- 4.23.3 Classification, Selection and General Procedures for Employment Tax Cases
- 184.108.40.206 Overview
- 220.127.116.11 Identifying SB/SE Employment Tax Examinations
- 18.104.22.168 Planning and Selection Criteria for SB/SE
- 22.214.171.124.1 Combined Annual Wage Report (CAWR)
- 126.96.36.199.2 CP2100 Backup Withholding (BWH) Notice Report
- 188.8.131.52.3 SS-8 Worker Classification Follow-up
- 184.108.40.206.4 Classification Settlement Program (CSP) and Voluntary Classification Settlement Program (VCSP) Follow-up
- 220.127.116.11.5 Compliance Initiative Projects (CIP)
- 18.104.22.168.6 Employment Tax Leads
- 22.214.171.124.7 Financial Crimes Enforcement Network Query (FCQ) System, Currency Transaction Reports (CTRs), and Suspicious Activity Reports (SARs)
- 126.96.36.199.8 Unreported Tip Income
- 188.8.131.52 Planning and Selection Criteria for Large Cases Referrals
- 184.108.40.206 Compliance Checks
- 220.127.116.11.1 Guidelines for Compliance Checks
- 18.104.22.168 Employment Tax Examination Procedures
- 22.214.171.124.1 Required Filing Checks For Non-Employment Tax Cases
- 126.96.36.199.2 Referrals to Employee Plans and Exempt Organizations
- 188.8.131.52.3 Examination Request Master File, Form 5345-D
- 184.108.40.206.4 Procedures for Required Filing Checks and Scope of Employment Tax Examinations
- 220.127.116.11.4.1 Required Filing Checks
- 18.104.22.168.4.2 Scope of an Employment Tax Examination
- 22.214.171.124.4.3 Controlling Employment Tax Returns
- 126.96.36.199.5 Scheduling the Appointment
- 188.8.131.52.6 Contact With Taxpayers
- 184.108.40.206.7 Taxpayer Rights
- 220.127.116.11.8 Third Party Authorization/Power of Attorney
- 18.104.22.168.8.1 Bypassing a Taxpayers Representative
- 22.214.171.124.9 Trustee in Bankruptcy Acting as Employer
- 126.96.36.199.10 Examination Control Updates
- 188.8.131.52.11 Request For Terminal Action, Form 4844
- 184.108.40.206.12 Time Reporting
- Exhibit 4.23.3-1 Guidelines for Evaluation of Referrals
- Exhibit 4.23.3-2 Employee Plans (EP) Referral Checksheet
Part 4. Examining Process
Chapter 23. Employment Tax
Section 3. Classification, Selection and General Procedures for Employment Tax Cases
August 25, 2016
Note:This IRM no longer contains Official Use Only (OUO) information.
(1) This transmits revised IRM 4.23.3, Employment Tax, Classification, Selection, and General Procedures for Employment Tax Cases.
(1) Editorial and technical changes have been made throughout this section.
(2) Section title name change to Employment Tax, Classification, Selection, and General Procedures for Employment Tax Cases to more accurately describe the contents.
(3) IRM 220.127.116.11. Enhanced the description of role of Employment Workload Selection and Delivery (WSD) and employment tax referrals.
(4) IRM 18.104.22.168(8). Clarified that if indications of fraud are developed, the case should be discussed with the group manager and Fraud Technical Advisor to determine if a fraud referral back to Criminal Investigation is warranted.
(5) IRM 22.214.171.124(2). Added command codes BMFOLE and TRDBV.
(6) IRM 126.96.36.199.2(1). Added explanation of “B” Notice and split paragraph (1) into two.
(7) IRM 188.8.131.52.3. Deleted subsection, Employer Tax Employee Project (ETEP) as inappropriate for inclusion in this IRM.
(8) IRM 184.108.40.206.3. Formerly IRM 220.127.116.11.4.
(9) IRM 18.104.22.168.4. Formerly IRM 22.214.171.124.5. Title change, Classification Settlement Program (CSP) and Voluntary Classification Settlement Program (VCSP) Follow-up, to reflect monitoring programs in effect.
(10) IRM 126.96.36.199.5. Formerly IRM 188.8.131.52.6.
(11) IRM 184.108.40.206.6. Formerly IRM 220.127.116.11.7. Added information on the Employee User Portal (EUP), a system that provides a scanned copy of a filed return.
(12) IRM 18.104.22.168.7. Formerly IRM 22.214.171.124.8. Title change, Financial Crimes Enforcement Network Query (FCQ) System, Currency Transaction Reports (CTRs), and Suspicious Activity Reports (SARs).
(13) IRM 126.96.36.199.8. Formerly IRM 188.8.131.52.9.
(14) IRM 184.108.40.206. Title change to Planning and Selection Criteria for Large Cases Referrals. Additional information provided on the pre-examination analysis phase.
(15) IRM 220.127.116.11. Deleted Compliance Assurance Process (CAP), as the CAP Memorandum of Understanding revised in December of 2014 states that "Non-income tax returns, such as Form 940, Form 941... are not included in the CAP and may be the subject of traditional post-filing examinations."
(16) IRM 18.104.22.168. Formerly IRM 22.214.171.124.
(17) IRM 126.96.36.199.1. Formerly IRM 188.8.131.52.1. Removed instructions that examiners can initiate compliance checks by telephone. Added Note on compliance checks.
(18) IRM 184.108.40.206. Formerly IRM 220.127.116.11.
(19) IRM 18.104.22.168.1. Formerly IRM 22.214.171.124.1.
(20) IRM 126.96.36.199.2. Formerly IRM 188.8.131.52.2. Title change, Referrals to Employee Plans and Exempt Organizations. Change in address for EP referrals. Added (3) and (4) for referrals to Exempt Organizations.
(21) IRM 184.108.40.206.3. Formerly IRM 220.127.116.11.3.
(22) IRM 18.104.22.168.4. Formerly IRM 22.214.171.124.4. Deleted, Scope of Employment Tax Examinations. New subsection, Procedures for Required Filing Checks and Scope of Employment Tax Examinations. Information from the former subsection is combined with Interim Guidance Memorandum SBSE 04-0915-058 for the three new subsections.
(23) IRM 126.96.36.199.4.1. New subsection, Required Filing Checks.
(24) IRM 188.8.131.52.4.2. New subsection, Scope of an Employment Tax Examination.
(25) IRM 184.108.40.206.4.3. New subsection, Controlling Employment Tax Returns.
(26) IRM 220.127.116.11.5. Formerly IRM 18.104.22.168.5.
Added instructions on allowing 14 days to lapse after mailing initial contact letter
Added instructions for checking for a valid power of attorney
Removed instructions for telephone initial contact
Added Letter 3253 for use in confirming appointments
Added requirement to provide taxpayers with Publication 5146
(27) IRM 22.214.171.124.6. Formerly IRM 126.96.36.199.6. Title changed to Contact With Taxpayers, as this section is revised to reflect general information for taxpayer contacts. Added informational link to IRM 188.8.131.52.9, Providing Taxpayers with Employee Contact Information.
(28) IRM 184.108.40.206.6(4). New paragraph citing requirement to provide taxpayers with Publication 5146.
(29) IRM 220.127.116.11.7. Formerly IRM 18.104.22.168. Added information on Notice 89-51 for taxpayer recordings.
(30) IRM 22.214.171.124.7(1)(a)3. Corrected description of court remedies available.
(31) IRM 126.96.36.199.8. Formerly IRM 188.8.131.52.8. (2) deleted, and IRM cites provided for instructions on filling out Form 2848 and Form 8821.
(32) .IRM 184.108.40.206.8.1. Formerly IRM 220.127.116.11.8.1.
(33) IRM 18.104.22.168.9. Formerly IRM 22.214.171.124.9.
(34) IRM 126.96.36.199.10. Formerly IRM 188.8.131.52.10.
(35) IRM 184.108.40.206.11. Formerly IRM 220.127.116.11.11.
(36) IRM 18.104.22.168.12. Formerly IRM 22.214.171.124.12.
(37) Exhibit 4.23.3-1. Deleted "mis-classified" and changed to "employment tax issues."
Acting Director, Examination - Specialty Policy
Small Business/ Self-Employed Division
This section provides the guidelines for the classification, selection, and general procedures for employment tax returns for examination.
Employment tax returns generally do not contain information that would provide a basis for classifying returns for examination potential. Selection of returns is based on known or probable areas of non-compliance. Therefore, alternative classification techniques and criteria are used to identify those issues or returns that have the greatest potential.
The Employment Tax Examination Program is a lead-driven program. Examinations can originate from a variety of sources, some of which are listed in this section.
SB/SE Employment Workload Selection and Delivery (WSD) has primary responsibility for workload identification. However, field examiners must be continuously aware of new developments, rulings, and decisions affecting industries within their jurisdictions. Field Examination is encouraged to forward suggestions for Preparer Projects, Compliance Initiative Projects (CIPs) and partnering opportunities to Employment WSD.
There are various sources that assist in detecting taxpayers who are not complying with the employment tax laws. These sources include:
Internal Revenue Service employees who are in constant contact with taxpayers and are aware of possible non-compliance. Employment tax managers and examiners may receive referrals from Collection, Taxpayer Assistance Centers, Criminal Investigation, Examination, Automated Collection System (ACS) call sites, and Campus. Leads received from these sources must be forwarded to Employment WSD for evaluation and selection for audit, if warranted.
Specialist Referral System (SRS) referrals submitted to the Employment Tax Program for immediate assistance by an Employment Tax Specialist will be evaluated and assigned by the group manager. These are not forwarded to Employment WSD unless the case cannot be worked immediately or the referral is not made on a case currently open for an income tax examination.
Other federal and state government agencies (Social Security Administration, Department of Labor, State Departments of Unemployment, etc.)
Market segment studies, and
Strong emphasis is placed on the required filing-check program. During an examination of an income tax, excise tax, or exempt organization return, the examiner will follow the established procedures to determine if the taxpayer is in compliance with employment tax filing requirements and will decide if an examination of employment tax returns is warranted. If an employment tax examination is warranted, it should be conducted concurrently, if possible. If not possible, an employment tax referral should be made.
Related return information must be considered when determining examination potential for employment tax returns. This includes a review of the related income tax returns and, in the case of large corporations or publicly traded companies, a review of financial statements. Information may also be gained from news articles, company publications, and internet searches, such as Securities and Exchange Commission (SEC) filings and company web-sites.
All income tax cases selected for examination under the LB&I program should include consideration of employment tax potential. For a listing of mandatory referrals in the Specialist Referral System, see: https://organization.dstest.irsnet.gov/sites/itad/SRSHELP/SRSMandatoryReferralSpecifications/SitePages/Home.aspx. Where employment tax issues or returns warrant an examination, an employment tax specialist will prepare the employment tax portion of the examination plan.
The request for a specialist is made using the SRS at: https://srs.web.irs.gov/. SRS can be used by any employee, regardless of operating division. In addition to requesting referrals, SRS may be used to submit informal questions or to request a consultation with an employment tax specialist to discuss employment tax potential in the case.
The assistance of an employment tax specialist may be sought regardless of whether the team audit concept is employed in the particular case.
The Employment Tax Program may receive referrals from Criminal Investigation (CI). These lead cases should be worked with continual awareness of fraud potential. If indications of fraud are developed during the examination, the case should be discussed with the group manager and Fraud Technical Advisor (FTA) to determine if a fraud referral to CI is warranted.
In SB/SE, classification and selection of employment tax returns for examination is the responsibility of Employment WSD, specifically, Specialty Employment Tax Campus Classification supplemented by detailees from Field Examination.
Classification conducts the initial review of leads to determine employment tax audit potential. Generally, leads have been identified as part of a project, identified workstream, or referral. In most situations, the case file is pre-built with IDRS research, a classification sheet, and any other appropriate data. Generally, the minimum IDRS checks include:
Additional research specific to an individual project may be needed, including additional IDRS codes, information from Accurint, Financial Crimes Enforcement Network (FinCEN), etc.
All employment tax projects and workstreams are designed to identify cases with high potential for audit. Identification is generally achieved by sorting and filtering data The classifiers’ primary function is to use their expertise to conduct the initial manual review of selected files and eliminate cases for reasons as explained below:
Out of business: Review BMFOLI. If returns have recently posted or deposits recently made, this may indicate an ongoing business. The classifier may also check Internet resources such as Google for a company website or sites such as Yellowpages.com for current phone listings. If Internet research indicates the taxpayer is still in business, a print of the website information should be included in the file. If the taxpayer appears to be out of business, the case should be rejected.
CID activity: A "Z" freeze on the account indicates CID involvement in the case and it should be rejected.
Bankruptcy: A "V" freeze on the account indicates the taxpayer is in bankruptcy and the case should be rejected.
Examination: An "L" freeze on the account indicates there may be an open audit. The classifier should check the status of the examination by securing a current AMDISA. If there is an income tax audit with status code "06" or "08" , the case can be selected. If the income tax audit is in status "10" through "18" , the case should be non-selected. If the case is open for an employment tax examination (status "10" through "18" ), the information used for classification should be forwarded to the examiner working the case to incorporate into the employment tax examination. For classification purposes, the lead will be "non-selected" .
Collection: If the case is generated from a project designed to identify non-filers (e.g., Combined Annual Wage Reporting (CAWR)), and the case is currently assigned to a Collection employee, the case should not be selected. If the case is in the queue but not assigned to a particular person, it may be selected.
Classifiers review every lead for audit potential. Those selected will be controlled on the Examination Return Control System (ERCS) in status "08" and will differentiate between cases selected for field examination vs. office examination based on Examination Group Code (EGC) assignment (i.e., EGC 1XXX for Field, EGC 2XXX for Office). Issues identified during classification will be noted in the case file along with instructions to the Campus for establishing controls. Those selected for office examination will be assigned to Tax Compliance Officer (TCO) groups. These cases generally identify limited issues and are conducive to remote audit procedures rather than face-to-face examinations.
The following subsections include examples of the types of work classified and selected by the Employment WSD Unit. The list is not all-inclusive.
The purpose of the IRS Combined Annual Wage Report (CAWR) program is to ensure that employers paid and reported the proper amount of taxes, withholding, and advanced earned income credit. This is done by comparing five fields:
Social Security Wages,
Social Security Tips,
Medicare Wages and Tips,
Federal Income Tax Withheld, and
Advanced Earned Income Credit,
Form W-2, Wage and Tax Statement,
Form W-2c, Corrected Wage and Tax Statement,
Form W-3, Transmittal of Wage and Tax Statements,
Form W-3c, Transmittal of Corrected Wage and Tax Statements,
together with withholding amounts reported on:
Form 1099-MISC, Miscellaneous Income,
Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and
Form W-2G, Certain Gambling Winnings,
to the amounts reported on the Forms 94X:
Form 941, Employer’s QUARTERLY Federal Tax Return,
Form 943, Employer's Annual Tax Return for Agricultural Employees,
Form 944, Employer's ANNUAL Federal Tax Return,
Form 945, Annual Return of Withheld Federal Income Tax, and
Schedule H (Form 1040), Household Employment Taxes.
Employers filing Forms W–2 but no Form 941 may be non-filers. Employers consistently out of balance between Form W–2 and Form 941, coupled with other indicators, may indicate increased audit potential.
See IRM 4.19.4, Liability Determination - CAWR Reconciliation Balancing, for additional information on CAWR notices.
The Backup Withholding (BWH) program provides notices to payers who file information returns with incorrect Taxpayer Identification Numbers (TINs). The Computer Paragraph (CP) 2100 Notice (CP2100) advises payers that backup withholding could become necessary if a payee fails to certify their TIN. The CP2100 instructs the payer to provide a "B" Notice to each payee whose Name/TIN combination and account number are identified as incorrect by the IRS. The "B" Notice informs the payee that the Name/TIN combination furnished to the payer does not match IRS or SSA records and describes the steps the payee must take to avoid backup withholding.
The CP2100 Notice also lists accounts with missing TINs on which the payer was required to backup withhold under IRC 3406(a)(1)(A). Payers with missing or obviously incorrect TIN accounts should not wait to receive a CP2100 to begin backup withholding. The BWH program includes a number of different information returns, including but not limited to:
Form 1099-INT, Interest Income,
Form 1099-MISC, Miscellaneous Income,
Form 1099-K, Payment Card and Third Party Network Transactions.
Payers with payees receiving Form 1099-MISC with missing or obviously incorrect TINs have the highest audit potential; backup withholding on qualifying amounts should have been withheld at the time of payment.
See IRM 5.19.3, Backup Withholding Program, IRM 126.96.36.199.1, Overview of Backup Withholding Notices, and IRM 188.8.131.52.6.3.3, Special Notice Review Procedures for Notice 972CG, for additional information on CP2100 notices.
Firms and workers file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to request a determination of the status of a worker under the common law rules for purposes of federal employment taxes and income tax withholding.
Referrals meeting established criteria are made by the SS-8 Unit to Employment WSD for potential classification and selection for an employment tax examination.
The Classification Settlement Program (CSP) allows businesses and tax examiners to resolve worker classification cases without involving an appeal, thereby reducing taxpayer burden. The procedures ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied. Under the CSP, examiners are able to offer businesses under examination a worker classification settlement using a standard closing agreement.
Monitoring and follow-up activities are centralized in the ET-WSD for agreements secured in SB/SE and Appeals; TE/GE will monitor its own agreements. Since CSP closing agreements include a provision that the taxpayer complies prospectively, research using Corporate Files On-Line (CFOL) command codes will ensure that taxpayers are in compliance with their agreement. See IRM 184.108.40.206, Monitoring CSP Agreements.
Taxpayers not in compliance with CSP closing agreements have a high worker classification audit potential. See IRM 4.23.6, Employment Tax - Classification Settlement Program (CSP), for additional information.
Under a Voluntary Classification Settlement Program (VCSP) closing agreement, businesses not under examination can apply for a worker classification settlement using a standard closing agreement. Monitoring and follow-up activities for SB/SE and LB&I will be centralized in the Employment WSD; TE/GE will monitor its own agreements. Because the VCSP closing agreement includes a provision that requires the taxpayer to comply prospectively, research using CFOL command codes will ensure that taxpayers are in compliance with the VCSP closing agreements.
Some lead-driven initiatives require an approved Compliance Initiative Project (CIP). CIPs involve groups of taxpayers characterized by unique employment tax compliance issues. All employment tax specialists are encouraged to identify areas where CIP procedures can assist in identifying employment tax non-compliance. Any suggestions should be discussed with the manager before contacting Employment Tax Policy to discuss the issue and determine if development of a CIP is appropriate
The criteria mentioned in IRM 220.127.116.11.8, Compliance Initiative Projects (CIP), must be used to determine when CIP procedures apply for Employment Tax projects.
CIP procedures are not required in the case of "routine business operations" , as defined in IRM 18.104.22.168, Activities Not Subject to CIP Procedures.
Employment Tax Examination group managers receive all Specialist Referral System (SRS) referrals for their areas of coverage. Group managers will ensure that the referrals are given appropriate consideration, consistent with available staffing and resources. Compliance efforts and follow-up actions will also be determined in accordance with resource availability. If the receiving group manager cannot work the case due to resource issues, consideration must be given to transferring the case to a different employment tax group to work. Tax non-compliance levels and geographic area should be considered when determining if a transfer is warranted.
The Employment WSD will establish a consistent process for evaluating all other leads for examination potential and priority. To ensure consistency in lead evaluation, available internal information will be considered. Several CFOL command codes should be utilized to determine lead potential and priority. These include the following:
AMDIS: Lists current examination status. If an examination is in process in another group, forward the information to the group controlling the examination.
BRTVU/RTVUE: Provides transcribed views of original Business Master File (BMF) and Individual Master File (IMF) tax returns and schedules. These can frequently be used in place of an original return. However, original returns may be requested for inspection, when needed. The Employee User Portal (EUP) will also be reviewed for any e-filed returns. This system provides a scanned copy of the filed return that can be inspected for potential employment tax issues.
PMFOL: Provides summary of Forms 1099/1096 data.
BMFOL/IMFOL: Provides online research of nationwide entity and tax data information. When used with Definer Code "Z" , it shows prior audit history information. When used with Definer Code "U" , consolidated annual Forms 941 and W-2 information is displayed. When used with Definer Code "I" , it shows a complete filing history, freeze codes, and any outstanding liabilities owed by the taxpayer.
In determining the priority of a lead, the following factors should be considered, including, but not limited to:
CFOL information described above,
Activity code of the entity,
Number of employees on payroll,
Potential number of reclassified employees,
Taxpayer’s current compliance level,
Materiality of potential adjustments, and
Complexity of the issues.
If a lead will not be assigned for examination because of its low priority or other business reasons, it will be closed (rejected).
Exhibit 4.23.3-1, Guidelines for Evaluation of Referrals, contains further guidance that can be used when evaluating referrals received through the SRS system.
This guidance is specific to SB/SE Employment Tax employees authorized to access the FinCEN Query (FCQ) System. All FCQ users have access to at least ten years of historical financial transaction data as well as recently filed data captured in the FinCEN System of Record. The FCQ System does not block the user from accessing Suspicious Activity Reports (SARS).
Authorized employees include selected Employment Tax specialists, policy analysts, managers, and classifiers.
After submitting a request for FinCEN Query access through the OL5081 application at https://ol5081.enterprise.irs.gov/OL5081/olne_home_page_display.show_page, users must complete two Enterprise Learning Management System (ELMS) briefings and systems training:
Safeguarding Online Access and Using Suspicious Activity Report (SAR) Info Briefing (Briefing 41166)
Safeguarding, Requesting, and Using Suspicious Activity Report (SAR) Security Briefing (Briefing 36247)
The SAR information must be treated with the same security as information received from a confidential informant, and is subject to restrictions of both Title 31 and Title 26.
The rules governing access to and disclosure of returns and return information under the IRC (Title 26) are different from the rules governing access and disclosure of information collected under the Bank Secrecy Act (BSA) (Title 31).
No SAR information, including the existence of a SAR, can be disclosed in the course of any compliance activity to the filer of the SAR, the subject of the SAR, or to any party outside the IRS without prior consultation with the Bank Secrecy Act (BSA) Liaison to the Financial Crimes Enforcement Network (FinCEN). FinCEN may allow sharing of SAR information, but only in special circumstances.
Requesting SAR information: For those examiners without access to the FCQ System, the following procedures must be followed when requesting SAR information:
The examiner must complete Form 10509-A, Suspicious Activity Report (SAR) Document Request, electronically and forward the form via encrypted email to his/her manager. The request may contain multiple taxpayers.
The manager should indicate approval of the request only after confirming association with an active, assigned case. Once confirmed, the manager forwards the approved request by encrypted email to the Employment Tax SAR Gatekeeper.
The gatekeeper will access FCQ:
- If no SARs are found, the examiner will be notified via encrypted email.
- If SARs are found, the gatekeeper will send the SAR information to the requester using encrypted email.
The Employment Tax SAR Gatekeeper(s) will maintain the electronic requests for a period of one year or until an audit trail review covering the time-frame for those requests is completed, whichever occurs later. For more information, see IRM 22.214.171.124.3, Access to SARS for Tax Purposes.
Tip cases are classified when tipping is customary for the employer’s industry and a return reflects low or zero tip wages reported on its Form 941.
A tip examination is warranted on entities, including food and beverage establishments, if an analysis of tip reporting by the entity indicates a significant amount of unreported tips. The analysis for a tip examination includes, but is not limited to, the type and size of the business, the historical tip reporting by the entity, and the Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, data available.
Often, the selection of an LB&I employment tax return for examination is initiated from a referral generated at the start of a related income tax examination. The referral may be a result of a mandatory procedure or based on a specific or identified concern of the agent or manager making the referral. Once the referral is made, it is the responsibility of the employment tax manager and agent to evaluate the examination potential. The following information should be considered when evaluating the examination potential.
During the pre-examination analysis phase, the employment tax specialist should perform a study of available information, including:
Review and consideration of related tax and information returns
IDRS research to obtain information to determine filing compliance and identify potential employment tax issues, including but not limited to:
- BMFOL / IMFOL
Internet research, including but not limited to:
- Company website
- Security and Exchange Commission (SEC) filings, if present
- Search for news articles and other company information
Intranet Research to identify coordinated or emerging issues. Research can include:
- Emerging Issue Alerts
- Industry or Market Segment Specialization Program (MSSP) Guides
- Technical Guidance and Coordinated Issue Papers
The above information is used to determine if an employment tax examination is warranted and to set the scope of the examination. All findings must be established under the appropriate Standard Audit Index Number (SAIN) and fully documented on the appropriate workpapers.
In certain situations, employment tax leads may be assigned directly to the examiner to determine if a compliance check should be conducted rather than an examination.
A compliance check is a review conducted under Title 26 of the IRC to determine whether a business owner or individual is adhering to record keeping and information reporting requirements. It does not directly relate to the determination of a tax liability for any particular period.
A compliance check should be considered as an opportunity to educate the taxpayer and encourage compliance. Pub 3114, Compliance Checks, contains additional information on compliance checks and is used as a taxpayer handout.
Compliance checks can be useful tools in certain situations. However, care must be exercised to prevent examining the taxpayer under the guise of a compliance check to avoid infringing on taxpayer rights and to also avoid establishing a section 530 safe haven.
Generally, SB/SE Employment Tax does not conduct compliance checks, but uses examinations to determine adherence to information and reporting requirements. Managerial approval must be secured by an SB/SE examiner to conduct a compliance check. However, see IRM 126.96.36.199, Mandatory Compliance Follow up Reviews on Voluntary Tip Agreements.
Examiners will schedule a compliance check by letter and enclose Pub 3114, Pub 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, as enclosures to the compliance check appointment letter. At the review, the examiner must explain to the taxpayer that the appointment is merely a compliance check and does not qualify as an inspection under IRC 7605(b) or as an audit for purposes of section 530 of the Revenue Act of 1978.
To avoid unauthorized disclosures of return information, immediately identify the taxpayer or his/her authorized representative. For purposes of identification, the examiner must verify and document the complete name, title, and the purpose of the call/contact. For further information, see IRM 188.8.131.52.3, Required Taxpayer Authentication.
Limit the scope of the check to IRS documents that have already been voluntarily prepared and filed with the Service including any amended returns. In addition, the compliance check should inspect forms that are not required to be filed (e.g., Form W-4).
During a compliance check, do not:
Inspect books and records
Discuss books and records
Question whether a worker is an employee or independent contractor
Ask how the taxpayer determined that a Form W-2 or 1099 should be filed
However, if no information return was filed, it is reasonable to ask how much was paid and whether the recipient was incorporated, or other questions designed to determine whether or not filing was required.
If the examiner is able to determine the taxpayer is in compliance or is able to bring the taxpayer into compliance at the initial interview without reviewing the books or records or asking common law questions, the examiner may recommend that no examination be conducted. If delinquent returns are submitted to the examiner by the taxpayer, the examiner will follow procedures as described in IRM 4.23.12, Employment Tax - Delinquent Return Procedures.
If the examiner cannot determine the taxpayer’s compliance at the initial compliance interview, the examiner will inform the taxpayer that the compliance check is completed and a full employment tax examination will be opened. At that time, the examiner must follow all established examination procedures.
The following procedures are provided to assist examiners in the examination of employment tax returns.
The group manager should be alert for possible employment tax issues in assigning non-employment tax cases and should, when appropriate, inform the examiner to consider the required filing checks procedures. See IRM 184.108.40.206.4, Procedures for Required Filing Checks and Scope of Employment Tax Examinations, and IRM 4.10.5, Required Filing Checks.
The related employment tax returns are not usually associated with the income tax returns or tax-exempt returns classified for examination. Examination of the related returns will ordinarily be made from the taxpayer’s retained copies of such returns or a BRTVU. If an employment tax examination is warranted but the examiner cannot secure copies of the returns, the examiner will requisition the originals of those returns for association with the case file.
Collection employees share full compliance check responsibilities. When making a field visit, the revenue officer should determine whether all required employment tax returns were filed and paid. If the revenue officer encounters a situation where it appears that the firm is treating employees as non-employees or where there are questionable fringe benefits, a referral will be made for LB&I or SB/SE taxpayers to the Employment Workload Selection and Delivery (WSD). Referrals for TE/GE taxpayers should be sent to the appropriate Classification Area; see IRM 220.127.116.11.2, Referral to Employee Plans and Exempt Organizations. Collection employees should refer to the Collection Handbook for further guidance.
When an employment tax specialist is needed to assist the income tax examiner with employment tax issues on open income tax cases, a referral must be made by the income tax examiner through the Specialist Referral System (SRS). If an income tax examiner becomes aware of employment tax non-compliance on a return not directly related to an open income tax case, a referral can be made to the Employment WSD for review and potential selection for a future examination.
The relief provisions under section 530 apply only to the relief of federal employment taxes for the employer; therefore, the worker should be treated as an employee for all other purposes. If an examiner encounters an employer entitled to the relief provisions of section 530, there remains the potential that an Employee Plans (EP) issue exists and a referral should be considered. See Exhibit 4.23.3-2, Employee Plans (EP) Referral Checksheet.
If a referral to TE/GE – EP is required as a result of a compliance check or an examination, the examiner will report the findings on Form 3449, Referral Report, and mail to:
IRS - EP Classification
9350 Flair Drive
El Monte, CA 91731
If an employer is recognized as a tax-exempt organization or is a Form 990 series filer, make a referral to TE/GE Exempt Organizations (EO). If an employer files no annual return, but claims to be:
Affiliated with a church
A non-exempt charitable trust described under IRC 4947(a)(1)
A non-exempt charitable split-interest trust described under IRC 4947(a)(2)
Affiliated with a governmental unit
A political organization described under IRC 527
A taxable private foundation
A subordinate organization in a group exemption
Make a referral, or contact TE/GE EO Examination by fax, to ascertain jurisdiction of the audit.
If a referral to TE/GE EO is required, the examiner will complete Form 5666, TE/GE Referral Information Report, and mail to:
IRS – EO Referrals Group
Mail Code 4910 DAL
1100 Commerce St.
Dallas, Texas 75242
As soon as it is determined that an examination will be conducted, the examiner will complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users. A maximum of five tax periods for the same taxpayer may be requested on each Form 5345-D. TE/GE examiners may continue to use Form 5597, TE/GE IMF/BMF/EPMF Request.
Areas with automated inventory controls systems, such as Report Generation Software (RGS), Issue Management System (IMS), and Examination Returns Control System (ERCS), should follow locally established procedures for requesting or updating controls.
Examinations of LB&I coordinated industry cases (CIC) must be annotated on Form 5345-D by placing a "P" in the field that asks if this is an LB&I/CIC case.
Cases originating in Classification will have the project and tracking code on the controls prior to receipt in the group. Employment Tax project codes will be determined by the main issue identified during classification; tracking codes indicate the source of the case. All related tax periods must have the same tracking code as the key case. For cases received directly in the group, such as through the SRS system, project and tracking codes must be determined by using the most current listing available, found on the Employment Tax website at: http://mysbse.web.irs.gov/examination/specialty/et/initiate/work/reqcontrols/projcode/default.aspx.
After obtaining group manager approval, forward the Form 5345-D for terminal input. Retain a copy of each Form 5345-D in the case file.
The following subsections outline an employment tax examiner’s responsibilities regarding required filing checks, scope of exams, and examination controls, and will assist the examiner in meeting quality standards and ensuring appropriate and consistent audit procedures.
Examiners must determine whether:
The taxpayer under audit filed the information returns required. Examiners must address whether the appropriate information returns were filed for any reportable payments (e.g., Form 1099-MISC, Miscellaneous Income; Form 1099-K, Payment Card and Third Party Network Transactions; Form 1099-INT, Interest Income.) If the appropriate forms were not correctly filed, the examiner must consider expanding the audit to include a penalty case file and/or Form 945, Annual Return of Withheld Federal Income Tax, for the development of the backup withholding issue.
The taxpayer properly withheld income tax and Federal Insurance Contributions Act (FICA) taxes (including Additional Medicare Tax for the tax periods beginning January 1, 2013) from wages, and/or backup withholding from reportable payments. See IRM 18.104.22.168.1, IRC 3102(f)(3) – Relief for Employer When Employees Have Paid Additional Medicare Tax on Wages; IRM 22.214.171.124, FICA Tax; and IRM 126.96.36.199, IRC 3406 – Backup Withholding.
All other federal return reporting requirements have been met. Examiners must ensure all required returns, including non-employment tax and information returns, have been filed properly and do not contain a Large, Unusual, and Questionable (LUQ) item needing to be addressed by other areas. Any unfiled returns must be addressed. If the unfiled returns are employment tax returns, the audit will generally be expanded to include those years as part of the current examination. Other unfiled returns (e.g., income, excise, etc.) will generally be solicited as part of the audit. If received, the examiner must date stamp the return, review for any LUQ items, and submit the return to the address the taxpayer would normally mail the return if it had been timely filed. If the return is not received by the time the employment tax examination is complete, or if LUQ items are identified in a review of the related returns, a Form 5346, Exam Information Item, must be completed and forwarded to the Employment Workload Selection and Delivery (WSD). Employment WSD will forward referrals to the appropriate location. All actions and decisions relating to unfiled returns MUST be fully documented in the case file.
In cases where LUQ items are identified in a return submission, the examiner will make a copy of the return and attach it to the referral. The original return will be mailed to the address the taxpayer would normally mail the return. In no case should the original return be attached to the referral.
All employment tax cases received from Employment WSD contain a classification sheet detailing the issues identified during classification. The classification sheet will indicate if a case has been designated by Employment WSD as a limited scope examination. Examples of limited scope employment tax examinations include all Employment Tax, Tax Compliance Officer (ET TCO) examinations, or cases with special circumstances specifically directed by management to be a limited scope exam. Examiners will follow the steps shown in (2) below for limited scope examinations. When the scope is not limited during classification or by management, the examiner will follow steps shown in (5) below.
For cases received through the SRS system, the initial scope of the examination will be set by the specialist assigned in conjunction with the income tax examiner that made the referral. Procedures addressing filing checks and interviews will be determined on a case by case basis.
In all cases designated as limited scope examinations, regardless of source, the examiner must still address and document certain audit steps, including:
Interviewing the taxpayer and touring the business. A tour of the business is only applicable for field examinations and is not applicable when remote audit procedures are used. When a tour of the business is not feasible, the reasons must be fully documented in the case file.
Completing the required filing checks addressed in IRM 188.8.131.52.4.1.
Considering applicable penalties such as failure to file, failure to pay, failure to deposit, and negligence.
Fully developing the limited scope issue(s).
Preparing workpapers that support the proposed adjustments. See IRM 4.23.4, Employment Tax – Workpapers, Employment Tax Examinations, for additional information.
If the steps in (2) above reveal a material potential non-compliance issue, examiners will use their judgment regarding whether to expand the examination to include the issue. If expansion of a limited scope examination to address additional issues is warranted, the examiner must discuss this recommendation with the manager and document the decision in the case file.
Examples of examinations assigned as limited scope audits:
A management directive was issued allowing specific cases to be converted from full employment tax examinations to limited scope examinations. A copy of the directive must be included in the case file to show why the examination was treated as a limited scope examination.
During the classification process, a specific issue is identified that needs to be addressed; however, because of the cycle or statute of limitations, the case would not be assigned for a full employment tax examination. The classification sheet is clearly marked "limited scope" for the appropriate issue.
Cases classified for ET TCOs are limited to issues appropriate to their experience and training. The issue(s) included in the limited scope are clearly reflected on the classification sheet and the sheet is clearly marked "limited scope" .
In examinations not designated as limited scope examinations, the examiner will use facts learned during the pre-audit, the interview of the taxpayer, and the review of books and records to determine the scope of the examination. The examiner will limit the scope of the examination if, in the examiner’s judgment, it is not in the government’s best interest to pursue the issue further. The examiner will expand the scope of the examination to other issues found if, in the examiner’s judgment, expansion is warranted to ensure all items necessary for a substantially proper determination of the tax liability have been considered. All examiners must document the basis for any decision to change the scope of the examination.
Employment tax examinations generally cover an entire calendar year; therefore, the examiner must establish audit controls on all return(s) to address the entire calendar year. This generally means all four quarters of Form 941, Employer’s Quarterly Federal Tax Return, will be opened when the examination is started. This applies even if the case results in a no-change, as it will more accurately reflect the audit work conducted. Additionally, any subsidiary or related employment tax return(s) must be opened for examination and established on the Examination Returns Control System (ERCS) if related taxpayers’ records have been requested and reviewed.
Examiners must document the reasons for controlling less than all four quarters of a calendar year. For example, the examiner may determine that it is appropriate to control less than all four quarters of a calendar year when the examination involves a claim filed for a certain period, when bonuses were paid in a specific quarter, or when the business was not operating for a full year.
Generally, examiners should not start an examination for a calendar year until after the last filing date for all employment tax returns of that year. Normally, this is January 31 following the end of the calendar year.
Examiners should not secure control of any quarter for the current year, unless there are unique circumstances requiring inclusion of the current year quarter(s) (e.g., the taxpayer is no longer in business and the audit is expanded to resolve all remaining employment tax matters). Generally, the examiner will inform the taxpayer to correct any errors for the current year in accordance with IRC 6205 and the applicable regulations.
If the examination was concluded on November 1, 2016, an examination report will be prepared for 2014 and 2015. If the same issue(s) exist for 2016, the examiner will advise the taxpayer to correct them by filing the appropriate amended returns in accordance with IRC 6205. This procedure is consistent with Policy Statements 4-4 and 5-133.
Examiners should expand any employment tax examination to include prior and subsequent years if the issue(s) under development are material and recurring, or if there appear to be other LUQ items, unless there are reasons for not doing so (e.g., statute concerns). All reasons must be fully documented.
Prior to making initial contact, examiners must check BMFOLT or TXMODA to determine if a valid power of attorney is on file for the tax periods and type of tax under examination. If a TC 960 is posted the examiner must secure a CC CFINK and retain a copy in the file. If CC CFINK indicates that a valid power of attorney is on file, the examiner will mail the appropriate initial contact letter to the taxpayer and a copy of the letter to the representative with Letter 937, Transmittal Letter for Power of Attorney. After mailing the initial letter, and sufficient time has elapsed for the taxpayer to respond (allow 14 calendar day from the mailing of the letter), employees can initiate contact by telephone, as needed. For additional information regarding a power of attorney see IRM 4.11.55, Power of Attorney Rights and Responsibilities.
Letter 3850, Employment Tax Appointment Letter, or Letter 3851, Employment Tax Call-in Appointment Letter will be used in all instances to schedule a field appointment for an employment tax interview, except for LB&I team audit cases. When the taxpayer calls in response to the Letter 3851, the examiner will discuss documents necessary for the examination. The examiner will send Letter 3253, Taxpayer Appointment Confirmation Letter, confirming the appointment and detailing documents needed. If the taxpayer does not call in response to Letter 3851, the examiner will issue Letter 3850 scheduling the appointment.
In LB&I team audit cases, the initial appointment is set in conjunction with the team lead, following established procedures.
Employment tax TCOs generally conduct audits using remote audit procedures; Letter 3850-T, Employment Tax TCO Appointment, will be used to schedule this type of audit. This letter may also be used by any examiner following the remote audit process.
See IRM 184.108.40.206.2, Contacting the Taxpayer or Representative by Letter, (2), (3), (6) and (7) for additional information regarding scheduling the initial appointment.
Schedule the appointment at a time and/or place convenient to the taxpayer and consistent with Treasury Regulation 301.7605–1. For examinations not following the remote audit process, efforts should be made to conduct the examination at the taxpayer’s place of business. Field examinations are normally be conducted at the taxpayer’s place of business. Enter a taxpayer’s private premises only when invited in by the rightful occupant. If fraud is a feature or if the interests of the government may be jeopardized, the convenience of the taxpayer should be considered but need not be regarded as paramount.
Examinations should generally be conducted at the location where the taxpayer maintains the books and records of the business operations. However, the examination may be conducted at a place other than the location of the business operation if agreed to by the examiner and the taxpayer or the authorized representative. Once the appointment is made, avoid cancelling or rescheduling it, when possible.
Publication 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, must be included with all initial contact letters. Publication 5146, Employment Tax Returns: Examinations and Appeal Rights, will also be mailed with the initial appointment letter. This new publication replaces Publication 3498, The Examination Process, for employment tax examinations. If not mailed to the taxpayer in advance of the interview, provide the documents at the initial meeting. Workpapers and the Activity Record should be documented when and how these documents were provided to the taxpayer.
Examiners are not authorized to assure taxpayers that their books and records will be used solely for civil purposes. If a taxpayer insists upon such assurances or gives the examiner a statement that the books and records are only being made available for limited purposes, the examiner will ask for and document the taxpayer’s reasons for refusing to furnish the records without restriction, discontinue the examination, and report this information to the group manager. The group manager and the examiner should then discuss the matter with the Criminal Investigation (CI) function, which will study any available information on the taxpayer and advise on the next steps. CI may decide that, in view of all known factors, including the taxpayer’s refusal to furnish records unconditionally, there is a possible indication that fraud exists. When appropriate, a referral to the CI will be made in accordance with IRM 220.127.116.11.5, Referrals to the Criminal Investigation Division. Advice should be sought from Area Counsel when necessary.
To avoid unauthorized disclosures of return information, immediately identify the taxpayer or his/her authorized representative before disclosing tax information. For such purposes examiners must know and document with whom they are speaking, including the complete name, title, and the purpose of the call/contact. For further information, see IRM 18.104.22.168.3, Required Taxpayer Authentication.
Section 3705 of the Internal Revenue Service Restructuring and Reform Act (RRA 98) requires that during personal and telephone contacts and on all manually generated correspondence by an employee working tax related issues, the employee’s title (e.g., Mr., Mrs., Miss), first name, last name, and unique identification number must be provided. This requirement ensures that taxpayers are able to contact the appropriate employee to address any further questions they may have about their tax matter. For additional information, see IRM 22.214.171.124.9, Providing Taxpayers With Employee Contact Information.
Provide Pub 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, to the taxpayer at the initial appointment contact, if not provided as enclosures to the appointment letter.
Pub 5146 must be given to the taxpayer at the initial appointment if not mailed with the initial appointment letter. This new publication replaces Publication 3498 for employment tax examinations.
If the examination is to address worker reclassification issues, Publication 1976, Do you Qualify for Relief under Section 530?, must be furnished. See IRM 126.96.36.199.1, Section 530 Relief.
The initial interview is an important part of the examination and/or compliance process. An initial interview must be conducted except in special circumstances, such as:
Undeliverable appointment letters; IRM 4.10.2..8.4, Undeliverable Initial Contact Letters,
Unlocatable taxpayers; IRM 188.8.131.52.5, Using Credit Bureau Information to Locate Taxpayers, or
Uncooperative taxpayers; IRM 184.108.40.206.6, Case Closing Procedures if the Taxpayer Cannot be Located.
In LB&I Team Audit examinations where it is not practical to hold an initial interview;The examiner will follow the direction of the Team Lead on how to ascertain the necessary information to conduct the employment tax examination.
When an interview cannot be conducted, document the reasons in the case file. In situations where taxpayers are being uncooperative, examiners must discuss the use of a summons with their manager before making the decision to issue a report based on the available information. Appropriate steps must be taken by all examiners to ensure a full interview is conducted. Questions must allow the examiner to reach a comfort level that the taxpayer is in substantial compliance with all employment tax laws and filing requirements and should not be limited to the classified items if facts developed during pre-contact or initial contact indicate other issues may be present.
In the initial interview or opening conference:
The first few minutes should be spent explaining the process and the taxpayer’s rights. The taxpayer’s receipt of Pub 1 will be confirmed and specifically noted in the workpapers. Pub 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 Pub 1, furnish the publication before proceeding with the initial interview.
Several other provisions in IRC 7521, Procedures involving taxpayer interviews, affect taxpayer interviews. See IRM 220.127.116.11.7, Taxpayer Rights, below.
Do not settle tax due, or agree not to examine a taxpayer where noncompliance is known, in exchange for prospective compliance. Where settlement of tax appears to be advantageous to Service objectives, Area Counsel should be contacted for assistance. On LB&I coordinated industry cases, the attorney assigned to the case should be contacted for advice. In situations where execution of a closing agreement is warranted to resolve an issue, Counsel will assist in providing the appropriate language.
Under IRC 7521, Procedures Involving Taxpayer Interviews, the taxpayer has a right to:
Receive, in non-technical language, an explanation of the rights available at each step of the examination process. This explanation must be furnished before an initial interview. Pub 1, Your Rights as a Taxpayer, was developed to meet this requirement. Routine telephone calls initiated by the taxpayer or the Service are not considered initial interviews. Pub 1 explains the procedures covering examination of tax returns and appeal rights and should be furnished to all taxpayers. Examiners must ensure the taxpayer has a full understanding of the examination process.
1. At the beginning of an examination, ask the taxpayer whether they have any questions regarding the audit process, regular selection procedures, or appeal rights.
2. If the taxpayer does have questions, give clear and concise explanations.
3. Advise the taxpayer of various court remedies available for employment tax issues. All post-assessment employment tax cases can be heard in a U.S. District Court or the U.S. Court of Federal Claims. Some employment tax cases can be heard by the U.S. Tax Court before assessment is made if they involve an issue of worker reclassification or entitlement to relief from employment tax under section 530 of the Revenue Act of 1978.
Consult with a representative who is currently authorized to represent taxpayers under rules provided in Treasury Department Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents and Appraisers before the Internal Revenue Service. If taxpayers clearly state, during an interview, that they wish to consult with a representative, suspend the interview until the representative is involved. In cases where this process is abused (e.g., repeated suspension of interviews to contact a representative) an administrative summons may be issued. A taxpayer cannot be required to accompany an authorized representative to an examination interview in the absence of an administrative summons. However, the taxpayer’s voluntary presence at the interview can be requested through the representative as a means to expedite the process.
Notice 89-51, 1989-1 C.B. 691, contains guidance for allowing the taxpayer to audio record any in-person interview relating to the determination or collection of any tax as long as there is a 10-day advance notification. For information on taping interviews by either the taxpayer of the Service, see IRM 18.104.22.168.6, Requests to Audio Record Interviews.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees help taxpayers whose problems with the IRS are causing financial difficulties; who have tried but have not been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. Pub 1546, Taxpayer Advocate Service - Your Voice at the IRS, provides contact and additional information.
Refer taxpayers to TAS when the contact meets TAS criteria (see IRM 13.1.7, Taxpayer Advocate Case Processing - TAS Case Criteria) and the taxpayer's issue cannot be resolved the same day. "Same day" cases include those the examiner can completely resolve in 24 hours, as well as cases in which the examiner has taken steps within 24 hours to resolve. Do not refer same day cases to TAS unless the taxpayer asks to be transferred to TAS and the case meets TAS criteria. Refer to IRM 22.214.171.124, Same Day Resolution by Operations for additional requirements before referring a same day case to TAS.
All inquiries being referred to TAS should be documented on Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or Form e-911, and forwarded to the Advocate's office by the most expeditious method available.
Accountants, attorneys, enrolled agents or other representatives, from whom a taxpayer has requested assistance on tax problems, may submit inquiries to the IRS to assist in clarifying issues with their client. To authorize a third party reply, the representative may submit a Form 2848, Power of Attorney and Declaration of Representative, (POA), or Form 8821, Tax Information Authorization, (TIA). The examiner will ensure that the authorization or a similar privately designed form is properly executed. See IRM 126.96.36.199.7, Authorized Forms, and IRM 188.8.131.52.8, Receipt of POA or TIA Form, for additional guidance.
Upon receipt of a POA/TIA, the examiner must submit a copy of the form to one of the three centralized CAF Units at the Campuses within five workdays of receipt. See IRM 184.108.40.206.3, Processing Sites (CAF Function), to determine where to send the POA/TIA. The original or a copy of the POA/TIA should also be retained with the case file.
Forwarding the POA/TIA to the CAF Unit will trigger required actions to ensure input of a POA code to the entity on the appropriate master file or non-master file and will result in subsequent mailings of copies of computer-generated communications to the authorized representative. POAs/TIAs are maintained on an automated system known as the Centralized Authorization File (CAF).
POAs/TIAs filed for specific issues are not to be detached from the related document and are not sent to the CAF Unit unless the document authorizes specific return(s) and specific return periods in addition to the specific issue. In this case, a copy of the POA/TIA should be sent to the CAF Unit to input the return portion. Examples of specific issues include, but are not limited to, the following:
Form 843, Claim for Refund and Request for Abatement,
Form 966, Corporate Dissolution or Liquidation,
Form W–4, Employee’s Withholding Allowance Certificate,
Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners,
Form SS–4, Application for Employer Identification Number, and
General Power of Attorney or Durable Power of Attorney. These powers of attorney usually do not contain sufficient information to process on CAF. If a general or durable power of attorney is submitted, attach a completed Form 2848 (POA), and send both forms to the CAF function for processing.
Occasionally, the POA of record states he or she is no longer representing the taxpayer, or the taxpayer indicates they wish to cancel the existing POA. If the POA withdraws from the representation, or the taxpayer revokes the POA’s authority, the CAF record will need to be updated to delete the existing POA. All revocations or withdrawals must be in writing. The taxpayer’s signature and date are required to process a revocation. The representative’s signature and date are required to process a withdrawal. Such signed statements will generally be sent to the CAF Unit.
If the power of attorney is for a specific matter, the revocation or withdrawal is sent to the IRS office handling that matter.
See the instructions to Form 2848 for additional details about how to properly revoke or withdraw.
The Form 8821 does not authorize a representative to sign documents on behalf of the taxpayer or to represent the taxpayer before Appeals.
There may be occasions when it becomes necessary to bypass the taxpayer’s representative and communicate directly with the taxpayer. IRM 220.127.116.11, By-Pass of a Representative, provides detailed examination information on bypass procedures.
In accordance with IRC 3401(d)(1) and the holding of the Supreme Court in Otte v. U.S., 419 U.S. 43 (1974), 1975-1 C.B. 329, a trustee in bankruptcy is an employer for purposes of income tax withholding and withholding the employee’s share of FICA. This is because the trustee in bankruptcy has control of the payment of wages. As the payer, the trustee is obligated to prepare and file Form 941 and to prepare, file, and distribute the related Form W–2 for each wage claimant. Furthermore, Otte has been extended to provide that the person having control of the payment is also an employer for purposes of the employer’s share of FICA and FUTA. See Lane Processing Trust v. United States, 25 F.3d 662 (8th Cir. 1994), and re Armadillo Corp., 410 F. Supp. 407 (D. Col. 1976), aff’d, 561 F.2d 1382 (10th Cir. 1977). Withholding and employment taxes incurred by the bankruptcy estate are entitled to be paid as administrative expenses under Bankruptcy Code § 503(b)(1)(B).
The Otte doctrine may be applied in cases involving payers other than bankruptcy trustees.
Form 5348, AIMS/ERCS Update, (or Form 5595, TE/GE Update or RCCMS) is used with examination audit labels to:
Update status code,
Update statute date,
Update project code, and
Update amount of claim.
These updates are input on ERCS by the Group Secretary or Clerk.
Form 5348, AIMS/ERCS Update, (or Form 5595, TE/GE Update or RCCMS) is used with examination audit labels to:
Re-establish closed returns,
Update the AIMS Assignee Code(AAC) (this would only be completed if the AAC is correct on ERCS and the AAC on AIMS is incorrect),
Generate a follow-up request for a missing return, and
Request additional audit or address labels.
Forward the Form 5348 to your local AIMS/ERCS Analyst for input.
Instructions on the use of Form 5348 can be found in IRM 18.104.22.168, Items that can be Updated/Corrected/Deleted and Form to Use. Form 5348 will be submitted to the group secretary for input on ERCS.
Form 4844, Request for Terminal Action, will be completed where the results of a compliance check or examination reveal that the taxpayer has filing requirements that are not currently on IDRS. Document 6209, IRS Processing Codes and Information, lists the correct codes for BMF Filing Requirements.
Accurate time and activity reporting is essential to effective Employment Tax Program planning, budgeting, and evaluation..
For those employees working mixed inventories, time will be charged to the appropriate activity codes. Activity codes can be found in Chapter 12, Examination, of Document 6209. See IRM Handbook 4.9.1, Examination Technical Time Reporting System and Procedures, Outline of System, and Exhibits for complete explanations.
(1) Information from an income tax return can reveal employment tax issues in a number of areas:
a. Compensation of corporate officers can be shown as "0" but a review of the Form 1120 may reveal that the officers have taken draws, dividends, professional fees, administrative fees, etc., to avoid reporting taxable wages.
b. Compensation of corporate officers can be shown as "0" but a review of the Form 1120 may reveal that the officers have spent 100 percent of their time in the operation of the business.
c. Schedules for "other deductions" often disclose bonuses to officers and employees. Payments to consultants are often listed on these schedules.
d. The reconciliation of accounts often shows loans and advances to corporate officers which may be salary in disguise.
e. Cost of goods sold often reveals labor and wage costs which may not appear on Forms W–2/1099/ 941.
f. A service organization reporting cost of labor in cost of goods sold is suspect.
g. Schedule C, Form 1040, often shows cost of labor and/or commissions in the cost of goods sold - but no Forms 941 have been filed.
(2) Reconciliation of the Forms 941/940/W–2 and the income tax return often highlights a discrepancy.
(3) Taxpayers may file Form 940 but no Forms 941. Tying this information into the tax return may show a discrepancy.
(4) Reconcile labor deducted on the income tax return less the FICA wages and total of amounts reported on Forms 1099 issued. Any discrepancy may mean an excessive deduction for wages and an adjustment. If the accrual method of accounting is used, an adjustment to the FICA wages reported will have to be made to make the income tax return information comparable to the Forms 941 and 1099.
(5) Large changes in the gross profit percentage [(SaIes - Cost of Good Sold) divided by Sales)] from one year to another may indicate hidden labor costs.
(6) The Payer Master File General Transcript (CC PMFOL) provides the following information:
a. No Record of filing or filing late can eliminate the safe haven provided by section 530 if this becomes an issue.
b. The summary of transcript contains information concerning the number of Forms 1099 filed and the dollar amount of these forms. This figure can be compared to the miscellaneous wage figures reported on the tax return for possible underreporting.
(7) Researching the particular industry will indicate the pros and cons of worker classification issues presented in previous rulings - or indicate a category on which to base an evaluation. The research will provide a basis for evaluating the likelihood of successfully challenging an issue.
(8) Interviews of third party contacts (particularly the individual supplying the lead information) can provide additional information to ensure the correct entity has been identified, provide the number and types of workers, the possible amount of wages misclassified, and other information that will assist the evaluator in assigning a priority to the lead. However, before contacting third parties, ensure the provisions of IRC 7602, Examination of Books and Witnesses, are followed.
(9) If no internal information can be obtained, the initial lead evaluation process is restricted to the information contained on the lead, interviews of third parties, general industry research, and past experience in the industry. If the lead warrants additional consideration after the above steps have been taken, the lead may, at the manager's discretion, be assigned to an examiner for personal contact with the taxpayer.
1. Were any non-employees reclassified as employees? Y N
If yes, please attach a list of those employees.
2. Were any plan participants’ compensation adjusted? Y N
If yes, please attach a list of the participants, their compensation, and the adjustment amount.
3. Does the employer offer plan participation of individuals other than common law employees or self-employed individuals treated as employees pursuant to IRC section 401(c)(1)?
4. Are there any employees who are covered by the section 530 safe haven who have been excluded from participation in the plan? Y N
If yes, please attach a list of the names of those employees.
INSTRUCTIONS: Any yes answer warrants a referral to TE/GE —Employee Plans (EP).