4.23.21 Tax Compliance Officer Employment Tax Procedures

Manual Transmittal

September 20, 2016

Purpose

(1) This transmits a revision to IRM 4.23.21, Employment Tax - Tax Compliance Officer Employment Tax Procedures.

Background

Updates are made to this section for editorial, procedural, and technical changes.

Material Changes

(1) IRM 4.23.21.1. Updated the organizational reference.

(2) IRM 4.23.21.4.1. Information on the use of Inventory Management System (IMS) included, and (2) added for daily time recording.

(3) IRM 4.23.21.5. Added (3) on requirement to maintain the Microsoft Outlook planning calendar.

(4) IRM 4.23.5.1. Added requirement to include Pub 5146 as enclosures in mailings.

(5) IRM 4.23.21.5.4. Provided corrected cite for requirement to not conduct group manager concurrence meetings.

(6) IRM 4.23.21.6.2. Deleted Fast Track Mediation and added Fast Track Settlement as a requirement to offer the taxpayer when an appeals request is received.

(7) IRM 4.23.21.6.3. Follow-up actions, including Letter 3850-F, added.

(8) IRM 4.23.21.6.3(4), Changed IRM reference to IRM 4.10.2.8.4, Undeliverable Initial Contact Letters

(9) IRM 4.23.21.6.3(5). Clarified that the procedures in (1) of IRM 4.10.8.12.9, Follow-Up to 30-Day Letters are not followed in Employment Tax TCO cases.

(10) IRM 4.23.21.6.3(7). Corrected cite for exemption of use of Status Code "13" .

(11) IRM 4.23.21.8. Deleted discussion on materiality. Added cite to IRM 4.23.14, Statute Control and Extension.

(12) Exhibit 4.23.21-1. New Exhibit, Action Codes and Purge Dates.

Effect on Other Documents

This material supersedes IRM 4.23.21, dated October 23, 2014. Interim Guidance Memorandum SBSE-04-1015-0064, Procedures for Follow-Up Attempts in No Show/No Response Employment Tax – Tax Compliance Officer Cases, dated October 2, 2015, has been incorporated into the IRM. Interim Guidance Memorandum SBSE-04-0116-0006, Action Codes and Purge Dates, Employment Tax – Tax Compliance Officer Cases, dated January 27, 2016, has also been incorporated into the IRM. Interim Guidance Memorandum SBSE-04-0416-0013, Use of Publication 5146, Employment Tax Returns: Examinations and Appeal Rights, dated April 18, 2016, has been incorporated into the IRM.

Audience

Tax Compliance Officers and their managers within the SB/SE Employment Tax Specialty Program.

Effective Date

(09-20-2016)

Alfredo Valdespino
Acting Director, Examination,Specialty Policy
Small Business/ Self-Employed Division

Introduction

  1. The purpose of this section is to provide instructions unique to the Tax Compliance Officer (TCO) Program in SB/SE Specialty Examination, Employment Tax (ET). IRM 4.23.21 serves as a starting point for consistent administration of employment taxes by ET TCOs. It is intended that ET TCOs rely on the direction contained in this section for unique procedures that pertain to the assignment, audit, and closure of ET TCO cases. Any instructions or procedures not addressed in this section indicate there is no difference between the ET TCO process and other current employment tax and/or field procedures, and the ET TCO should rely on IRM 4.23, Employment Tax, or IRM 4.10, Examination of Returns.

Overview – General

  1. ET TCO groups increase compliance through the use of remote audit techniques and limited scope employment tax examinations. Initial assignment of cases to ET TCOs will be based on limited identified issues (e.g., ET non-filer, officer compensation, or unique focused issues such as COBRA) that require less extensive audit development than more complex employment tax issues. The utilization of a limited scope approach increases the amount of employment tax compliance coverage directly impacting filing, payment, and reporting compliance.

ET TCO Cases - General

  1. ET TCO case assignments are generally post of duty (POD) neutral, recognizing that the audit is conducive to being worked using the remote audit process. The remote audit criteria were developed specifically for use by ET TCO examiners.

