This IRM outlines an examiner’s responsibilities regarding employment tax workpapers and will assist the examiner in meeting quality standards and ensuring appropriate and consistent audit procedures.

Employment tax provisions are found at Internal Revenue Code Subtitle C:

The Employment Tax Program is governed by Policy Statements and other internal guidance that apply to all Service personnel regardless of operating division. The Policy Statements found in IRM 1.2.1, Servicewide Policies and Authorities, Servicewide Policy Statements, apply to all employment tax issues and examinations. Examiners should review these Policy Statements to properly perform their examination duties.

A website, Delegation Orders and Policy Statements by Process, located at https://www.irs.gov/privacy-disclosure/delegation-orders-and-policy-statements-by-process, summarizes data contained in the applicable IRM sections under IRM 1.2.1 and IRM 1.2.2, Servicewide Policies and Authorities, Servicewide Delegations of Authority, in a single electronic source.

IRM 4.23 provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting, and payment of employment taxes. IRM 4.23 serves as the foundation for consistent administration of employment taxes by various IRS operating divisions. By providing one source of authority for all operating divisions, the Service greatly reduces philosophical and procedural inconsistencies.

Director, Specialty Examination Policy is responsible for the procedures and updates addressed in this IRM.

Director, Examination Specialty, is the executive responsible for examination operational compliance.

Program Goals: The processes and procedures provided in this IRM are consistent with the objectives or goals for Employment Tax - Examination that are addressed in IRM 1.1.16.3.3.3, Employment Tax Examination and for Employment Tax Policy, found in IRM 1.1.16.3.5.2.2, Employment Tax Policy.

Program Effectiveness: Program goals are measured with Employment Tax Embedded Quality Performance Reports that monitor whether quality attributes are applied uniformly and consistently.

Annual Review: Employment Tax Policy - Program Manager, is responsible for reviewing the information in this IRM annually to ensure accuracy and promote consistent tax administration.

The following table lists commonly used acronyms and their definitions:

Other helpful information sources include:

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR. See IRC 7803(a)(3). For additional information about TBOR, see https://www.irs.gov/taxpayer-bill-of-rights.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal procedures, or who believe that an IRS system or procedure is not working as it should. Pub 1546, Taxpayer Advocate Service - We Are Here to Help You, provides contact and additional information. The program is designed to alleviate taxpayer hardships that arise from systemic problems or the application of the Internal Revenue Code. In addition, see IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria, and IRM 13.1.19, TAS Operations Assistance Request (OAR) Process, for additional information.

Employment tax examiners should consider the disclosure provisions when preparing agreed and unagreed case reports. See the Privacy, Governmental Liaison and Disclosure web site at: https://irssource.web.irs.gov/PGLD/Pages/Home.aspx for additional information.

Workpapers are key in the support of all IRS positions taken when making adjustments. Properly prepared workpapers:

Workpapers are required in every examination case. Workpapers should include all evidence gathered by the examiner to show the work performed, audit techniques followed, tax law relied on, and conclusions reached. Supporting workpapers must be prepared when necessary to fully document all issues and conclusions. These supporting workpapers must be attached to the appropriate lead sheet.

As workpapers are used in the preparation of the audit report, examiners must ensure that the information contained in the workpapers is consistent with and fully supports the final conclusions reached. The workpapers will be relied upon to support the issues in appealed or litigated cases. The workpapers can be provided to a subsequent reviewer or the taxpayer when requested under the Freedom of Information Act (FOIA) process.

Use of the Employment Tax Lead Sheets (ETLS) will help the examiner meet all workpaper requirements. Use of stand-alone workpapers, while not prohibited, does not relieve the examiner from meeting workpaper requirements.

Properly prepared workpapers must provide adequate documentation to support conclusions. Without sufficient documentation, it is not possible for reviewers to verify that the scope of the examination is appropriate, or the basis of an adjustment is accurate. Examiners should always cite legal authority to support the conclusions (e.g., Internal Revenue Code, applicable regulations, court cases, revenue rulings and/or revenue procedures).

Workpapers must be neat, legible, clear, and concise. The legibility of examination workpapers and reports is an important aspect of the overall quality of the examination. The easier it is to read workpapers and reports, the easier it is to understand them.

Workpapers must be clearly headed:

Workpapers must be indexed, numbered, and securely fastened together. Index workpapers as they are prepared. If an issue cannot be fully explained on the specific lead sheet, supporting workpapers must be prepared, indexed, and attached behind the appropriate lead sheet. Supporting workpapers may be required to provide detailed explanations, analysis, schedules, and/or computations. For example, supporting workpapers would be used to schedule out wage adjustments applicable to each employee.

