
IRM 184.108.40.206, Overview: Expanded to incorporate information on the importance of required filing checks.
IRM 220.127.116.11, General Guidelines: Expanded to clarify what can be requested or asked without constituting an examination.
IRM 18.104.22.168.2, Internal Sources of Information: Renamed section, added IRM references and website references for tools available.
IRM 22.214.171.124.4, Case File Documentation: Restructured section and moved information from 126.96.36.199.2 to this section.
IRM 188.8.131.52.5, Closing Prior, Subsequent and Related Return Cases: Updated section for changes made to IRM 8.20.5.
IRM 184.108.40.206.6, Returns Not Filed: Expanded to incorporate information from subsection and restructured section.
IRM 220.127.116.11.1, Analysis of Prior and Subsequent Returns: Moved content and added reminder on potential Section 183 issues.
IRM 18.104.22.168.2, Examination of Prior and Subsequent Returns: Section modified to incorporate content from different sections.
IRM 22.214.171.124.2, Examination of Related and Spin-Off Returns: New section added to introduce filing check requirements of related returns.
IRM 126.96.36.199, Employment Tax Returns and Other Withholding Taxes: Updated section and incorporated information from IRM 188.8.131.52.4.
IRM 184.108.40.206.3, Worker Classification Issues: Updated content including information about ACA.
IRM 220.127.116.11.1, Analysis of Information Returns: Clarified what expenses and what tax periods are required to be checked for compliance with information return filing requirements.
IRM 18.104.22.168.3, Backup Withholding: Added note regarding the assertion of backup withholding and consideration of it as an alternative position to disallowing an expense.
IRM 22.214.171.124, Information Returns and Forms Involving Foreign Entities: Added content to include the form numbers and additional forms.
IRM 126.96.36.199, Forms 8300 Report of Cash Payments over $10,000 Received in a Trade or Business: Moved section from IRM 188.8.131.52 and updated and reorganized section.
IRM 184.108.40.206.1, FinCEN Use in Income Tax Examinations: Moved section from IRM 220.127.116.11.2.
IRM 18.104.22.168.2, Currency Transactions Reports (CTRs): Moved section from IRM 22.214.171.124.1.
IRM 126.96.36.199, Excise Taxes: Updated for ACA information.
IRM 188.8.131.52, Gift (and Generation Skipping Transfer) Returns: New section added to outline the filing requirements for gift tax returns.
IRM 184.108.40.206, Health Coverage Information Returns: New section added to outline the filing requirements for health care coverage.
IRM 220.127.116.11, Form 5346, Examination Information Report: Moved information from IRM 18.104.22.168 and added a new section to outline the requirements for submitting a referral.
Michael W. Damasiewicz
Director, Examination–Field and Campus Policy
Small Business/Self-Employed Division
Required filing checks are necessary to ensure voluntary compliance. Examiners should determine that taxpayers are in compliance with all federal tax and information return filing requirements (IRM 22.214.171.124.2, Policy Statement 4-4), and that all returns reflect the substantially correct tax. Returns include the taxpayer’s returns, all related returns that impact the taxpayer’s returns and any return the taxpayer is responsible for filing or can control. See IRM 126.96.36.199.4.3, Required Filing Checks (Corporations and Other Business Returns), for additional guidance on returns that are considered related to the taxpayer.
In addition to the procedures in this IRM, the following examiners should refer to the listed IRMs:
SB/SE employment tax examiners—IRM 188.8.131.52.4, Procedures for Required Filing Checks and Scope of Employment Tax Examinations, and IRM 184.108.40.206.1, Required Filing Checks For Non-Employment Tax Cases.
SB/SE estate and gift tax examiners—IRM 4.25.5, Technical Guidelines for Estate and Gift Tax Issues, for required filing checks.
SB/SE excise tax examiners—IRM 220.127.116.11.6, Required Filing Checks (RFC).
LB&I examiners—IRM 4.46.3, Planning the Examination. LB&I refers to required filing checks as required compliance checks. IRM Exhibit 4.46.3-5, Compliance Checks Tool, outlines the compliance checks that are required, may be waived and are not required for LB&I examiners.
Completion of required filing checks must be documented. See IRM 18.104.22.168.4, Case File Documentation, for information.
Required filing checks consist of an analysis of return information and, when warranted, expansion of the audit to include additional returns.
The analysis and pickup of prior, subsequent, and related returns, when warranted, is a primary responsibility of examiners in every audit. This analysis is designed to answer two primary questions:
Has the taxpayer under audit filed all required returns?
Do any of the returns controlled by the taxpayer warrant audit?
Proper required filing checks impact compliance by providing coverage greater than the single tax year under audit. By ensuring that the taxpayer under audit has complied with all filing requirements and identifying potential noncompliance on related returns, the required filing checks increase the overall compliance coverage of every examination.
The inspection of a return is not an examination. It is essentially the same as classifying a return for audit potential. No records should be examined as part of this process. The examiner may question the taxpayer concerning items on the return in an attempt to understand how or why they occurred (see Patterson v. C.I.R., T.C. Memo. 1984-58 and Benjamin v. Commissioner, 66 T.C. 084, 1097).
The examiner asks the taxpayer why the gross income decreased in the subsequent year from the year under audit. The taxpayer states that he lost two key clients. There were no other large, unusual or questionable items on the return, and the examiner accepted the taxpayer’s explanation without looking at any records. The examiner’s question does not constitute an examination and the examiner should advise the taxpayer that the audit is not being expanded to the subsequent year.
When inspecting returns or asking questions, examiners should not request records to verify or substantiate items on the return being inspected as this may constitute an examination. There are only limited circumstances when records for prior or subsequent years can be requested without constituting an examination. This would be situations in which the records requested for the prior or subsequent years are relevant to an issue being considered in the audit of the primary year (e.g., carryovers, carrybacks, verification of asset basis acquired in prior year, etc.).
Examiners must verify that all returns within the taxpayer’s sphere of influence are filed. To decrease taxpayer burden, examiners should use internal sources of information (see IRM 22.214.171.124.2, Internal Sources of Information) to complete required filing checks. Returns include, but are not limited to:
Prior and subsequent year returns.
Related income tax returns.
Information returns (e.g., Form 1099, Form 926, Form 1095-B, etc.).
Employment tax returns.
Gift tax returns.
Excise tax returns.
Pension plan returns.