  2. Remote audit features include:

    1. Telephonic appointments where interviews are used to discuss the audit process and initially develop the identified issues with the appropriate party.

    2. The request of limited source documents, including books and records to be supplied via mail/fax/e-mail (subject to adherence to secure messaging requirements), for the examiner's review.

    3. Expansion of the pre-identified scope of audit to include multiple years, related pick-ups, or expansion to additional issues when approved by the group manager.

    See IRM 4.23.19, Employment Tax - Employment Tax Case Assignment and Grading Criteria, for a full discussion on remote audit criteria.

  3. ET TCOs may conduct face-to-face examinations when the taxpayers are within their geographic location. These face-to-face examinations may be conducted in the IRS office or, in rare circumstances, at the taxpayer’s place of business.

  4. ET TCOs are not generally required to conduct a tour of the business, since the majority of the examinations are worked using the remote audit process. However, in examinations where ET TCOs conduct the examination at the taxpayer’s place of business, the ET TCO will request and conduct a tour.

  5. If the development of the pre-identified or subsequently identified issues indicates a more in-depth on-site examination is warranted, the ET TCO will consider transferring the case to an employment tax field group. The ET TCO will discuss such cases with their manager to determine the best course of action. The factors considered and decisions made must be documented in the case file.

Reference Material

  1. An Employment Tax TCO Desk Guide and a TCO Job Aid for Embedded Quality (EQ) are both available for use by ET TCOs when working their cases. These documents provide a more in-depth discussion of the ET TCO procedures and provide examples of best practices.

Case Assignment

  1. Appropriate case selection for ET TCO examinations is critical to the success of the program. Cases must:

    • Be conducive to the remote audit process, and

    • Involve limited scope of not more than one or two issues identified during classification.

    These types of issues can be reconciled generally with minimal review of books and records.

  2. Cases conducive to remote audit include, but are not limited to, Combined Annual Wage Reporting (CAWR) and officer compensation cases.

    • CAWR cases involve employers that failed to file Employment Tax returns.

    • Officer compensation cases involve Form 1120S returns where little or no officer compensation is noted on the face of the S Corporation income tax return; distributions may or may not be indicated on the 1120S return or attachments.

    IRM 4.23.19, Employment Tax - Employment Tax Case Assignment and Grading Criteria, contains a more detailed discussion of work conducive for ET TCOs.

Establishing Case Files

  1. When a case is assigned to the ET TCO, initial set-up in Inventory Management System (IMS) must take place to organize the case file and allow the examiner time to perform pre-contact analysis. See Issue Management System Training (IMS), ELMS Course 56523, for additional assistance.

  2. ET TCOs will complete their daily time report contemporaneously to account for all hours of the day. Examiners must use action codes and purge dates for the completion of the daily time report. See Exhibit 4.23.21-1, Action Codes and Purge Dates, for the specific action codes, definitions, and purge dates.

  3. Examiners must utilize the ETLS - Employment Tax Lead Sheets (formerly re-engineering workpapers) for all examinations. See IRM 4.23.21.6.1, Workpapers, for more information on the use of these lead sheets in ET TCO examinations.

  4. The scope of an ET TCO case is initially limited to issues shown on the classification sheet. Examiners must review the case file and other relevant information prior to contacting the taxpayer. If this pre-contact analysis leads to a change in the scope of the examination, either removing issues identified during classification or adding issues found during the pre-contact analysis, the examiner will discuss these changes with the manager. This discussion and conclusions reached will be documented on Form 9984, Examining Officer’s Activity Record.

Conducting the Examination – General

  1. ET TCO audits are based on the premise of a limited scope approach utilizing a remote audit process; pre-planning activities are critical in every examination. Before making contact with the taxpayers, ET TCOs will research internal sources to determine:

    • The taxpayer’s filing history,

    • Prior audit results,

    • The identified issues, and

    • Documents needed.

  2. External sources should also be researched.

  3. Use the action codes and purge dates in Exhibit 4.23.21-1, to maintain the Microsoft Outlook planning calendar throughout the examination; this ensures cases are timely worked and meet all established time-frames.