The volume of supporting workpapers prepared during examinations will vary depending on the size of the entity and the number and type of issues developed. While there is no fixed requirement to include specific schedules or analyses in the supporting workpapers, examiners must include enough information to support the conclusion documented on the lead sheet. Any notes taken during interviews conducted must be included in the case file as added support of the final case resolution.

Workpapers should reflect what was actually accomplished during the examination. The workpapers should not include superfluous documentation, copies of irrelevant data, or the examiner's personal opinions relating to the taxpayer or the business. For example, copies of CPA workpapers or reports should not be included in the workpapers where they do not contribute to the development of an issue. In addition, examiners should never make personal comments about a taxpayer. Remember, taxpayers always have the right to request any and all workpapers included in the case file under the Freedom of Information Act (FOIA).

The case file should include a well-documented, contemporaneous case history sheet. For SB/SE examiners using IMS, the Examining Office’s Activity Record in IMS should be used for this purpose. For non-IMS users, Form 9984, Examining Officer’s Activity Record, is used for this purpose and is numbered as Workpaper 100. The case history documents:

If the case was initiated by a referral, examiners must include a printed copy of the "Specialist Referral System (SRS) Referral Form" in the workpapers.

Examiners have different workpapers available depending on the type of examination being worked and the type of training received:

The LB&I web page "Audit Tools" contains links to many job aids that the ET specialist may find useful. They can be found at: https://irssource.web.irs.gov/LBI/SitePages/AuditTools.aspx.

Examiners should access the latest versions of ETLS, ETER, and other miscellaneous workbooks via the Knowledge Management Employment Tax Base (within the Tools Book). Examiners can access the "Tools" book by clicking the following link and selecting the tool they wish to download: https://portal.ds.irsnet.gov/sites/vl014/lists/employmenttaxtools/landingview.aspx

In order to access the most current Employment Tax letters and forms, examiners will need to go to the Forms Repository at http://publish.no.irs.gov/catlg.html. In Forms Repository, the examiner will:

ET has four distinct categories of cases. Each category has different documentation requirements within IMS.

Exhibit 4.23.4-1, Mandatory Items - IMS, provides a quick reference of attributes and documents that are mandatory versus optional. Any forms or documents not specifically addressed in Exhibit 4.23.4-1 are considered optional. In all cases, IMS lead sheets and workpapers should support the audit trail. Mandatory attributes or documents should be maintained within IMS; however, when warranted, the examiner may obtain and document managerial authorization to deviate from IMS requirements. Additional information on workpapers is contained throughout IRM 4.23.4.

All case names must begin with "ET" for ease in identifying employment tax cases. To ensure consistency, all examiners will use the following naming convention when naming a case in IMS:
ET [Taxpayer Name] [Year]: (Example: ET ABC Inc 2012)

To ensure consistency, all examiners will prepare and complete Information Document Requests (IDRs) within IMS, including annotating the Form 4564, Information Document Request, as appropriate (e.g., Date IDR Issued, Date Information due by). All Examiners will update the IDR status and date fields via IDR Edit Status screen. The IDR status choices will vary depending on the current status of the IDR (e.g., Issued, Received, Revoked, Closed, etc.).

To charge time to a case within IMS, each return must have an "ET 080-Administrative Procedures" issue. All other ET issues will be entered in IMS on the key return (generally, the 4th quarter return) for each tax year that the issue is examined. The time spent on the case will be charged to the examined ET issue(s) reflected on the key return(s), as appropriate. Examples of how to set up a case, its issues, and how to charge time are provided in supplemental training materials.

Tax Compliance Officers (TCO) and Tax Examiners (TE) will set up the primary issue on each return included in the examination. If other issues are found, they will be added to the key return(s) (generally, the 4th quarter return), as appropriate. The time spent on the case will be charged to the examined issue(s) reflected on the key return(s). Examples of how to set up a case, its issues, and how to charge time are provided in supplemental training materials for TCOs and TEs.

Each return must have time charged except when the return is closed using a non-examined disposal code such as Disposal Code "32" or "36" . Further detail on processing non-examined returns in IMS is provided in supplemental training material on surveys.

See IRM 4.9.17.2, Time Input on ERCS and IMS, through IRM 4.9.1.7.2.2, Inputting Time Into IMS, addressing charging time. Note that employees in Employment Tax who are required to input technical time now use IMS for time input. The Examination Returns Control System (ERCS) Group Handbook also addresses ERCS time entry and fractional hours.

The Time Sheet in IMS Client allows the IMS user to enter all categories of daily time applied, including case time and below the line time. TCOs and TEs input daily time as well as purge actions.

The Form 9984, Examining Officer’s Activity Record, in IMS Client is used to document each action taken on the Entity/Return issues. Documentation should include the date, location, time charged, and an explanation of each activity or contact. The activity record should provide a complete and concise case history. Recordation of events should be made by examiners or other employees responsible for activity on the case as warranted (e.g., group managers, engineers, clerical staff, team members, actions taken by group secretaries, etc.)