Internal sources can be used to determine the taxpayer’s compliance with filing requirements. Refer to the Internal Sources of Information website article, for additional information. Examples of internal sources of information include:
Compliance Data Environment (CDE). See IRM 4.103.1, CDE Application and Use.
Corporate Files On Line (CFOL). See IRM 126.96.36.199, Account Inquiry Research.
Integrated Data Retrieval System (IDRS). See IRM 2.3.1, Section Titles and Command Codes for IDRS Terminal Responses.
Modernized e-File (MeF). See IRM 188.8.131.52.4.4, TRDBV Research Command Codes.
yK1. See the yK1 Link Analysis Tool website article.
Case Built File (CBF) Information. See IRM 184.108.40.206.3(1)(c), Planning - Return Assignment, (LB&I only).
Some of these sources (e.g., MeF, CDE, etc.) are available through the Employee User Portal (EUP). See IRM 220.127.116.11, Employee User Portal (EUP) System,
for more information.
After analysis of internal sources of information, if additional return information is needed, the return should be requested from either the taxpayer or the Campus for inspection.
UNAX WARNING: Access to and inspection of paper and electronic taxpayer records are only allowed when the information is needed to carry out assigned tax administration duties as set forth in IRC 7213A. Specifically, service employees may access taxpayer information only when there is a "need to know" the information for their tax administration duties. Additionally, employees are not allowed to access taxpayer records when their involvement in a tax matter could cause a possible financial conflict of interest, or when they have a personal relationship or an outside business relationship that could raise questions about their impartiality in handling the tax matter. See Document 10281, Safeguarding Taxpayer Records, for additional guidance.
Examiners are responsible for assessing the audit potential of all returns within their area of expertise. Area of expertise is the area of tax in which examiners have been formally trained. If it is determined that additional returns require audit, examiners are responsible for expanding the audit to include those returns, unless otherwise instructed by management. Discussions with management must be documented. See IRM 18.104.22.168.4, Case File Documentation. Examiners should verify that returns are not currently under examination before opening them as part of their audit.
For returns outside the examiner’s area of expertise, examiners should verify filing and discuss with their manager to determine audit potential. If audit potential exists, examiners should ensure these issues are examined by a specialist or with specialist assistance. Returns may be referred to a specialist using the Specialist Referral System (SRS) or by preparing a manual referral. See IRM 22.214.171.124.5.2.1, Specialist Referral System (SRS) - Online Referrals, and IRM 126.96.36.199.5.2.2, Manual Referrals, for guidance on which process must be used. Additionally, see IRM 188.8.131.52, Form 5346, Examination Information Reports, for guidance regarding use of Form 5346.
Examiners are required to document the facts, procedures, audit techniques used, management involvement, and conclusions reached in the completion of the required filing checks. This documentation must include:
Actions taken to verify that all required returns (e.g., prior and subsequent, related, information, etc.) were filed including the internal sources of information (e.g., IMFOLI/BMFOLI, etc.) reviewed for each return.
Analysis completed (e.g., comparative analysis, related transactions, etc.) to evaluate audit potential of prior, subsequent and related returns.
A narrative reflecting the conclusion reached as to whether or not to expand the examination to the prior, subsequent and related returns.
Examiners’ written narrative must include an explanation if the audit is not expanded when:
Adjustment(s) are proposed in the initial year, or
Large, unusual, or questionable items are identified in the prior, subsequent or related returns (including related transactions).
Documentation of required filing checks is made as follows:
SB/SE field examiners must use the mandatory administrative Lead Sheet 130, Multi-Year and Related Returns. Any supporting workpapers must be indexed to Lead Sheet 130. See IRM 184.108.40.206.1, Administrative Lead Sheets, and IRM 220.127.116.11, Workpapers.
SB/SE employment tax examiners should refer to IRM 18.104.22.168, Workpaper Preparation: General, and IRM 22.214.171.124, Guide for Examiners Using ETLS - Employment Tax Lead Sheets, for documentation requirements and use of Lead Sheet 130, Multi-Year and Related Returns Lead Sheet - Employment Tax.
SB/SE estate and gift tax examiners use the return specific Mandatory Case Examination Lead Sheet to document required filing checks. See Required Filing Checks in IRM 4.25.5, Technical Guidelines for Estate and Gift Tax Issues, for documentation requirements.
SB/SE excise tax examiners should refer to IRM 126.96.36.199.6, Required Filing Checks (RFC), for required check sheets.
LB&I examiners should refer to IRM Exhibit 4.46.3-5, Compliance Checks Tool, and use the Standard Audit Index Numbering (SAIN) 713 mandatory compliance checks workpaper (IRM 4.46.6, Workpapers and Reports Resources). If an examiner waives a specific compliance check, the workpapers should document the reasoning and analysis used to support the conclusion reached.
Examiners must exercise caution when documenting consideration of spin off cases (relatives, employees, employers, subcontractors, return preparers). The examiner should document what IDRS research was completed, but should not include the results of the research of the spin-off case in the taxpayer’s case file since the information about the spin-off case should not be available to the taxpayer.
Examiners would document that an information return was not filed for a subcontractor and that IDRS research was conducted on the subcontractor. To prevent disclosure of the subcontractor’s information, examiners would not document in the taxpayer’s file whether the subcontractor filed or reported the income from the taxpayer. See IRM 188.8.131.52.6, Returns Not Filed.
–Tax years are closed using the original return or an electronic print, such as TXMOD, IMFOL/BMFOL, RTVUE/BRTVU, CDE, TRDBV, TRPRT, or LIN (LB&I Imaging Network–LB&I only). A copy of a return is not required to close a prior, subsequent, or related tax return. If a copy of a return has been secured and examined, it must be properly identified as such and retained in the case file. See IRM 4.4.1, AIMS Procedures and Processing Instructions, and IRM Exhibit 4.4.1-2, Case Assembly, for additional instructions.
Original returns are generally required in certain cases (e.g., fraud, delinquent returns and jeopardy assessments) closed to Appeals. See IRM 184.108.40.206.1.1, Non-Docketed Case Types Requiring an Original Return, for exceptions to requiring original returns.
If examiners find that a return within the taxpayer’s sphere of influence has not been filed, they should solicit the delinquent return, except when fraud or willful failure to file is indicated. Nonfilers must be brought current in their filing requirements following the guidelines in Policy Statement 5-133 Delinquent returns—enforcement of filing requirements. Refer to IRM 220.127.116.11.18, Policy Statement 5-133.
If there is an indication that the failure to file was willful, or if there is any other indication of fraud, the return should not be solicited. Examiners must discuss the indicators of fraud with the group manager. If it is agreed that the case has fraud potential, examiners must contact the Fraud Technical Advisor (FTA) for their geographical area. See IRM 18.104.22.168(2), Investigative Techniques, and IRM 25.1.7, Failure to File.
Examiners should be alert to nonfiled spin-off cases (e.g., relatives, employees, employers, subcontractors, return preparers/representatives, etc.). Examples include:
If the taxpayer is involved in a family business, determine if family members engaged in the operation or ownership of the business have filed returns.
If the taxpayer is involved in a partnership, determine if partnership returns have been filed and if key partners have filed returns. For the purpose of this section, key partners are those partners that can control or influence the operation of the business.
If the taxpayer has employees and/or subcontractors, determine if required information returns have been filed (e.g., Form W-2 or Form 1099) and if not, verify whether the employees and/or subcontractors have filed. See IRM 22.214.171.124, Information Returns, for information on verifying non-employee payments.
If the taxpayer is a corporation, determine if key shareholders have filed returns. For the purpose of this section, key shareholders are those shareholders that can control or influence the operation of the business.
All secured delinquent returns must be reviewed for audit potential. If the return is outside the examiner’s area of expertise, examiners should discuss the return with their manager to determine audit potential. If audit potential exists, examiners should ensure the issues are examined by a specialist, worked with specialist assistance or referred to the appropriate function.
If the taxpayer is uncooperative and does not provide the examiner with the delinquent return(s), examiners must consider substitute for return procedures, with managerial approval. Refer to IRM 126.96.36.199, Related and Spin-Off Returns, for additional information on these returns and to IRM 4.4.9, Delinquent and Substitute for Return Processing, for substitute for return (SFR) and delinquent return procedures. Also see IRM 4.12.1, Nonfiled Returns, for SFR, delinquent return, and refund return procedures.
Managerial approval is required prior to opening an examination on any related or spin-off case. If an examination appears warranted and is not initiated (e.g., taxpayer resides outside of the examiner’s area, return is outside examiner’s area of expertise, etc.), an information report is appropriate. Form 5346 should be prepared, submitted to the group manager for approval, and if approved, forwarded to Planning and Special Programs (PSP). See IRM 188.8.131.52, Form 5346, Examination Information Report, for further guidance.
Examiners must document their actions and conclusions. If the examiner determines that there is no filing requirement, this must be documented in the case file. See IRM 184.108.40.206.4, Case File Documentation.
See IRM 4.12.1, Nonfiled Returns, for additional guidance.
Required filing checks must be completed for:
All subsequent year returns that are filed or due before the audit is closed from the group.
All prior year returns that have open statutes, including those not filed. In addition, if the immediate prior year tax return’s statute is closed, it still needs to be reviewed as part of the comparative analysis for the returns. See IRM 220.127.116.11.3, Required Filing Checks, and IRM 4.10.4, Examination of Income.
When auditing an individual, S Corporation, partnership, trust or estate, if the required filing checks indicate the taxpayer is engaged in an activity with a pattern of losses and potential lack of profit motive, examiners must consider IRC 183, Activities Not Engaged in for Profit. IRC 183 provides the taxpayer with a rebuttable presumption that an activity is a business and not a hobby, if profit results from the activity in three out of five (two out of seven in the case of horse breeding, training or racing) consecutive years. In these circumstances, examiners should expand their review to cover the five or seven year presumptive period. See IRM 18.104.22.168, Activities Not Engaged in For Profit - Hobby Loss (IRC 183). Examiners must document their actions in the case file. See IRM 22.214.171.124.4, Case File Documentation.
The analysis of the prior and subsequent year returns for the taxpayer under examination includes determining:
Whether the taxpayer met all filing requirements. See IRM 126.96.36.199.6, Returns Not Filed, for information on delinquent returns.
Whether the same pattern of noncompliance, identified on the return under audit, is present on the prior and/or subsequent year return(s) (e.g., high entertainment expenses, passive activity losses, or potential IRC 183 issue).
Whether large, unusual, or questionable (LUQ) items such as income, expense, or credit items, have audit potential independent of the return under examination.
Whether or not the audit should be expanded to include additional years or returns.
To confirm filing and evaluate audit potential, examiners must research prior and subsequent years’ tax return information using internal sources. Examiners should review the three year comparative analysis provided by CDE, if available, and use their professional judgement to determine if a more detailed analysis is required. See IRM 188.8.131.52.2, Internal Sources of Information, and the Internal Sources of Information website article. If internal sources of information do not provide enough detail, the examiner should inspect the taxpayer’s retained copies or requisition the original returns.
Examiners must comment on all years open within the normal three year statute of limitations, including prior year returns that are "out of cycle." See IRM 184.108.40.206.2, Examination Cycles, and IRM 220.127.116.11.4, Case File Documentation, for additional information.
If the examination of a prior or subsequent year return(s) is warranted, the return(s) will be audited concurrently with the assigned return. Generally, the 26/27 month examination cycle time guidelines should be followed. See IRM 18.104.22.168.2, Examination Cycles.
Examiners must use IDRS (e.g., command codes TXMOD, AMDISA, etc.) to determine if the return is currently under examination or has been selected for audit. If the research reveals the return is:
Not under examination, AIMS control must be established using Form 5345-D, Examination Request - Examination Returns Control System (ERCS) Users. See IRM 22.214.171.124, Preparation and Use of Form 5345-B or Form 5345-D.
Under examination, examiners must discuss the case with the group manager. If it is determined that the case should be transferred, refer to IRM 4.11.29, Transfer of Returns Open for Examination, and IRM 126.96.36.199, Transfers of Returns Prior to the Initial Appointment.
Examiners must notify the taxpayer orally or in writing of the decision to audit the returns. For written notification, use Letter 5968, Prior or Subsequent Year Pickup. When expanding the examination, examiners determine the scope of the examination (IRM 188.8.131.52.1.2 (4), Determining the Scope of an Examination–Current, Prior and Subsequent Years) and must document their actions and conclusions (IRM 184.108.40.206.4, Case File Documentation).
If indicators of fraud are identified, examiners should follow the procedures in IRM 25.1.2, Recognizing and Developing Fraud.
If an issue concerning a return not yet due to be filed is identified, Form 5346 must be prepared, submitted to the group manager for approval, and if approved, forwarded to PSP. See IRM 220.127.116.11, Form 5346, Examination Information Report, for additional information.
The taxpayer’s 2016 income tax return was audited and the net operating loss was reduced from $300,000 to $240,000. The taxpayer carried back the net operating loss to the prior two years and had an unabsorbed loss available for carry forward totaling $100,000. Since the audit adjustments reduced the net operating loss carry forward from $100,000 to $40,000 and the 2017 income tax return was not yet due to be filed, the examiner must prepare Form 5346 to reflect the changes to the net operating loss carry forward.
During the audit of the primary return, examiners should identify related returns (e.g., corporate, partnership, employment tax, and excise tax returns). Related returns are returns that have a relationship to the return under examination. Returns are considered related if:
Adjustments made to one return require corresponding adjustments to the other return to ensure consistent treatment (refer to IRC 1313(c) and IRC 267), or
Entities over which the taxpayer has control can be manipulated to divert funds or camouflage financial transactions (refer to IRC 267(b)).
During the audit of the primary return, examiners may identity spin-off returns (e.g., relatives, employees, employers, subcontractors, etc.) that warrant further review. These returns do not have a direct relationship to the return under examination. Examples of spin-off returns to consider include:
Family members engaged in the operation or ownership of a family business.
Employees who received benefits that were not included in wages (e.g., bonuses, awards, gifts, travel allowances, etc.).
Employer who treated the taxpayer as a subcontractor rather than an employee.
Subcontractor who did not report income received from the taxpayer.
To identify and analyze related and spin-off returns and obtain information about them, examiners:
Can use internal sources of information to obtain information for known related and spin-off returns that were filed. See IRM 18.104.22.168.2, Internal Sources of Information, and the Internal Sources of Information website article and use command codes RTVUE and BRTVU and the yK1 Link Analysis Tool.
Can use external asset locator/people locator tools to determine related businesses, asset ownership, and real estate. Visit the SPDER ReferenceNet research website to determine the current electronic asset locator/people locator tools available (e.g., Accurint).
Should ask about the taxpayer’s involvement with partnerships, limited liability companies (LLCs), trusts, corporations, and related family transactions.
Must determine whether transactions between related parties are correctly accounted for on all impacted returns. Correct reporting of flow-through items should be observed, whipsaw issues checked, and proper reporting of related transactions verified. For example, alimony versus child support, loans or dividends from a corporation to a shareholder, and character and limitation of K-1 items from flow-through entities (e.g., partnerships, S-Corporation, etc.).
Must evaluate large, unusual, and questionable items, such as income, expense, or credit items, for audit potential, independent of the entity under examination.
Should ask questions to probe for possible participation in domestic and offshore abusive tax schemes and listed transactions. If a listed transaction surfaces during an audit, examiners should contact the Technical Advisor/Issue Specialist. For additional information see IRM 22.214.171.124.3, Coordination of Listed Transactions.
Examiners should discuss the related or spin-off return with the group manager if:
A new or unique abusive promotion or transaction is identified during an audit. An Abusive Transaction Advisor should be included in the discussion. See IRM 126.96.36.199.4, SB/SE Emerging Issues.
Indicators of fraud are identified. See IRM 25.1.2, Recognizing and Developing Fraud, for additional procedures concerning fraud development.
If a related or spin-off return has audit potential, the examination should be expanded to include the return(s) and the related or spin-off taxpayer should be notified of the audit. See IRM 188.8.131.52, Initial Contact: Overview. AIMS control must be established using Form 5345-D, Examination Request - Examination Returns Control System (ERCS) Users. See IRM 184.108.40.206, Preparation and Use of Form 5345-B or Form 5345-D.
If a return has a filing requirement and has not been filed, see IRM 220.127.116.11.6, Returns Not Filed.
If a material issue concerning a return not yet due to be filed is identified, Form 5346 should be prepared, submitted to the group manager for approval, and if approved, forwarded to PSP. See IRM 18.104.22.168, Form 5346, Examination Information Report, for additional information.
Employment tax returns of a business taxpayer will be considered for examination at the same time the income tax return is audited. See IRM 22.214.171.124.2, Policy Statement 4-4.
Employment and other withholding taxes include taxes such as Federal Insurance Contribution Act (FICA), Railroad Retirement Tax Act (RRTA), Federal Withholding Tax, and Federal Unemployment Tax Act (FUTA), as well as back-up withholding (IRM 126.96.36.199, IRC 3406 - Backup Withholding), withholding on gambling winnings (IRM 188.8.131.52, Withholding Tax on Certain Gambling Winnings), and withholding on income paid to foreign persons (IRM 4.10.21, U.S. Withholding Agent Examinations - Form 1042).
Also included is the tax required to be withheld by the buyer or other transferee (withholding agent) when a foreign person disposes of a U.S. real property interest. Refer to IRC 1445.
If a payer willfully fails to collect or pay over withholding taxes, examiners will refer the case to Collection for consideration of the Trust Fund Recovery Penalty, under IRC 6672 against the payer's responsible officer(s). Referral procedures can be found in IRM 184.108.40.206, Trust Fund Recovery Penalty. See also IRM 220.127.116.11, IRC 6672 Failure to Collect and Pay Over Tax or Attempt to Evade or Defeat Tax.
The Withholding Compliance Program ensures that taxpayers who have serious under-withholding problems are brought into compliance with federal income tax withholding requirements. This process is based on W-2's filed and is the responsibility of the Withholding Compliance Unit. See IRM 5.19.11, Liability Collection, Withholding Compliance Program.
Examiners should inspect internal sources of information for each employment tax return filed up to and including the last quarter for which an employment tax return was due. See IRM 18.104.22.168.2, Internal Sources of Information, and use the following command codes:
INOLE—provides filing requirements
BMFOLI—provides history of filing and nonfiling
BMFOLU—provides a summary of W-2s filed
IRPTRI—provides detail of each W-2 or 1099-MISC filed
BMFOLE—shows if the taxpayer has marked any returns as "final"
BRTVU, BMFOLR, BMFOLT, and TXMOD—provide return information for the Form 94X series of returns
Employment tax examinations should be conducted concurrently with the income tax audit. See Exhibit 4.10.5-1, Pro Forma Employment Tax Check Sheet.
An employment tax audit is warranted if:
Available information indicates that the employment tax liabilities have not been correctly reported.
Delinquent returns are secured (IRM 4.23.12, Delinquent Return Procedures, and IRM 4.4.9, Delinquent and Substitute for Return Processing).
The potential additional liability or the resulting improvement in voluntary compliance will justify the expenditure of time required to make necessary verification and adjustment.
IRM 4.23, Employment Tax, provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting and payment of employment taxes. It provides guidance and procedures for employment tax issues and is the primary source of authority for the administration of employment tax audits. See also the Employment Tax Knowledge Network for the Employment Tax Examiner’s Report application and user guide.
If the employment tax audit is outside the examiner's area of expertise, the examiner should refer the case to an Employment Tax Specialist using the Specialist Referral System. See IRM 22.214.171.124.5, Referrals for Specialists. The referral should be made as early as possible in the income tax examination process to reduce taxpayer burden and ensure that the employment tax audit is conducted concurrently with the income tax examination.
If an employment tax audit is not initiated, the examiner should refrain from asking questions regarding the classification of a worker. These questions suggest that the examiner is conducting an audit on worker classification and could establish a safe haven available under section 530. See IRM 126.96.36.199, Section 530 of the Revenue Act of 1978. This does not preclude the examiner from asking general questions regarding deductions for contract labor, including the reason the contractor was engaged and the work performed. However, if general questions lead the examiner to believe a worker has been misclassified, then an employment tax audit should be initiated before asking additional questions.
If an employment tax audit involving worker classification is initiated by the examiner, the first step is to determine if the taxpayer qualifies for section 530 relief (Section 530 does not apply to issues other than worker classification). See IRM 188.8.131.52.1, Section 530 Relief. Pub 1976, Do You Qualify for Relief under Section 530?, must be provided to the taxpayer before initiating any worker classification examination.
If the taxpayer qualifies for relief, the examiner should terminate the employment tax audit with respect to the worker classification issue. However, it is important to remember that even if an employer is entitled to relief under section 530, workers determined to be employees are employees for other purposes of the Code. See IRM 184.108.40.206.3, Effect of Section 530 on Workers.
If the taxpayer does not qualify for relief, the examiner must accurately determine the status of the worker as either an independent contractor or employee. See IRM 220.127.116.11, Independent Contractor or Employee.
In addition to section 530 considerations, there are other very specific procedures to follow in worker classification issues. Examiners should review IRM 4.23, Employment Tax, and Worker Classification Resources on the Employment Tax Knowledge Network to become familiar with these procedures or refer the case to an Employment Tax Specialist as described in IRM 18.104.22.168.2(5), Examination of Employment Tax Returns, if warranted.
Internal Revenue Code sections, IRC 6039 through IRC 6056, and Title 31, United States Code, require that taxpayers report various types of payments to both the Service and the recipients of the payments. These payments include such items as rent, salaries, wages and income paid in the course of a trade or business, and payments such as dividends, interest, and royalties made to another person.
The term "information return" means any statement, return, form or schedule as described in IRC 6724(d)(1). While the most common information return is the Form 1099, other information returns may be required related to education, health insurance, transfers of stock and retirement reporting.
When payers file information returns, these documents become important leads in identifying income for both taxpayers and the IRS. The Information Returns Program (IRP) matches information returns to individual tax returns to determine compliance. Therefore, it is important that taxpayers (payers) timely file these returns. Command code IRPTRR can be used to order a hardcopy payer transcript.
When auditing individual, partnership and some corporation returns, consider them not only as potential payers who may be required to file Forms 1099, but as potential payees for whom another payer may not be in compliance with filing required Forms 1099.
A Payor Master File (PMF) indicator, "1099 Filer," will appear on Form 5546, Examination Return Charge-Out Sheet, if the taxpayer is listed on the PMF. The case file may include a PMF transcript. If neither document is in the case file, examiners should pull PMFOL or IRPTRI to determine if the taxpayer has filed information returns.
Some LB&I examiners may waive this compliance check when it is determined that substantial compliance exists. See IRM Exhibit 4.46.3-5, Compliance Checks Tool.
To ensure the timely and correct filing of information returns, examiners must ascertain that all information returns required to be filed by the taxpayer are filed for all open periods. Generally that includes the prior and all subsequent periods, as well as the period under audit.
At a minimum, examiners must:
Determine the potential filing requirements for information returns. See Pub 1220, Specifications for Electronic Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, for a list of payments requiring the issuance of information returns. Certain line items of the income tax return are often indicative of an information return filing requirement.
Expenses on the income tax return under audit must be reviewed for information return filing requirements and the findings documented even if the expenses are not audited. If the taxpayer complied with the 1099 filing requirements in the year under audit, and review of the prior and subsequent income tax returns does not identify additional expense items requiring issuance of a Form 1099, an in-depth analysis to determine potential filing requirements is not necessary for the prior and subsequent years.
Research filed information returns using command code PMFOL. Sometimes examiners will not be able to tie the amounts on the PMFOL transcript to a line item on the tax return because some payments made to the payees may be under the threshold amounts for reporting, or fragmented between several deductions on the tax return, or amounts may differ due to cash versus accrual, or fiscal year versus calendar year deductions.
Question the taxpayer regarding their internal procedures for information reporting.
Verify all reporting requirements have been met.
Various Forms 1099 may be required to be filed. For each form's filing requirements, refer to the form instructions. Listed below are some Forms 1099 required to be filed by businesses:
Form 1099-A, Acquisition or Abandonment of Secured Property
Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
Form 1099-C, Cancellation of Debt
Form 1099-DIV, Dividends and Distributions
Form 1099-G, Certain Government Payments
Form 1099-INT, Interest Income
Form 1099-K, Payment Card and Third Party Network Transactions
Form 1099-MISC, Miscellaneous Income
Form 1099-Q, Payments from Qualified Education Programs (Under Section 529 and 530)
Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 1099-S, Proceeds from Real Estate Transactions
For incomplete and nonfiled Forms 1099, consider the applicability of backup withholding. Refer to IRM 22.214.171.124.3, Backup Withholding.
Examiners must document their actions and conclusions. See IRM 126.96.36.199.4, Case File Documentation.
IRC 6721, IRC 6722, and IRC 6723, provide civil penalties for persons who fail to:
File correct information returns,
Furnish correct payee statements, or
Comply with other information reporting requirements respectively.
IRC 6724 contains the definitions and provisions for wavier of information return penalties based on reasonable cause.
Examiners are required to consider the penalties during an audit if it is found that the taxpayer failed to file, filed late, or filed incorrectly. The resulting improvement in voluntary compliance (payer or payee) will justify the expenditure of time required to pursue the penalties and/or to secure copies of the incorrect or delinquent information returns.
See IRM 188.8.131.52.6, Examination Delinquent Information Return Procedures, for the procedures to follow when securing information returns and/or the assessment of information return penalties. See Employment Tax Knowledge Network on the employment tax website for the Information Returns Penalty Reporting Writing Program. Information return penalties are not subject to notice of deficiency procedures. All cases are forwarded to Centralized Case Processing at closing for assessment of the penalties.
IRC 3406, generally requires payers to withhold income tax on reportable payments of interest, dividends, and other payments, including payments reported on Form 1099-MISC under the following conditions:
The payee fails to furnish a TIN to the payer in the manner required.
The Secretary notifies the payer that the TIN furnished by the payee is incorrect.
There has been a notified payee under-reporting described in IRC 3406(c).
There has been a payee certification failure described in IRC 3406(d).
Before backup withholding is addressed, the examiner must first determine whether or not a worker is an employee. See IRM 184.108.40.206.3, Worker Classification Issues. If the worker is an employee, backup withholding is not applicable and if asserted, could establish a safe haven.
When a backup withholding issue exists, examiners will discuss the case with the group manager to determine whether a backup withholding or worker classification audit is warranted or if a referral to an employment tax specialist should be considered.
When Form 1099 has not been filed by the taxpayer for a properly classified independent contractor, examiners should consider whether a condition requiring backup withholding exists along with the Form 1099 penalty case.
Additional information and procedures on backup withholding are available in IRM 220.127.116.11, IRC 3406–Backup Withholding. Also see Backup Withholding on the Employment Tax Knowledge Network.
An information return may be required to be filed in certain situations involving foreign entities. Examiners must make a referral on the Specialist Referral System for international assistance when they are assigned a case that involves international information returns. See IRM 18.104.22.168, Assessment Procedures for Penalties Not Subject to Deficiency Procedures.
Some of the situations requiring the filing of an information return or form include:
Situation(s) Files Information Return
A U.S. person who makes certain transfers of tangible or intangible property to a foreign corporation.
Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
A U.S. person who creates a foreign trust, transfers (directly or indirectly) any money or property to a foreign trust, or is treated as the owner of any portion of a foreign trust (under the grantor trust rules).
A U.S. person who receives a distribution, directly or indirectly, from a foreign trust.
The executor of the estate of a U.S. citizen or resident decedent who was treated as the owner of any portion of a foreign trust under the grantor trust rules, or any portion of a foreign trust.
A U.S. person who receives certain large gifts from foreign persons.
Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
A U.S. person who is treated as the owner of any portion of a foreign trust must ensure that the foreign trust files.
Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
A U.S. person who controls or owns at least 10% of the total value or total combined voting power of a foreign corporation.
A U.S. citizen or resident who is an officer or director of a foreign corporation of which a U.S. person owns at least 10% of the total value or total combined voting power.
A U.S. person who owns (directly, indirectly, or constructively under IRC 958) at least 10% of the total combined voting power of a foreign corporation that is a controlled foreign corporation (within the meaning of IRC 957) for an uninterrupted period of 30 days or more and owns that stock on the last day of the foreign corporation’s tax year.
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
A U.S. corporation with at least one direct or indirect 25% foreign shareholder at any time during the tax year and that has a reportable transaction with a foreign or domestic related party.
A foreign corporation engaged in a U.S. trade or business and that has a reportable transaction with a foreign or domestic related party.
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
A U.S. person who is a shareholder in a passive foreign investment company.
Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
A U.S. person who owns a foreign disregarded entity either directly or indirectly (by owning a 10% or greater interest in a controlled foreign partnership or at least 10% of the total value or total combined voting power of a foreign corporation).
Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
A U.S. person who controls or owns a 10% or greater interest in a controlled foreign partnership.
A U.S. person who makes certain transfers of property to a foreign partnership.
A U.S. person who has certain changes in an ownership interest in a foreign partnership.
Form 8865, Return of U.S. Persons With Respect To Certain Foreign Partnerships
A U.S. person that is a specified individual or a specified domestic entity and that has an interest in specified foreign financial assets exceeding the individual’s or entity’s reporting threshold.
Form 8938, Statement of Specified Foreign Financial Assets
See IRM 4.60.6, International Referral Criteria and Procedures, for additional information.
IRC 7701(a)(30) defines a United States person to include a citizen or resident of the United States, a domestic partnership, a domestic corporation, and certain estates and trusts.
IRM 20.1.9, International Penalties, describes the penalties that apply for failure to timely file complete and accurate international information returns. It gives specific information regarding the types of penalties, code specific information, assertion requirements, statutes of limitations, and whether the penalties are subject to deficiency procedures.
Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is part of the required filing checks. If a trade or business engages in transactions over $10,000 and filing violations are found, Form 5346 should be prepared and sent to BSA Examination Case Selection (ECS) for consideration of a Form 8300 compliance audit.
IRC 6050I was enacted to assist the IRS in discovering unreported income from legal and illegal sources by identifying taxpayers with large cash income. This law requires any person engaged in a trade or business, who, in the course of a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions) to file a Form 8300 information return with respect to such transaction(s) at such time.
Additional information can be found in the following IRM sections devoted to Form 8300 and information reports:
IRM 4.26.10, Form 8300 History and Law
IRM 4.26.11, BSA Examiner Responsibilities for Form 8300/6050I Examinations
IRM 4.26.12, Examination Techniques for Form 8300 Industries
Examiners should also consider preparing a Form 5346 for the recipient of large, unusual, or questionable cash transactions identified during an audit of a trade or business. IDRS research should be conducted before preparing Form 5346. See IRM 22.214.171.124, Uncovering a BSA Violation in a Title 26 case, for additional information.
Some LB&I examiners may waive this compliance check when it is determined that substantial compliance exists. See IRM Exhibit 4.46.3-5, Compliance Checks Tool.
Financial Crimes Enforcement Network (FinCEN) information is useful in identifying cash activity that may not be accurately reported on the income tax return. In addition, it may lead examiners to discover sources of unreported income, often derived from criminal activity. See IRM 126.96.36.199.3, Examiner Uses of FinCEN Query, for additional information.
To request information, examiners use Form 10509, FinCEN Query (FCQ) Request, and submit the form to the Exam FinCEN Super Users listed on the website.
Financial institutions, including casinos, must report each receipt, and each withdrawal, exchange of currency or other payment or transfer which involves a transaction in currency of more than $10,000. However, financial institutions do not report this on Form 8300. They are required to file a FinCEN Currency Transaction Report (CTR). These CTRs are required by Title 31, Money and Finance, rather than Title 26, Internal Revenue Code, and are not included in the required filing checks.
Title 31 inquiries should not be made during a Title 26 audit. For example, an examiner conducting an income tax audit of a financial institution should not inquire as to the financial institution’s Title 31 responsibilities.
Examiners should be aware that each United States person who has a financial interest in or signature or other authority over any financial accounts in a foreign country (including bank, securities, or other types of financial accounts) with an aggregate value exceeding $10,000 at any time during the calendar year, must report that relationship each calendar year by filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
FBAR is not a Title 26, Internal Revenue Code, requirement. However, examiners should verify the responses to the questions about foreign financial accounts and foreign trusts that appear on Form 1040, Schedule B, Part III. Examiners must use FinCEN to verify the filing of an FBAR. If a required FBAR has not been filed, examiners must obtain a "related statute memorandum" before an FBAR case can be started or before the taxpayer can be asked about FBAR filings.
If an FBAR audit is warranted, examiners should consult IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR), and IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures, for guidance. Examiners may request assistance from an FBAR Coordinator. See the FBAR website and Report of Foreign Bank and Financial Accounts (FBAR) on the LB&I website.
Examiners should verify that required excise tax returns have been filed. If audit potential is noted, a referral to an excise tax specialist should be considered using the Specialist Referral System.
Excise taxes are taxes imposed on the sale or use of various items (IRC 4041 through IRC 5881). Excise taxes administered by the IRS include fuel taxes, environmental taxes, communication taxes, air transportation taxes, manufacturer taxes, retail sales taxes, ship passenger taxes, foreign insurance taxes, and taxes on obligations not in registered form, as well as various taxes created by the Affordable Care Act (e.g., tax on amounts paid for indoor tanning services). Some of these taxes are dedicated to trust funds that pay for related capital improvements such as highways and airports. Excise taxes are imposed independently of income taxes except for purposes of calculating certain income tax credits.
It is important to consider the applicable excise tax requirements for different market segments. Pub 510, Excise Taxes, provides useful information on excise taxes.
Excise taxes are reported on the forms listed below:
Form 11-C, Occupational Tax and Registration Return for Wagering
Form 720, Quarterly Federal Excise Tax Return
Form 720X, Amended Quarterly Federal Excise Tax Returns
Form 730, Monthly Tax Return for Wagers
Form 2290, Heavy Highway Vehicle Use Tax Return
Form 6197, Gas Guzzler Tax
Form 6627, Environmental Taxes
Form 8849, Claim for Refund of Excise Taxes
Form 8876, Excise Tax on Structured Settlement Factoring Transactions
For detailed information on Form 720, see IRM 188.8.131.52, Excise Taxes Reported on Form 720. For an overview of excise taxes reported on Form 2290, Form 11-C, and Form 730, see IRM 184.108.40.206, Excise Taxes Reported on Form 2290, Form 11-C, and Form 730.
Certain excise tax-related credits may be filed on the entity's income tax return. These tax credits are filed on Form 4136, Credit for Federal Tax Paid on Fuel, Form 8864, Biodiesel and Renewable Diesel Fuels Credit, or Form 6478, Biofuel Producer Credit, as attachments to the income tax return. Contact an excise tax specialist for assistance with working questionable credits filed on these forms.
Examiners should be aware that entities involved in certain excise tax activities are required to be registered with the IRS. Registration of such entities is administered by the Excise Tax program. See IRM 4.24.2, Form 637, Excise Tax Registrations.
Some LB&I examiners may waive this compliance check when it is determined that substantial compliance exists. See IRM Exhibit 4.46.3-5, Compliance Checks Tool.
Employers who provide a pension plan for their employees are required to file an appropriate information return, Form 5500, Annual Return/Report of Employee Benefit Plan. Examiners should verify that Forms 5500 were filed by reviewing command code EMFOL and determine whether a referral of the plan to Employee Plans in the Tax Exempt and Government Entities (TE/GE) function is required.
Form 4632-A, Employee Plans Referral Checksheet, should be used when reviewing the pension plan 5500 series returns. Instructions are found on the back of the form. Contact TE/GE for assistance, as needed. Examiners should not attempt to ascertain the correctness of the information reported on Form 5500. Examiners must complete Form 4632-A for all plans. Any plan which meets the requirements on Form 4632-A is a mandatory referral.
Form 4632, Employee Plans Referral, is used to make a referral to TE/GE Employee Plans Classification Unit. A copy of the latest IRS determination letter should accompany the referral.
A gift is a direct or indirect transfer of property (real, personal, tangible or intangible) for less than full and adequate consideration. Generally, a transferor (donor) of a gift is responsible for reporting the gift by filing a Form 709, United States Gift (and Generation–Skipping Transfer) Tax Return, if the transferor gave gifts to someone (other than a spouse or charity) in excess of the annual exclusion. Certain future interests gifts are not subject to the annual exclusion and the transferor must file Form 709 even if the gift was under the annual exclusion. See the Instructions for Form 709 and IRM 220.127.116.11.7, Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for additional definitions and guidance regarding filing requirements and exceptions. When examiners encounter potential gift tax issues during an audit, an Estate and Gift Tax consultation should be considered. To determine whether a referral is warranted, the examiner should contact the Estate and Gift Workload Selection and Delivery Referral Coordinator by phone or email. If after the consultation, it is determined that the transfer likely resulted in a gift, the examiner should make a referral through the Specialist Referral System. See IRM 18.104.22.168, Revenue Agent Referrals to Estate and Gift Tax.
Examiners must verify that required health coverage information returns (Form 1094-B, Transmittal of Health Coverage Information Returns; Form 1095-B, Health Coverage; Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns; and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage) are filed. Use command code IRPOL to determine whether information returns were filed. See IRM 2.3.86, Command Code IRPOL, for additional information regarding what is available on IRPOL for health coverage information returns.
Every person that provides minimum essential coverage to an individual during a calendar year must file an information return reporting the coverage. Filers will use Form 1094-B (transmittal) to submit Forms 1095-B (returns). Form 1095-B is used to report certain information to the IRS and to covered individuals about the coverage they have been provided. Generally, this will identify all family members who were covered by minimum essential coverage and therefore aren't liable for the individual shared responsibility payment (SRP). Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, individual market plans, and other coverage the Department of Health and Human Services designates as minimum essential coverage. Refer to the Affordable Care Act (ACA) website for additional information about reporting minimum essential coverage. Filers will use either Form 1095-B or Form 1095-C as detailed below.
Employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year use Form 1094-C and Forms 1095-C to report information about offers (or non-offers) of health coverage and enrollment in health coverage for their full-time employees. Form 1094-C must be used to report to the IRS summary information for each applicable large employer (ALE) Member and to transmit Forms 1095-C to the IRS and to the employee. Form 1094-C and Form 1095-C are used in determining whether an ALE Member owes a employer shared responsibility payment (ESRP). Form 1095-C is also used in determining the eligibility of employees for the premium tax credit. Refer to the ACA website for additional information about an ALE.
The following table provides examples of what forms are required to be filed.
If Then Additional information The employer is not an ALE but self-insures employees The employer provides Form 1095-B to the employees. None The employer is not an ALE and offers coverage through an insurance company The employer has no filing requirement. The insurance company provides Form 1095-B to the employees. The employer is not an ALE and does not provide coverage The employer has no filing requirement. If individuals have other minimum essential coverage, the coverage provider generally provides Form 1095-B to the individuals. If individuals have coverage through the Marketplace, the Marketplace provides the Form 1095-A, Health Insurance Marketplace Statement. The employer is an ALE and self-insures The employer provides Form 1095-C to its full-time employees. The employer must use Form 1095-C to report coverage for non-full-time employees and must use Form 1095-B for non-employees if Form 1095-C is not used. Employee coverage information is shown in Part III of the Form 1095-C. The employer is an ALE and offers coverage through an insurance company The employer provides the Form 1095-C to its full-time employees. The insurance company provides the Form 1095-B to the employees.
Every taxpayer that provides minimum essential coverage to an individual during a calendar year must file and furnish an information return reporting the coverage. Refer to the Affordable Care Act (ACA) website for additional information about reporting minimum essential coverage. Filers will use either Form 1095-B or Form 1095-C as detailed below.
Examiners should secure any nonfiled health coverage information returns. Information return penalties under IRC 6721 and IRC 6722 should be considered and applied if appropriate. Refer to IRM 22.214.171.124.6, Examination Delinquent Information Return Procedures, for procedures to follow when securing information returns and the assessment of information return penalties. The failure to file penalty applies to Form 1094-C, Form 1095-B, and Form 1095-C. The failure to furnish penalty applies to Form 1095-B and Form 1095-C. See IRM 126.96.36.199.2, Forms.
If the taxpayer is required to file and does not provide the delinquent information returns, the examiner must complete the following actions:
If the employer is not an ALE and provides self-insured coverage, examiners will need to determine the number of employees who were covered. The penalty is assessed for failure to file and furnish Form 1095-B for each of these employees.
If the employer is an ALE, examiners should prepare Form 5346, submit it to the group manager for approval. If approved, forward the referral to *SBSE ET WSD Referrals (Employment Tax Workload Selection and Delivery) for consideration of the information return penalties and ESRP. Use MFT 43 on the Form 5346.
Form 5346 is used when an examiner does not expand the audit to related years or related entities, including spin-offs, and there is information of sufficient compliance value to warrant enforcement action. If there are less than 180 days remaining on the normal statute, there must be a firm and clearly defined issue involving substantial additional tax before a Form 5346 is prepared and approved. Form 5346 should be prepared when:
The return in question is not yet due to be filed.
The return in question was (or will be) filed in another area.
Instructions for preparing Form 5346 are included on the reverse side of the form. Examiners should include sufficient information to allow evaluation of the audit potential. If necessary, documentation may be attached to the form.
After preparing the Form 5346, examiners must submit the form to the group manager for approval and if approved, it will be forwarded to the PSP Territory Manager in the applicable Area Office. Examiners must exercise caution when documenting any actions taken on related or spin-off cases in the taxpayer’s file.
Form 5346 is not used when the information discovered is not related to an ongoing audit (e.g., newspaper articles, informant, etc.). In these situations, examiners must complete Form 3949-A, Information Referral, and submit it to the address listed on the form. If Form 3949-A is prepared due to contact with the informant and the informant intends to claim a reward, the informant should be advised to file Form 211, Application for Award for Original Information. See IRM 188.8.131.52, Request for Reward for Information Provided.
References for Examination Information Reports:
IRM 184.108.40.206.5, Information Reports/Referrals–Other Types
IRM 220.127.116.11.4, Form 5346, Examination Information Report
LB&I Examination Information Referral Program Homepage (LB&I only)
Answer YES or NO to each question.
|No.||YES or NO||Question|
|1.||_____||Are employment tax returns (Forms 940, 941, 943, 944, 945, and/or 945) filed?|
|2.||_____||Have employment tax returns been reconciled to deductions per the tax return where applicable?|
|3.||_____||Are W–2s and 1099s issued where applicable?|
|4.||_____||Are 1120-S corporate officers paid wages?|
|5.||_____||Are deductions taken for payments to "Outside |
Labor," "Commissions," "Consultants." "Sub-Contractors" or "Casual Labor?"
|6.||_____||Are bonuses, prizes, or awards given?|
|7.||_____||Are fringe benefits given to employees?|
|8.||_____||Are employees provided with company vehicles |
and/or monthly allowances with no requirement to
submit a travel voucher?
|9.||_____||Are recurring payments made to individuals not |
|10.||_____||Are any individuals rendering personal services |
|11.||_____||Were any audits conducted by the State Workforce Agencies?|
|12.||_____||Are non-cash payments made? (e.g., an apartment |
manager living in an apartment, in exchange for
|13.||_____||Are corporate officers performing services for |
more than one corporation?
|15.||_____||Are there employee reimburse/accountable plan issues?|
If any of the questions from 1–3 are answered "NO" , or
If any of the questions from 4–13 are answered "YES" ,
Then an employment tax issue may be present and the examiner should gather additional information to determine if an audit is warranted.