  4. The Employment Tax TCO Desk Guide provides a more detailed discussion of pre-planning actions.

Contacting the Taxpayer

  1. Letter 3850-T, Employment Tax TCO Appointment, will be issued to schedule a date and time for a telephone interview; this letter was specifically developed for use in a remote audit.

  2. When a taxpayer is located in the same area as the ET TCO, face-to-face appointments may be conducted. If a face-to-face appointment is scheduled, use the normal appointment letter, Letter 3850, Employment Tax Appointment Letter.

  3. Both Letter 3850-T and Letter 3850 will include Pub 1, Your Rights as a Taxpayer, Pub 5146, Employment Tax Returns: Examinations and Appeal Rights, and Notice 609, Privacy Act Notice. During the initial conversation with the taxpayer, ET TCOs must ensure the taxpayer received these documents and have no questions concerning them. This discussion must be documented in the case file.

  4. The ET TCO must attach a Form 4564, Information Document Request (IDR), to the Letter 3850-T or Letter 3850. The IDR will be tailored to each taxpayer, requesting specific information and documents to assist in developing the issues identified through both classification and pre-planning. IDRs should:

    • Be specific to the classified issues and any additional issues that were approved by the group manager,

    • State the tax periods covered by the examination,

    • Include a date and method of submission for the information requested (e.g., via mail/fax/e-mail or bring to initial appointment), and

    • Include a request for copies of appropriate income tax returns when electronic copies are not available for review (e.g., returns available in the Employee User Portal (EUP)). The ET TCO will be able to review these documents for other employment tax issues or potential referral to income tax, when warranted.

  5. In a remote audit, the requested information will be due to the ET TCO prior to the initial telephone interview. If a face-to-face appointment is scheduled, the taxpayer will be asked to provide the information at the initial appointment.

Conducting the Interview

  1. Interviews are required in ET TCO examinations. The interview will help determine:

    • If there are other employment tax issues,

    • If there are any related entities with potential employment tax issues,

    • The reasons for non-compliance with employment tax filing or reporting requirements, and

    • If the non-compliance is intentional, i.e., the identification of the badges of fraud.

  2. During the initial interview, the ET TCO will gain an understanding of the taxpayer's business and the taxpayer's understanding of employment tax laws by asking questions specific to the taxpayer and the classified issues.

  3. Interviews are used to probe for other employment tax non-compliance and to help determine the applicability of penalties, including fraud. Therefore, some type of interview will be conducted in all ET TCO cases except when the taxpayer cannot be located, is unresponsive to the request for an appointment, or refuses to participate in an interview. See IRM 4.23.21.5.3(2) for additional information.

Developing the Issue(s)

  1. When conducting a remote audit, ET TCOs should have the requested books, records, and supporting documentation prior to the initial interview. If documents were not received prior to the initial interview, the reasons for the delayed receipt must be fully documented. If after the receipt of the non-filed returns or interview, the ET TCO decides not to pursue obtaining the books and records previously requested, the rationale to discontinue the examination must be fully documented.

  2. When taxpayers are unresponsive or uncooperative, ET TCOs must consider all options, (e.g., whether to issue a "no-show report" based on the information available or use appropriate enforcement actions such as issuance of a summons). These decisions will be based on the facts and circumstances and be documented in the case file.

  3. In all non-filer cases, the ET TCO must determine the reasons for non-filing during the interview. If facts and circumstances warrant, the ET TCO will discuss the case with their manager to determine the following:

    1. Are additional books and records required to fully develop the issue?

    2. Can the ET TCO obtain the additional books and records or should the case be transferred to a field specialist to complete the audit?

  4. Follow-up IDRs may be required. The IDR will include a request for specific information needed to continue the development of the issues and include a specific due date and delivery method. Prior to issuance of this IDR, ET TCOs will attempt to discuss this request to ensure the taxpayer fully understands why additional records are being requested. This discussion will also allow the examiner to clarify the information that is needed. If attempts to discuss the request are unsuccessful, ET TCOs should document the case file and issue the IDR.

  5. Appropriate research should be conducted to assist the examiner in developing the issue. This can include making third party contacts when warranted. See IRM 4.11.57, Examining Officers Guide (EOG) - Third Party Contacts, for information on making third party contacts.

Managerial Involvement in ET TCO Cases

  1. ET TCOs are required to obtain managerial approval when:

    • Based on facts learned during the pre-contact analysis, review of the requested documentation, or interview of the taxpayer, the scope of the exam is being changed from the classified issues,

    • There are indications that a worker reclassification issue needs to be developed,

    • Transfer to a field group may be warranted, or

    • Penalties are being proposed that require managerial approval, e.g., negligence.

  2. If badges of fraud are present, the TCO will discuss the case with their manager and jointly decide when/if to contact the Fraud Technical Advisor (FTA).

  3. All discussions with the manager must be documented in the case file either on the case activity record or appropriate lead sheet.

  4. ET TCOs are not required to hold Group Manager Concurrence Meetings covered in (8) of IRM 4.23.4.4, Guide for Examiners Using ETLS – Employment Tax Lead Sheets.

  5. ET TCO managers are encouraged to contact the taxpayer on unagreed cases being closed for assessment or a Notice of Determination; contact is not required on no-response cases. Managers are required to make contact on any case in which the taxpayer requests a formal appeal, unless the taxpayer specifically waived the right to a managerial conference offered by the examiner. See IRM 4.23.21.6.2(2). The refusal must be documented in the case file.

  6. In addition to the specific items noted here, other sections of IRM 4.23 may also apply when managerial involvement is required.

Workpapers, Report Writing and Case File Assembly

  1. Except as noted in this section, ET TCOs will follow the same procedures, guidelines, and time-frames that employment tax specialists use when preparing:

    • Workpapers,

    • Employment Tax Examination Report (ETER), and

    • The case for closure.

Workpapers

  1. ET TCOs are required to use the ETLS - Employment Tax Lead Sheets (formerly re-engineering workpapers).

  2. ET TCOs are exempt from using the following lead sheets that are mandatory in other ET cases:

    • 115 - GM Concurrence Meeting Check Sheet

    • 140 - Mandatory Issues Check Sheet

    • 150 - Risk Analysis Workpaper

  3. Refer to IRM 4.23.4, Workpapers — Employment Tax Examinations, for additional information on workpapers.

Report Writing Procedures for Cases with Taxpayer Contact

  1. The ET TCO must attempt to discuss the issues with the taxpayer to ensure the taxpayer has a full understanding of the proposed adjustments; this can be done either before or after the issuance of the 30-day letter and report.

  2. ET TCOs must offer a managerial conference or Fast Track Settlement to all taxpayers when a request for an appeal is received. If the taxpayer declines one or both offers, that declination must be documented in the case file.

    Note:

    See IRM 4.10.7.5.5, SB/SE Fast Track Settlement, for additional information.

Report Writing Procedures for No-Response Cases (No Show) or Unlocatable Taxpayers

  1. A no-response case occurs when a "deliverable" address exists, but the taxpayer does not respond to correspondence or does not "show" for a scheduled appointment. A follow-up attempt must be made to contact the taxpayer and secure their cooperation. The examiner will make a telephone call to the taxpayer or use Letter 3850-F, Employment Tax Second Contact, in an attempt to obtain their cooperation. If the ET TCO has a valid telephone number and makes telephone contact with the taxpayer, use this opportunity to discuss as much about the case as possible, as it may be the only contact. The ET TCO will not leave a message for the taxpayer to return the call. If the ET TCO does not have a valid telephone number or the taxpayer does not answer, the ET TCO will issue the Letter 3850-F to schedule the follow-up appointment within sixteen calendar days, and the IDR response within eleven calendar days. Document all attempts to contact the taxpayer, by phone or letter, on the Form 9984, Examining Officer’s Activity Record.

  2. If the ET TCO can determine a substantially correct wage adjustment from the information available, a 30-day letter and report will be issued, even if the taxpayer fails to keep the appointment scheduled in Letter 3850-F or makes no attempt to reschedule.

  3. If the examiner cannot determine a substantially correct wage adjustment based on the information available, the examiner will discuss the case with their manager to determine the best course of action to resolve the classified issues, as well as any additional issues identified through the pre-contact analysis. The final decision may include:

    • Transfer of case to a field group,

    • Use of appropriate summons procedures to gain taxpayer cooperation, or

    • Closure of the case using survey procedures.

    Factors used in the determination must be fully documented in the case file.

  4. If a no-response occurs because the address is not valid (mail returned as undeliverable), appropriate steps must be taken to locate a valid address and make contact with the taxpayer before issuing a report. See IRM 4.10.2.8.4, Undeliverable Initial Contact Letters, for procedures to follow when a taxpayer is unlocatable. If the ET TCO determines a report will not be issued, they must discuss this decision with the manager.

  5. The procedures in (1) of IRM 4.10.8.12.9, Follow-Up to 30-Day Letters are not followed in Employment Tax TCO cases.

  6. Refer to IRM 4.23.10, Employment Tax - Report Writing Guide for Employment Tax Examinations, for more information on report writing.

  7. All ET TCO cases are exempt from the use of Status 13 as outlined in (12) of IRM 4.23.10.9, 30-Day Letters. Managers will use action codes and purge dates, or other case monitoring systems, to ensure timely actions are taken after the issuance of the 30-day letter.

Case File Assembly

  1. Refer to IRM 4.23.10.21.1, Assembly of Employment Tax Case File Folder - SB/SE, for information on case file assembly.

Case Closing

  1. ET TCO cases will be closed following the same procedures and time-frames used by all employment tax specialists:

    • Agreed, No-Change, Surveyed, or Unagreed cases not requiring the issuance of Letter 3523, Notice of Determination of Worker Classification, will be closed to the appropriate Centralized Case Processing Unit.

      Note:

      Form 3198, Special Handling Notice for Examination Case Processing, needs to be annotated if the taxpayer is entitled to an interest-free period per IRC 6205. Also, the closing document (Form 5344, Examination Closing Record) needs to show TC 308 with the interest start date if the taxpayer is entitled to an interest-free period. See IRM 20.2.12, Interest - Employment Taxes.

    • Unagreed cases requiring the issuance of Letter 3523, Notice of Determination of Worker Classification, "Offer In Compromise – Doubt as to Liability" cases, or a case where the taxpayer has requested a formal appeal, will be closed to the appropriate Technical Services Unit.

Statute Control Quality

  1. In determining whether Attribute 100, Protection of Statute of Limitations, is met, ET TCOs will be measured on whether the employee took appropriate actions to protect the Statute of Limitations and whether the statute expired. See IRM 4.23.14, Statute Control and Extension, for more information.

Action Codes and Purge Dates

Action Code Definer Meaning Purge Date
01 FIRST APPT Interview scheduled Set by User
02 SUBS APPT Subsequent Appointment Set by User
03 LOCATOR SERVICE Locator Service required – Address Search Today + 15 days
04 PREPARE 30 DAY Case ready for preparation of report and 30-Day Letter Today + 15 days
06 SCH PRE-AUDIT Pre-audit cases – secure and review research needed and submit Form 5345-D for additional modules Set by User
07 30-DAY LETTER DEFAULT PERIOD 30-Day Letter issued and default of 30 days set for monitoring. (If report/protest received earlier, case pulled for closing actions (Action code 10); if no response, case pulled after 30-day default for unagreed, no response closure). Today + 30 days
08 FOLLOW-UP ACT Follow up activities/review documentation/revised report issued if applicable Today + 10 days
09 MGR CONF APPT Conference with manager requested Set by User
10 CLOSING ACTIONS Closing Actions needed on case (also used when accepted delinquent return received) Today + 5 days
12 READY TO CLOSE All actions completed by ET TCO, case ready to close out of the group Today + 5 days
13 SECOND NOTICE Second Notice Letter in no-response cases Today + 15 days
14 SUSPENSE CASES Case Suspense (Fraud, National Office or Counsel). Appropriate when case is in either Status 14 or 18. Set by User
15 FAST TRACK SETTLEMENT Fast Track Settlement Set by User
16 LOCALLY DEFINE Reserved
17 FRAUD DEVELOPMENT Developing a case for fraud potential Set by User