IRM 4.4.12.5.38, Item. 28: Examiner’s Time, et seq., addresses the requirement to enter time on the Form 5344. Time may be charged in 15 minute increments.

Tax and Penalty Data Fields: The examiner will:

Wage Adjustment Data Fields: The examiner will:

Depending on the MFT on the Entity/Return, different types of closing forms (e.g., Form 5344, Examination Closing Record, Form 5351, Examination Non Examined Closings, or Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties) may be required to be completed in IMS before a case file can be closed in IMS. Refer to the IMS Job Aids and check sheets on Closing Cases in IMS and Tip Compliance Cases in IMS for more information.

Examiners will close their cases in IMS to correspond with closure of the paper case file to their manager. ET Managers can then perform their reviews and indicate concurrence with the closure of cases from the group using the "Manager Concurrence" feature on the Team WebSite (TWS) and selecting "yes" . These timely steps allow other stakeholders (e.g., Appeals, Technical Services, and Centralized Case Processing) to access cases electronically in IMS/TWS. IMS case closing procedures and processes are described in more detail in ET IMS course books, job aids, and check sheets. Additional closing procedures in IMS involving stakeholders will be provided when they are fully operational for employment tax cases.

If all workpapers are not added/uploaded/saved in IMS, examiners are reminded to include a compact disc of the downloaded closed file in the paper case file when closed to Technical Services.

Additional information:

Examiners must prepare an individual Form 4564, Information Document Request (IDR), for each issue being developed, and a Form 5701, Notice of Proposed Adjustment (NOPA), for each issue adjusted.

The examiner will create Form 13744, Risk Analysis Worksheet.

The examiner will create an audit plan for large case examinations consisting of examination workpaper cover sheets:

For further guidance, examiners should refer to IRM 4.10.9, Workpaper System and Case File Assembly, and IRM 4.46, LB&I Examination Process.

The examination plan (audit plan) provides the following information:

For ET specialists working LB&I exams, ET examiners are required to prepare an audit plan. The due date of the plan will be agreed upon by the LB&I team coordinator and ET specialist. The plan is prepared by the team coordinator using Form 4764, LB&I Examination Plan. Refer to IRM 4.23.4.5.1 , Mandatory Workpapers, for the forms used in creating the employment tax audit plans for LB&I team examinations.

ET specialists working LB&I stand-alone employment tax audits may follow LB&I team audit procedures or use the "ETLS - Employment Tax Lead Sheets" , covered in IRM 4.23.4.3. In those cases where only an employment tax examination is being conducted, the ET specialist may use Form 4764-IC, LB&I Examination Plan for Industry Case (IC) Audits. However, Form 4764-IC is not required and does not replace either Form 4764-A or Form 4764-B.

The taxpayer will be given a copy of the audit plan and such action should be documented in the "Examining Officer’s Activity Record" .

During the pre-examination analysis phase, the employment tax specialist should analyze available information, including:

ET specialists working LB&I exams using a team approach should follow the guidance in IRM 4.23.3.6.4.1, Scheduling the Initial Appointment - LB&I Team Audits, for issuing an employment tax exam notification letter. For stand-alone ET audits, ET specialists should follow the guidance in IRM 4.23.3.6.4, Scheduling the Initial Appointment, for letters to use when scheduling a field appointment.

An officer of a corporation must sign either the communications agreement contained in the LB&I Audit Plan or any other type of written authorization that designates the persons with whom the examination team can communicate. A copy of the written authorization must be included and documented in the ET case file.

Risk-based decision-making is critical to the effective allocation of limited examination resources. A risk assessment must be conducted:

The first risk analysis described in (1) above is prepared during the initial planning phase of the examination. Depending on materiality and/or compliance considerations, the risk analysis can be done on an issue-by-issue or a case basis.

A mid-cycle risk analysis is required on all large case ET examinations with an Estimated Closing Date (ECD) exceeding 12 months and must be approved by the Employment Tax group manager. A mid-cycle risk analysis is optional on large case ET examinations with an ECD of less than 12 months. Should the ECD of a large case be extended to exceed 12 months, an updated risk assessment is required. Refer to (2) and (3) of IRM 4.46.3.3.6, Documenting The Risk Analysis.

The mid-cycle risk analysis includes time applied and indicates if additional time is needed. The examiner should also state the potential tax liability by issue and by year, and provide a brief assessment of the audit.

After the agent completes the mid-cycle risk analysis, it may be apparent that additional time is needed to complete the examination. If the examiner needs more time than was originally planned, provide an explanation of why additional time is warranted and how much additional time is needed to complete the examination.

The SB/SE ET group manager must approve a request for additional time.

Form 4564, Information Document Request (IDR), must be used to request information from the taxpayer. All requests for information should be specific, clear, and concise

Prior to issuing an IDR, the examiner should discuss with the taxpayer and the team coordinator the specific information that is needed. The taxpayer may be able to explain what type of information is available and may suggest a preferred wording for the IDR. Conferring with the team coordinator also ensures that the examiner does not ask for already available information.

The team coordinator may determine the numbering system used for all IDRs issued. An IDR log is maintained to provide a source for assigning numbers and to monitor response times.

Three copies of each IDR request should be prepared and distributed as follows;

IDRs should generally include only one issue or subject. This results in a faster turnaround time since information covering multiple topics may need to come from several sources.

The IDR Management Process is used for all cases. Examiners should follow both the general IDR procedures and enforcement IDR procedures found in IRM Exhibit 4.46.4-1, Requirements for Issuing IDRs, and Exhibit 4.46.4-2, IDR Enforcement Process.

The IDR process states that a reasonable response time to each IDR is determined after the draft IDR is discussed with the Taxpayer, prior to final IDR issuance. The importance of timely responses is emphasized as it improves cycle time and promotes earlier issue resolution. Refer to IRM 4.46.4.6, Information Document Request Process, IRM Exhibit 4.46.4-1, and IRM Exhibit 4.46.4-2.

IDR procedures found at IRM 4.46.4.6.3, IDR Enforcement Process, will be followed by the SB/SE examiner working with the LB&I income tax team.

The mandatory Enforcement Process has three graduated steps:

The process does not preclude the examination team from using judgment on a case-by-case basis. Continuous collaboration is needed to reach realistic due dates and dates can be revised based upon the facts and circumstances. A detailed description of the IDR Management Process can be found at IRM 4.46.4.6, Information Document Request Process and IRM Exhibit 4.46.4-1, Requirements for Issuing IDRs. The IDR Enforcement Process procedures can be found at IRM Exhibit 4.46.4-2, IDR Enforcement Process.

If the taxpayer does not agree with the examiner’s determination and the issue is likely to be appealed, prepare a Form 886-A containing the facts and solicit the taxpayer’s written acknowledgment of the facts (AOF). Refer to IRM 4.46.4.10.3, Issue the Draft Form 886-A with a Pro-Forma AOF IDR. ET Specialists on team audits with the LB&I income tax team will generally use the AOF; ET Specialists working stand-alone employment tax audits can follow AOF at their discretion.

All adjustments are proposed on a Form 5701, Notice of Proposed Adjustment, as they are developed. This form serves as a cover sheet to Form 886-A, Explanation of Adjustments, which is attached to fully explain the basis for proposing each adjustment.

Potential adjustments should be discussed with the team coordinator and the taxpayer prior to issuing the notice.

The ET group manager reviews and signs the Form(s) 5701. This signature indicates the group manager has accepted the examiner’s position on the issue. A Territory Manager’s approval/signature is required on all Form(s) 5701 involving issues on:

The Form(s) 5701 and Form(s) 886-A are attached to the final audit report.

Form 4764-B, LB&I Examination Plan, Part III - Examination Procedures Section, is the lead sheet describing the audit procedures applied and the conclusions reached for each issue and should:

Supporting documentation should be attached as a workpaper when further explanation is needed to support the conclusions reached.

Lead sheets also serve as an index for any workpapers that relate to a specific issue. All workpapers should be numbered, indexed, and referenced to the issue lead sheet.

All workpapers, either paper or electronic, should be associated with the appropriate issue SAIN number and issue name. This will ensure all team members' audit case files are organized in a consistent manner, allowing for ease of review by the team coordinator, group managers, and others.

SAIN codes for SB/SE examiners can be found by referring to the current SAIN Job Aid for ET, available on the "Employment Tax Knowledge Base" at "Employment Tax Resources/Tools" : https://portal.ds.irsnet.gov/sites/vl014/lists/employmenttaxtools/landingview.aspx.

In support of the LB&I Executive Compensation Strategy, ET specialists are required to verify up-to-date filing of officers’ and key executives’ returns using IDRS command code IMFOLI when conducting an LB&I stand-alone employment tax examination. The examiner should use their judgement to determine if key officer and executive returns should be further inspected. If issues are found, Form 5346, Examination Information Report, will be completed and forwarded per local procedures. Additional guidance on inspection of officers' returns is found in Exhibit 4.46.3-6, Inspection of Key Officer and Executive Returns. Also see "Corporate Executive Compliance" at: http://www.irs.gov/Businesses/Corporations/Corporate-Executive-Compliance.

The employment tax audit workpapers provide important historical information and are valuable for any subsequent cycles that may be opened.

When closing a related case at the same time as the primary/key case file, the required administrative workpapers do not need to be duplicated in the related case files if: