4.75.12 Required Filing Checks and Package Audit Procedures

Manual Transmittal

March 14, 2017

Purpose

(1) This transmits revised IRM 4.75.12, Exempt Organizations Examination Procedures, Required Filing Checks and Package Audit Procedures.

Scope

This chapter provides guidance for Exempt Organization (EO) agents on verifying the filing of required returns by exempt organizations and assessing the audit potential of those returns. Minimum required filing checks for EO agents are also included in this chapter. This revision incorporates Interim Guidance (IG) Memorandum TEGE-04-1016-0022, "Required Filing Checks and Package Audit Procedures," dated October 5, 2016.

Material Changes

(1) Changed terms such as examiner to agent, examination, and examine to audit, and organization, taxpayer, and entity, to exempt organization, as well as re-wrote sections to comply with the Plain Writing Act. For additional information on the Plain Writing Act, see http://www.plainlanguage.gov/. The term agent includes revenue agents and tax compliance officers.

(2) This manual has been reorganized to incorporate IG Memo TEGE-04-1016-0022 dated October 5, 2016.

(3) IRM section 4.75.12.1, Introduction, has been updated to include The Report of Foreign Bank and Financial Accounts (FBAR), as an information item. We introduce here the Filing Check and Package Audit concepts.

(4) All compliance actions are deemed to be conducted by agents unless specifically noted.

(5) IRM 4.75.12.1.1, Added a subsection of definitions for the various audit checks and package audit actions auditors will encounter. Incorporated a part of IG Memo TEGE-04-0117-0007, Review of Organizing Documents of Organizations that Attested to their Conformity in the Determination Process, dated January 30, 2017, clarifying that a focused audit includes inspecting organizing documents.

(6) Several new sections have been added to provide additional direction to assist agents in conducting more efficient and complete audits.

(7) IRM section 4.75.12.9.1, Examination Warranted, was deleted from this IRM because the information it contained was included in IRM 4.75.9.2, Examination Procedures. Examination Procedures was previously numbered IRM 4.75.9.2 and is now located in IRM 4.76.9.1, with the remaining sections following suit.

(8) Added an introductory section on filing checks.

(9) IRM 4.75.12.3; Re-wrote section on filing checks, in general, as presented in the IG memo.

(10) IRM 4.75.12.4; Added a new section on package audits.

(11) IRM 4.75.12.8; Retitled the subsection for content accuracy

(12) IRM 4.75.12.8.2; Deleted. Applicability to OCEP is more appropriately placed in IRM 4.75.12.8.1

(13) IRM 4.75.12.9; Deleted restricted OUO content.

(14) IRM 4.75.12.15, Tax Exempt Bonds, has been replaced with an overview of situations triggering a referral.

(15) IRM 4.75.12.16, Report of Foreign Bank and Financial Accounts (FBAR), was added to provide information regarding FBAR.

(16) IRM Exhibit 4.75.12-4 was added to provide a sample Form 4632-B, Employee Plans Referral Checksheet for EO IRC 403(b)/457 Plans.

(17) IRM Exhibit 4.75.12-5 was added as a reference guide to knowing what forms take filing check priority.

Effect on Other Documents

This IRM replaces IRM 4.75.12, Required Filing Checks, dated July 6, 2010.
This IRM supersedes IG Memo TEGE-04-1016-0022, "Required Filing Checks and Package Audit Procedures," dated October 5, 2016.

Audience

Tax Exempt and Government Entities
Exempt Organizations

Effective Date

(03-14-2017)

Margaret Von Lienen
Acting Director, Exempt Organizations
Tax Exempt and Government Entities

Introduction

  1. EO Exam agents determine whether the taxpayer complies with federal tax and information return filing requirements. Agents will ensure required returns have been filed, while assessing their audit potential.

  2. This manual describes how to conduct a filing check, how to waive a required filing check and how to distinguish it from a package audit.

  3. Because the filing checks and audit scope are different for Office/Correspondence Examination Program (OCEP) cases, refer to IRM 4.75.27 for those procedures.

  4. The agent will generally document on Form 5773, EO Workpaper Summary Continuation Sheet, section G, Package Audit, the steps taken to conduct these compliance checks.

  5. Compliance checks include conducting filing checks of related returns, including:

    • Income,

    • Employment,

    • Excise, and

    • Information returns

  6. While not a compliance check, agents must be aware of the requirements to file the Report of Foreign Bank and Financial Accounts (FBAR). See IRM 4.75.12.15..

  7. A package audit is defined in IRM 4.75.12.1.1 and explained in IRM 4.75.12.4.

Definitions

  1. Familiarize yourself with the following terms to understand the guidance on conducting various checks and package audits:

    1. Filing Checks – Involves verifying the filing of a return. A filing check can be as simple as reviewing IDRS printouts with return information, such as BMFOLI and BMFOLU, but may also include inspecting filed returns, BRTVU prints, or images of filed returns, obtained first from non-taxpayer sources.

    2. Package Audit – Although by itself not an actual examination, a package audit is a series of additional steps beyond a filing check, generally used in the pre-audit stage of the examination to evaluate completion and accuracy of a filed return. In a package audit process, the examiner reconciles and analyzes inconsistencies between filed returns or between returns and other documents available prior to reviewing books and records.

      Example:

      Prior to examining the books and records, the examiner reconciles quarterly Forms 941 with a fiscal year Form 990. This is a package audit.

    3. Full Scope Audit – A full scope audit requires the examiner to consider all classified issues, large, unusual and questionable items (LUQs) and item categories on Form 5773 to determine compliance. A full scope audit doesn't mean all issues and items warrant an examiner’s in-depth review; only that the examiner considers all issues and items, with written comment, in order to determine which ones require an in-depth review. It’s performed only when the facts and circumstances warrant (such as fraud, egregious non-compliance, undisclosed transactions, and certain training cases) or when otherwise directed.

    4. Focused Audit – A focused audit is limited to one or more issues that have been pre-identified during a return’s screening, classification, or selection process, inspection of organizing documents, and consideration for LUQs. Every audit is a focused audit, unless directed to conduct a full scope audit.

      Note:

      The term "organizing documents" denotes an organization’s governing instruments or the organizing and enabling documents. Inspection is required for organizations with a ruling date after 201310 in the EO Business Master File (BMF).

      Note:

      The terms "single issue audit" and "limited scope audit" are obsolete.

    5. EO BMF - The Exempt Organizations Business Master File.

    6. Primary return – The annual EO information return. Primary returns include Form 990, Form 990-EZ, Form 990-PF, Form 990-BL, Form 5227, and Form 1065 (for IRC 501(d) organizations). This is the return under EO jurisdiction around which other returns revolve. The primary return also serves as the return-of-record for statute purposes for certain related tax returns, such as Form 990-T, 1120-POL, 4720, 1041 or 1120.

    7. Related return – Any return of the same taxpayer. Discrepancy adjustment returns and Forms 4720-A (MFT 66) filed by related persons with respect to an organization under audit will be treated as a related return.

Regulatory Authority

  1. Internal Revenue Code (IRC) 6041 - 6053 provide requirements for the reporting of certain information concerning transactions with persons during the course of business, including wages paid to employees. Generally, the regulations require the reporting of items such as payments made in the course of trade or business to another person, payments of dividends, interest, wages, and cash receipts in excess of $10,000. Exempt organization must timely file these returns as required.

  2. IRC 6041A, Returns Regarding Payments of Remuneration for Services and Direct Sales, provides that if any person engaged in a trade or business pays compensation of $600 or more in a calendar year to an independent contractor for services in the course of that business, the payer must file an information return.

  3. IRC 6041A(e) requires the payer to furnish the payee a written statement setting forth the amount of such payments. The statement must be furnished to the payee on or before January 31 of the year following the calendar year for which the return was made.

  4. IRC 6051(a) and Treas. Regs. 31.6051-1(a) and (b) provide that employers must furnish Form W-2, Wage and Tax Statement, to employees for compensation paid during the calendar year showing the total amount of wages paid subject to withholding of income tax, the total amount of wages paid subject to Federal Insurance Contribution Act (FICA) tax, and the total amount of income tax and FICA tax deducted and withheld. The statement must be furnished to the employee on or before January 31 of the succeeding calendar year.

  5. Employers must file Forms W-2 with the Social Security Administration, which are due on or before January 31 of the succeeding calendar year. (See Sec. 201 of the PATH Act and IRC 6071(c)).

  6. IRC 6050I and the regulations thereunder require that any person who, in the course of a trade or business, receives cash in excess of $10,000 in one transaction (or two or more related transactions), must file a report or Form 8300, Reports of Cash Payments Over $10,000 Received in a Trade or Business, within 15 days after receiving the cash.

Introduction to Filing Checks

  1. For both focused and full scope audits, you are required to conduct filing checks.

  2. See Exhibit 4.75.12-5, "Filing Check Guidance Table" for a list of returns that are subject to required or waiver-eligible filing checks.

General Guidelines - Filing Checks

  1. In the interest of conserving resources, increasing compliance, and reducing multiple contacts with exempt organizations, review the filing of other returns to determine whether the taxpayer is in compliance with all filing requirements.

  2. A filing check:

    • Requires minimal time

    • May be as simple as inspecting IDRS printouts of filed returns, including a BMFOLI print.

    • May be as involved as inspecting actual returns, BRTVU prints, or images of filed returns.

    • Doesn’t require a supplemental workpaper, but ensure you document the work completed on Form 5773, Section G

    • Is always required for annual EO returns, Form 990-N, and employment taxes

    • For other returns, a waiver of a filing check requires authorization and documentation.

  3. Be alert to possible liability for other federal taxes, potentially leading to referrals, securing delinquent returns, or expansion of the audit.

  4. Consider inspecting returns obtained first from non-taxpayer sources.

  5. Filing checks are further categorized as:

    • Always required (see IRM 4.75.12.3.1).

    • Required but waiver-eligible (see IRM 4.75.12.3.2).

    • Optional or not required (see IRM 4.75.12.3.3).

Filing Checks Always Required

  1. A filing check is always required for:

    • Form 990 in the case of any IRC 501(c) organization or IRC 4947(a)(1) trust, not a private foundation and not a black lung benefit trust

    • Form 990-EZ in the case of any IRC 501(c) organization or IRC 4947(a)(1) trust, not a private foundation and not a black lung benefit trust

    • Form 990-N in the case of any IRC 501(c) organization other than a private foundation, except those ineligible to file Form 990-N listed in https://www.irs.gov/charities-non-profits/form-990-n-e-postcard-organizations-not-permitted-to-file

    • Form 5578 in the case of any IRC 501(c)(3) organization not filing Form 990 or Form 990-EZ that operates, supervises, or controls a private school

    • Form 990-PF in the case of any private foundation or IRC 4947(a)(1) trust treated as a private foundation.

    • Form 990-BL in the case of any black lung benefit trust exempt under IRC 501(c)(21)

    • Form 1065 in the case of any religious or apostolic organization under IRC 501(d)

    • Form 5227 in the case of any IRC 4947(a)(2) split-interest trust.

    • Form 990-T in the case of any IRC 501(c) organization or government-owned college and university

    • Form 1120 in the case of any taxable private foundation that is a corporation or unincorporated association

    • Form 1041 in the case of any IRC 4947 trust, or any taxable private foundation that is a trust

    • Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (not applicable to IRC 501(c)(3) organizations)

    • Form 941, Employer’s Quarterly Federal Tax Return

    • Form 944, Employer’s Annual Federal Tax Return

    • Form 945, Annual Return of withheld Federal Income Tax

    • Prior and subsequent year returns for each of the above

    Example:

    (1) EO agent is auditing a 501(c)(3) organization that’s exempt from filing Form 990 per EO BMF and it has no employees. The EO agent must conduct a filing check for Form 990 series and Form 941 for the current, prior and subsequent years. The EO agent isn't required to check for Form 1120 and Form 940. These returns are outside the organization’s sphere of influence (returns a taxpayer can’t possibly file). At the audit’s conclusion, the agent will determine whether the organization is actually required to file any other return or notice.

    Example:

    (2) EO agent is auditing a IRC 501(c)(12) electrical cooperative. The EO agent must check for the filing of Form 1120 as well as Form 990. Form 1120 is not outside the organization’s sphere of influence because a IRC 501(c)(12) organization that fails the 85 percent member income test for a specific tax year is required to file Form 1120 instead of Form 990 for that tax year. For the tax years the cooperative filed a Form 990, check for the filing of Form 990-T also. See Notice 92-33,1992-2 C.B. 363.

  2. Consider penalties under IRC 6651 and IRC 6652 for late or non-filed returns.

  3. See Exhibit 4.75.12-5, Filing Check Guidance Table, for a list of returns that are subject to required or waiver-eligible filing checks.

Filing Checks Required But Waiver-Eligible

  1. You can waive filing checks with managerial approval for certain returns. Group managers can waive a filing check for a return or return category if you show substantial compliance exists, or if specified conditions or circumstances warrant a waiver. Refer to a return’s instructions to better ascertain the need to waive a filing check.

    Example:

    A group manager can authorize waivers of filing checks for Forms W-2G, 730 or 11C for certain types of IRC 501 (c) organizations under audit that don’t conduct gaming.

  2. The waiver must be properly authorized and documented.

  3. Document a manager’s authorization on Form 5773, at section G. Include the reason used to support the waiver, and an analysis if the waiver is based on a computation.

    Note:

    An approved waiver of a filing check doesn’t relieve you from exercising due diligence in ensuring equitable and fair tax administration in any audit.

  4. Authorization and documentation can take the form of a group manager’s memo to the group specifying conditions or circumstances to justify a waiver. You can reference the group manager’s memo on Form 5773, at section G.

  5. Check for the filing of returns listed in the succeeding paragraphs, absent a waiver.

  6. In general, for any employer organization or payer of non-employee compensation, check for:

    • Form W-2, Wage and Tax Statement

    • Form W-3, Transmittal of Wage and Tax Statements

    • Form 1096, Annual Summary and Transmittal of U.S. Information Returns, including Form 1099 series

    • Form 1099-MISC, Miscellaneous Income

    • Form 1099-C, Cancellation of Debt (particularly with respect to officers and directors)

  7. In general, for any IRC 170(c) organization involved in fund-raising or receives donated property, check for:

    • Form 8282, Donee Information Return

    • Form 8870, Information Return for Transfers Associated with Certain Personal Benefit Contracts

    • Form 8899, Notice of Income from Donated Intellectual Property

    • Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes

  8. In general, for any organization involved in gaming, check for:

    • Form 730, Monthly Tax Return for Wagers

    • Form 11-C, Occupational Tax and Registration Return for Wagering

    • Form W-2G, Certain Gambling Winnings

  9. In general, for any educational, research or health care provider organization, check for:

    • Form 1098-E, Student Loan Interest Statement

    • Form 1098-T, Tuition Statement

    • Form 8899, Notice of Income from Donated Intellectual Property

    • Form 1099-Q, Payments from Qualified Education Programs (Under Section 529 and 530)

    • Form 1099-MISC, Miscellaneous Income (for reporting royalties)

    • See also IRM 4.75.12.3.2 (12).

  10. In general, for any applicable large employer organization as defined by IRC 4980H or provider of minimal essential health coverage, check for:

    • Form 1094-B, Transmittal of Health Insurance Coverage Statements

    • Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns

    • Form 1095-B, Health Insurance Coverage

    • Form 1095-C, Employer-Provided Health Coverage

    • Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code

  11. In general, for any organization with a food or beverage establishment or social club where tipping is customary, check for:

    • Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips

  12. In general, for organizations with international or foreign features, or with foreign workers and contractors, check for:

    • Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

    • Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding

    • Form 8288, U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests

    • FBAR, Report of Foreign Bank and Financial Accounts (see IRM 4.75.12.15)

  13. In general, for organizations that issue bonds, check for:

    • Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues

    • Form 8038-T, Arbitrage Rebate and Penalty in Lieu of Arbitrage Rebate

  14. In general, for organizations with employee benefit plans, check for:

    • Form 5500, Annual Return/Report of Employee Benefit Plan

    • Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

    • Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

  15. In general, for organizations that may be involved in reportable or abusive transactions, check for:

    • Form 4720, Return of Certain Excise Taxes on Charities and other persons under Chapters 41 and 42 of the IRC

    • Form 8300, Reports of Cash Payments Over $10,000 Received in a Trade or Business

    • Form 8870, Information Return for Transfers Associated with Certain Personal Benefit Contracts

    • Form 8886, Reportable Transaction Disclosure Statement

    • Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction

  16. In general, for organizations making political expenditures, or for political organizations, check for:

    • Form 4720, Return of Certain Excise Taxes on Charities and Other persons Under Chapters 41 and 42 of the IRC.

    • Form 8871, Political Organization Notice of Section 527 Status

    • Form 8872, Political Organization Report of Contributions and Expenditures

    • Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations

  17. See Exhibit 4.75.12-5 Filing Check Guidance Table, at the second column, for a complete list of filing checks that are required but are waiver-eligible.

Filing Checks and Other Checks Optional Or Not Required

  1. You are not required to explain your decision not to conduct a filing check for the returns and statements listed in IRM 4.75.12.3.3 (3).

  2. If information obtained from the case file, outside sources, internal databases, or from the conduct of the audit, indicates potential non-compliance, you may conduct a compliance check.

  3. Optional filing and compliance checks include:

    • All other returns not listed in IRM 4.75.12.3.2.

    • Returns of related persons including controlled organizations, such as the Forms 1040, 1041, 1120 -series, or Form 1065.

    • Withholding Compliance Program involving questionable Forms W-4.

  4. See Exhibit 4.75.12-5, Filing Check Guidance Table, second column, for a complete list of filing checks that are optional and non-required checks.

Package Audit Guidelines

  1. Package audits don't by themselves constitute an examination if the taxpayer’s books and records weren't examined. A package audit:

    • Is not a requirement.

    • Is performed at the discretion of the agent.

    • Is more time intensive than a filing check and requires a supplemental workpaper.

    • Helps to evaluate returns for consistency, completion and accuracy in reporting where needed.

    • Involves reconciling and analyzing between filed returns, or between filed returns and other documents available prior to the audit.

    • Can involve a comparison between any type of return, not just employment tax returns.

    • Can be performed for either full scope or focused audits.

  2. The conclusion of a package audit is useful in:

    • Identifying additional issues.

    • Deciding to expand the scope of the audit.

    • Revising audit steps and techniques.

  3. One reason to conduct a package audit includes reconciling a discrepancy between a Form 990’s salaries expense and payroll taxes, and amounts shown on Forms 941.

  4. Reconcile related returns with line items shown on the primary return under audit.

Audit Jurisdiction

  1. EO has audit jurisdiction for all annual EO primary returns listed in IRM 4.75.12.3.1., Form 990-N, and related EO tax returns, such as Form 990-T, Form 1120-POL and Form 4720.

  2. Employee plan returns and bond returns of an EO are under the audit jurisdiction of Employee Plans and Tax-Exempt Bonds functions respectively. Miscellaneous excise tax returns, such as Form 720 are under the audit jurisdiction of SB/SE.

  3. EO also has primary audit responsibility for employment tax returns, withholding returns and gaming excise tax returns filed by IRC 501(a) organizations, IRC 4947 trusts, IRC 527 organizations, and IRC 529 organizations.

  4. The returns and schedules under EO jurisdiction are listed in Exhibit 4.75.12-1.

Filing Verification

  1. During the pre-audit phase, verify whether the organization filed all required returns indicated on Integrated Data Retrieval System (IDRS).

    Example:

    An EO’s Form 990 reports salaries expense of $50,000. INOLES shows a Form 941 filing requirement, but Forms 941 weren't filed. On the surface it appears a filing delinquency exists, but the EO may have employed a Professional Payroll Organization (PPO). The Reporting Agents File in IDRS (BMFOLE) indicates if the organization authorized a PPO to file its employment tax returns.

  2. To minimize an organization’s burden, before requesting a retained copy of filed returns, use internal sources, such as IDRS, and online Statistics of Income Exempt Organizations Return Image Net (SEIN), to verify filing compliance.

    Example:

    Before drafting any initial Information Document Request, (IDR), request BRTVUs for Forms 941 and 940 ; and, IRPTRI for Forms 1099 and W-2. Don’t request these returns in the initial IDR unless you identify issues that can only be resolved by viewing the organization’s copies of the returns.

  3. CFOL (Corporate File On-Line) provides online access (read-only research) to tax accounts, returns and other related information stored in IDRS. See Document 6209, IRS Processing Codes and Information, for CFOL command codes. Look for detailed information on any command code in IRM 2.3 or IRM 2.4. You can also search external sources, such as Guidestar, ERI, or Foundation Center for copies of Form 990, rather than requesting them from the organization.

    Caution:

    Treasury employees including IRS employees are prohibited from accessing tax account information, unless such employee’s official duties require access for tax administration purposes. See IRC 6103(h)(1). BROWSING IS ILLEGAL AND CONSTITUTES UNAUTHORIZED ACCESS. BROWSING COULD RESULT IN SEVERE ACTION AGAINST THE EMPLOYEE.

  4. Obtain and review IDRS prints:

    • BMFOL – Business Master File Online (BMFOL) provides research of nationwide entity and tax information posted to the Business Masterfile.

    • IMFOL – Individual Master File Online (IMFOL) provides research of nationwide tax information posted to the Individual Masterfile.

    • PMFOL – Payer Master File Online (PMFOL) is a research tool, which provides information from Payer Master File (PMF).

    • IRPTR – Information Returns Transcript File is used to request transcripts of Forms 1099 filed from the Information Returns Master File (IRMF) for a particular Taxpayer Identification Number (TIN). The request is made for Payee or Payer Information.

    • IRPOL – Information Return Data by Individual accesses Information return master file profile by TIN and tax year. This file makes available data extracted from Forms 1099, W-2 and W-4.

    • BRTVU – Business Returns Transaction View provides a display of the transcribed line items on all business tax returns and their accompanying schedules or forms as the returns are processed at the campus.

    • RTVUE – Return Review (IMF only) provides a display of line items transcribed from Form 1040 series and their accompanying schedules and/or forms as the returns are processed at the campus.

    • INOLE – Entity Information for all Master File Accounts provides access to the National Account Profile (NAP) which contains selected entity information for all Master File (MF) accounts. This command code will provide filing status, filing requirements, cross-references to other TINs, etc.

Case File Documentation

  1. Specify on Form 5773 at Section G:

    1. The required filing check procedures considered;

    2. Those returns and forms required to be filed, and

    3. Whether the returns were filed timely.

  2. If the taxpayer has correctly filed all required returns, state your conclusion to that effect. Identify specific returns in the comments.

  3. Document actions taken and decisions made with resect to non-filed returns. See IRM 4.75.12.8.1.

  4. If you don’t complete the minimum required filing checks, include an explanation and document managerial involvement in the workpapers.

Required Actions on Non-Filed Returns

  1. If an organization failed to file what appears to be a required return, find out why the return was not filed. If the explanation cannot resolve the delinquency, take any of the following actions:

    • Request or obtain additional information, research the filing requirement, or perform additional audit steps. See IRM 4.75.12.8.1.

    • Solicit a delinquent return, except when fraud or willful failure to file is indicated. See IRM 4.75.22.4.

    • Establish a substitute for return (SFR) on AIMS and RCCMS. See IRM 4.75.22.7.

    • Make a referral to another function using Form 5346, Form 5666, or Form 4632.

    • Request a collateral examination. See IRM 4.75.13, Issue Development.

  2. Consider the effect of delinquency on tax-exempt status. Include the delinquency matter in an advisory if exemption is maintained.

General Audit Procedures

  1. Refer to IRM 4.75.11 for On-Site Audit Guidelines.

  2. Consider the following audit steps:

    1. Identify returns that should be filed. This can also be accomplished during a package audit.

      Example:

      Salaries are reported on Form 990, but Forms 941 are not filed.

      Example:

      Bingo income is reported on Form 990, but Form 990-T wasn’t filed to report the regularly carried-on sale of pull tabs or concessions.

    2. Reconcile related returns with line items shown on the primary return under audit.

    3. If the audit reveals transactions with related organizations, or the sharing of facilities, inspect pertinent related returns for accurate reporting.

    4. During the audit of a Form 990, 990-EZ, 990-PF or Form 990-BL where the facts and circumstances warrant, inspect the officers’ personal income tax returns by securing a RTVUE printout to determine whether all gross income items (from the EO audit) have been reported.

    5. If an officer didn't properly report all items of gross income, prepare a discrepancy adjustment report. If a full audit is warranted, complete Form 5666, TE/GE Referral Information Report, or Form 5346, and forward to the EO Referrals Unit for consideration by the appropriate function.

    6. Group manager: Refer an approved information report to the EO Referrals Unit for transmittal to the appropriate division for consideration.

    7. If an organization potentially violated the provisions of IRC 4980B concerning the continuation of health care benefits, prepare Form 5666 or Form 5346 and send to the EO Referrals Unit for forwarding to the appropriate PSP outside of EO.

  3. Inspect withholding and other statements retained by a payer organization on the Form W-4, Form W-4P, Form W-9 or Form 5754 series. In the case of organizations with non-resident alien employees or foreign payees, inspect withholding statements on Form 8233, Form W-8BEN, Form W-8ECI, Form W-8EXP or Form W-8IMY.

Prior and Subsequent Years’ Returns

  1. Review the organization’s Form 990 series returns for the prior and subsequent years of the audit year assigned to you for proper filing and to evaluate audit potential. Minimize the organization’s burden by securing copies of Form 990 from IDRS, online SEIN or through a service such as Guidestar or Foundation Center (unless IRC 6104(d) compliance is part of the audit scope).

    Note:

    If the returns aren't available under IDRS, Online SEIN, or other external sources (e.g. Guidestar), request to review the taxpayer’s retained copies of filed returns.

  2. Determine whether increases or decreases in activities and financial data affect the organization’s exempt status or result in tax. Such changes may warrant establishing the prior or subsequent tax year’s return for audit.

    Caution:

    Consult with the group manager before establishing prior and/or subsequent year returns for audit.

  3. A review of prior and subsequent year’s returns is essentially equivalent to the classification of a return to determine if an audit is necessary. If the group manager hasn’t approved the audit, don't request books and records related to those returns.

    Note:

    If transactions occurred in prior or subsequent years that affect the assigned return, such transactions may be audited and the relevant books and records may be requested. Inform the organization that the request is only for a determination of tax or continuation of exempt status for the return and year under audit, and does not open another return or tax year for audit.

  4. When evaluating the returns for issues related to the year under audit:

    1. Check for large, unusual, and questionable items.

    2. Compare amounts on a proportional basis as a percentage of gross receipts or gross income.

    3. Question large variances or amounts only present in one year.

    Reminder:

    Books and records cannot be requested to confirm amounts in prior or subsequent years returns without opening them for audit.

    Exception:

    If the agent requests prior years’ records solely to verify the public support schedule of an IRC 501(c)(3) organization’s Schedule A (Form 990) already under audit, and this purpose is made clear in the IDR.

  5. Document in the workpapers whether prior and subsequent years’ returns were reviewed and explain why an audit wasn't warranted.

  6. If, during the audit, information is obtained that indicates potential substantive noncompliance in subsequent years for which returns haven't yet been filed by the organization, obtain managerial approval to open the year(s) on Non-Master File.

  7. An audit of prior or subsequent year returns may be warranted if:

    • Noncompliance exists.

    • An issue is developed during the audit of an originally assigned return that carries back or forward to other years’ returns.

      Example:

      Generally, include all subsequent year returns in the audit if a revocation of exempt status is being considered for the current year. If all subsequent years are not established for audit, document your reasons in the case chronology including your discussions with the group manager.

    • There is a large, unusual or questionable item that must be resolved.

    • The adjustment in the audit year is likely to be treated the same in another tax year.

    • There are carryback or carryforward issues.

  8. If adjustments are made to the return(s) under audit, document the reasons other years weren't opened for audit.

  9. Obtain and document in the workpapers or the case chronology record, group manager approval to extend an audit into the prior or subsequent years. Upon the case closure, the manager will sign off on the case chronology, which should serve to affirm the documented discussions.

  10. Audit prior or subsequent year return(s) concurrently with the assigned return. Ensure sufficient time remains on the statute of limitations before starting an audit of a prior or subsequent year return. See IRM 25.6, Statute of Limitations.

  11. Inform the organization of the decision to expand the audit to include a prior or subsequent year’s return. Verify the presence or absence of an audit indicator on a related return before initiating the audit. If an audit indicator is present, take appropriate steps to coordinate before contacting the organization.

  12. In order to establish cases on AIMS using retained copies of the organization's returns, create a module on RCCMS as soon as you know an audit will be initiated. Request establishment with the Update AIMS check box selected for Business Master File (BMF) modules.

    Note:

    Ensure that the group manager approves the request for returns or establishment on AIMS and that all codes are correct.

  13. If it is not possible to secure the original return or if closing would be delayed by awaiting receipt of the original, close the case based on the organization's retained copy. If the organization doesn't provide a copy, secure BRTVUE and RTVUE prints internally. Original returns must be obtained in the following instances:

    • Unagreed cases involving fraud

    • Jeopardy assessments

    • When the closing is on the basis of a notice of deficiency

Audit Procedures

  1. Generally, audits of prior and subsequent year returns will be limited to the issue(s) giving rise to the audit of the originally assigned return. However, the returns would still be reconciled to the taxpayer’s books and records, just as the originally assigned return was.

  2. If you discover that the entity hasn't filed returns or forms, the audit of which are within the jurisdiction of another function or Operating Division, prepare Form 5666 or Form 5346 and sent to the EO Referrals Unit for transmittal to the appropriate function. See IRM 4.75.16 for EO closing procedures.

Employment Tax Returns

  1. Employment tax is an integral part of the audit of an exempt organization. Review all employment tax returns to ensure filing compliance. A separate employment tax audit may be necessary if the review reveals a lack of compliance.

Employment Tax Returns Guidelines

  1. Using IDRS commands BMFOLI and BRTVU, verify proper filing and payment of taxes for each tax period, up to and including the period for which an employment tax return was due.

  2. Employment taxes include:

    • Federal Insurance Contributions Act (FICA)

    • Railroad Retirement Tax Act (RRTA)

    • Federal Income Tax Withholding (FITW)

    • Federal Unemployment Tax Act (FUTA)

    • Back-Up Withholding

    • Withholding on gambling winnings

    • Withholding on income paid to foreign persons (a filing check for Form 1042 can be waived in some cases)

  3. This responsibility also extends when the audited return is only a Form 990-T.

  4. Determine whether available information warrants an employment tax audit of the organization’s books and records. If an audit is warranted, conduct the employment tax audit concurrently with the organization’s return. See Policy Statement P-4-4. Refer to IRM 1.2 and IRM 4.23.

  5. Generally, an employment tax audit is warranted if:

    1. Available information indicates that the employment tax liabilities weren't correctly reported.

    2. Returns are delinquent.

    3. The potential additional liability or the resulting improvement in voluntary compliance will justify the time required to make the necessary adjustment.

  6. Discuss and secure group manager approval for employment tax audits.

  7. In worker classification cases, give consideration to Section 530 relief before asserting that a worker is an employee.

  8. If an employment tax compliance check indicates there will be an adjustment to the organization’s employment tax liability, perform the following actions:

    1. Request BRTVU printouts or the original returns and a BMFOLT printout, or request retained copies of the returns from the organization (if readily available);

    2. Initially, employment tax returns are established only for the fourth quarter of each calendar year under audit.

    3. If you determine that the remaining quarters for that calendar year must be audited, request AIMS/RCCMS controls for each of those quarters.

    4. If you determine that there will be an adjustment for all four quarters during the initial stages of the audit, establish AIMS and RCCMS controls for all four quarters immediately.

    5. Allocate employment tax adjustments to the specific quarters by matching the payment dates, rather than lumping the adjustments to the fourth quarter.

  9. For all open employment tax cases where the audit didn't include either the identification of or the development of a worker classification issue, including requests for information or discussion regarding a reclassification issue, use Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment. If any workers were reclassified as employees, use Form 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases, to report additional tax due to the change in worker status.

  10. If an employer willfully fails to deduct, withhold or pay the employee’s portion of employment taxes, consider asserting the penalty provisions under IRC 6672. The employer is liable for the correct amount of FICA tax and income tax withholding from wages, even if the employer failed to collect the withholding taxes from the employee.

  11. If the employer fails to deduct the tax, the employer is nevertheless liable for the correct amount of tax that should’ve been withheld. The employee is also liable for the correct amount of tax until it is collected.

  12. If you concurrently audit employment tax returns and Form 990, attach Forms 3198-A, TE/GE Special Handling Notice, to the front of both the primary return case file and the employment tax return case file. Indicate on both Forms 3198-A that the case files are related and shouldn’t be separated. Also indicate on the Form 3198-A attached to the front of the primary return case file that there’s a related employment tax audit.

  13. In cases where the returns must be separated for expediency of processing, e.g., the primary return has a short statute date, state on Forms 3198-A the reason the related return is being closed separately.

Information Returns

  1. Certain information returns are the primary input documents for computerized matching programs to detect potential unreported income and nonfilers. Policy Statement P-4-4 (see IRM 1.2) and the "required filing check but waiver eligible" provisions in this manual spell out EO’s responsibility to ensure the timely and correct filing of information returns.

  2. Examples of information returns include:

    1. Form W-2.

    2. Form 8300.

    3. Form 1099 series.

  3. Group managers and special reviewers are responsible for ensuring that agents properly document their workpapers to reflect adequate coverage of information return issues.

  4. Refer to IRM 4.75.12.3.2 for information on waivers.

Form W-2

  1. Consider whether all items paid by an employer organization have been properly included in the employees’ wages. Wages include such items as bonuses and fringe benefits (cash or noncash). Examples include:

    • Nonaccountable automobile or housing allowances.

    • Corporate vehicles used for personal purposes.

    • Employer provided life insurance in excess of $50,000.

    • Prizes or awards.

    • Moving expenses above the actual move itself.

    • Employer provided apartments for employees.

    • Health or social club dues and fees

    • Spousal travel

    • Payments on personal legal services and other services

    • Payments on personal debts, including tax debts

  2. Review Schedule J, Form 990, Compensation Information, to identify reported compensation of officers, directors, trustees, key employees, and the highest compensated employees.

  3. Review Forms W-2. Determine whether the highest paid employees' compensation presents a potential inurement issue. When considering whether compensation is reasonable, or could present potential inurement, remember to consider:

    • Employee benefits.

    • Personal use of assets owned by the organization.

    • Personal expenses paid by the organization for travel, entertainment or other personal accounts.

Form 1099

  1. IRC 6041 through IRC 6053 require that exempt organizations report various types of payments to both the IRS and the recipients of the payments. These payments include such items as dividends, interest, rents, royalties and nonemployee compensation. These payments are reported on Form 1099.

  2. To ensure the timely and correct filing of information returns, determine whether all information returns required to be filed were filed by the organization for the calendar years that fall within the period of the assigned return under audit, to the most current calendar year. Consider the following minimum requirements:

    1. During the preplanning stages of the audit, determine the potential filing requirements. Line items of the return are often indicative of an information return filing requirement, e.g., interest paid, subcontractors labor, rents, consultants, legal and accounting fees, advertising, etc.

    2. Review highest paid contractors at Form 990 at Part VII, or Form 990-EZ at Part VI, or Form 990-PF at Part VIII.

    3. Use CFOL command PMFOL to determine if the organization has filed information returns. Use IRPTR to review filed Forms 1099.

    4. Question the organization about their internal procedures on information reporting and verify all reporting requirements have been met.

    5. Review copies of the Form 1099 series. These forms include:

    • Form 1099-DIV

    • Form 1099-INT

    • Form 1099-MISC

    Note:

    Make every attempt to gather this information internally before asking the organization for it (e.g. IDRS).

  3. Review the procedures the organization uses to decide whether to file information returns on payments made to independent contractors.

  4. Reconcile Forms 1099 to Form 1096, Annual Summary and Transmittal of U.S. Information Returns, and to the organization’s books and records.

  5. Form 1099 isn't required for payments less than $600 during a calendar year. In addition, Form 1099 isn't required for payments made to exempt organizations or corporations. However, there are exceptions to the corporation rule and they include the following:

    • Medical and health care payments

    • Gross proceeds paid to an attorney

    • Attorneys’ fees

    • Substitute payments in lieu of dividends or tax-exempt interest

    • Payments by a federal executive agency for services (vendors)

  6. While examining disbursements, note payments to individuals, proprietorships or partnerships for which required Forms 1099 weren’t filed. Obtain name, address, and TIN and make a referral on Form 5666, if necessary. Secure all delinquent Forms 1099 and consider whether back-up withholding tax and penalties under IRC 6721 and IRC 6722 are applicable. See IRM 4.23.

Form 8282

  1. Form 8282, Non-Cash Charitable Contributions Donee Information Return, is required to be filed by exempt organizations who sell, exchange, transfer, or otherwise dispose of charitable deduction property within three years after the date of its receipt. See IRC 6050L. A copy of the return must be given to the donor. Consider the assertion of the non-filing penalty provided in IRC 6721 or IRC 6723 if the Form 8282 isn't filed.

  2. Review Schedule M, Form 990, Non-Cash Contributions, for current and prior years

Form 8300, Cash Payments Over $10,000

  1. Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is required to be filed by any person who, in the course of carrying on a trade or business, receives more than $10,000 in cash in one transaction, or related transactions.

  2. Cash received as a charitable contribution isn't subject to the reporting requirements under IRC 6050I.

  3. Form 8300 must be filed with the IRS by the 15th day after the date the reportable cash payment was received. A person may elect to report as one payment, several independently reportable payments received within a 15-day period.

  4. Inspect the organization’s copies of Form 8300, along with the statements required to be furnished to an "identified person." See exceptions under IRC 6050I.

  5. The recipient of the cash payment must:

    1. Keep a copy of each Form 8300 for a period of five years from the date of filing.

    2. Furnish a written statement of each identified person on the Form 8300, showing the total amount of cash received during the year from that person(s).

      Note:

      This statement isn't required to be in a particular form or format. A copy of Form 8300 may be used for this purpose, if the identified person had only one transaction during the year.

    3. Furnish a copy of the written statement to the identified person on or before January 31 of the succeeding calendar year.

  6. Form 8300 must include the following information:

    1. Name, address and TIN of the person for whom the transaction was completed

    2. Name, address, and TIN of the person conducting the transaction, if different from (6)a, e.g., an "agent" for a principal

    3. Verification of identity of aliens or non-residents, passport, alien ID card, or other official document showing foreign nationality or residence (If Residents or Citizens, driver’s license, credit card, or other similar ID)

    4. Description of the transaction and method of payment, i.e., name of business that received cash

  7. A transaction giving rise to the reporting requirements of IRC 6050I is the underlying event precipitating the payer’s transfer of cash to the recipient. A reportable transaction may be, but isn't limited to:

    1. Sale of goods or services;

    2. Sale or rental of property;

    3. Exchange of cash for cash; or

    4. Conversion of cash to a negotiable instrument.

  8. Interview the person(s) responsible for compliance with IRC 6050I I. Generally, the person responsible for the filing of an EO return will also be responsible for filing Form 8300. During the interview, inquire as to:

    1. The names and titles of officers or employees who handle cash transactions and who may be responsible for filing Form 8300.

    2. The responsible person’s knowledge of the reports and records required under IRC 6050I.

    3. The internal controls of the business with regard to cash transactions.

    4. The types of records maintained on transactions required to be reported on Form 8300.

    5. Whether or not the organization has filed any Forms 8300.

    6. Whether procedures used to ensure that the information, such as the payer’s identity, contained in the report(s) were complete and correct.

  9. Inspect the cash receipts and sales journal, bank statements, and deposit slips to verify:

    1. Transactions involving cash receipts of more than $10,000.

    2. Consecutive or related transactions with total in excess of $10,000.

    3. Whether or not the currency transactions in excess of $10,000 were reported.

  10. Be alert to situations that may be an attempt to circumvent the reporting requirements of IRC 6050I, such as:

    1. A single transaction structured as multiple transactions of less than $10,000.

    2. Transactions in excess of $10,000 where large amounts of cash (under $10,000) are combined with small non-cash payments for purposes of avoiding the reporting requirements.

    3. A pattern or series of transactions of less than $10,000 conducted over a relatively short period of time by or for the same person.

  11. Submit Form 5666 or Form 5346 on unusual or questionable transactions discovered during an audit. Form 5666 or Form 5346 can be submitted on the "recipient" or the "identified person" , depending upon which party to the transaction is under audit when the questionable item is discovered. Prior to submitting Form 5666 or Form 5346, consider the following factors:

    1. Does the transaction appear to be an isolated incident, or one of many, which may have been unreported?

    2. Depending on the type of business, is it normal and customary for the business to conduct its transactions in cash?

    3. Is it reasonable for the business to receive large amounts of cash for any single transaction?

    4. Does the business pay its suppliers or vendors in cash, other than for petty cash type items?

  12. Refer to the final regulations for additional information and examples of reportable cash transaction under IRC 6050I.

Employee Benefit Plan Returns

  1. If the audit of an organization reveals that the organization maintains an employee benefit plan, conduct certain inspections of the benefit plan(s) in order to ensure compliance with all employee plan requirements. As a required but waiver-eligible filing check, agents will:

    1. Become familiar with the working provisions of the plan with particular emphasis on the operations as reflected in order to get background information.

    2. Note any transactions between the plan and the organization.

    3. Interview the responsible official with respect to transactions between the plan and the organization.

    4. Determine if Form 5330 is required (see IRC 4975).

    5. Inspect Form 5500 series return(s) in order to determine if it was filed correctly.

    6. Develop the facts and information necessary for the preparation of Form 4632-A, Employee Plans Referral Checksheet.

    7. Carefully review any unusual transactions encountered during the investigation with respect to other taxpayers involved.

    8. Consider the amount of deferred compensation in developing excessive compensation issues.

  2. Determine the type(s) of retirement plan(s) maintained by the organization. For each of the following plans, complete Form 4632-A to determine whether a referral would be made to Employee Plans:

    • Profit Sharing – IRC 401(a)

    • Money Purchase Pension – IRC 401(a)

    • Defined Benefit Pension – IRC 401(a)

    • Elective Salary Deferral – IRC 401(k)

    1. If all answers circled are in the left column, you are not required to refer the plan to Employee Plans (EP). In such cases, associate Form 4632-A with Form 5772, EO Workpaper Summary. This will satisfy the required filing check.

    2. If any answers in the right column of Form 4632-A are circled, refer the plan to EP. Use Form 4632 (Employee Plans Referral) to refer the plan. Attach copies of Form 4632-A and Form 5500 for each plan referred. Submit the referral package to EP Classification for assignment to EP. See Exhibit 4.75.12-2 for a sample Form 4632-A.

  3. If an organization has a profit sharing plan exempt under IRC 401 (a), determine the effect on the organization’s exempt status. Also, submit a referral to EP Classification for IRC 401(a) consideration.

  4. For audits of employee welfare benefit plans exempt under IRC 501 (c)(9), (c)(17), and IRC 120 (Qualified group legal services plan), review plan documents and complete Form 6212-B, Examination Referral Checksheet B. If any item on Form 6212-B is checked in the right hand column, forward the form to the Pension and Welfare Benefits Administration of the Department of Labor (DOL). The case won’t be closed until the earlier of receipt of a response from DOL, or 20 workdays after the date you submitted the document to DOL.

  5. Determine if fringe benefits constitute taxable wages. Review the chart of accounts for obvious employee benefits. Secure a copy of the personnel department’s employee benefits and executive benefits procedures.

    Note:

    A helpful resource to determine benefits and forms of compensation is the employee handbook (if available).

  6. Complete Form 4632-A for each plan for which a deduction is claimed. Form 4632-A will remain in the case file. See Exhibit 4.75.12-2 for a sample of Form 4632-A.

  7. A completed Form 4632-A will assist in the preparation of Form 4632, Employee Plans Referral, if necessary. See Exhibit 4.75.12-3 for a sample of Form 4632.

  8. If a referral is warranted due to other issues or circumstances not covered by Form 4632-A, a referral may be accomplished by a narrative explaining the particular issues or circumstances.

  9. Complete Form 4632-B, Employee Plans Referral Checksheet, for IRC 403(b) or IRC 457 plans, to determine if a referral on Form 4632 is necessary for the following plans;

    • Tax Deferred Annuities – IRC 403(b)

    • Eligible Deferred Compensation – IRC 457

    • Ineligible Executive Deferred Compensation – IRC 457(f)

  10. The revocation of a 501(c)(3) status may adversely impact deferred compensation programs sponsored by the organization. Consult with an Employee Plans IRC 403(b)/457 Coordinator.

  11. See Exhibit 4.75.12-4 for a sample of Form 4632-B.

Political Organization Returns (Form 1120-POL)

  1. IRC 527 explains the extent to which political organizations are taxed. Generally, only the political organization’s income from investments, less the expenses directly attributable to such income including a specific deduction of $100.00, is taxed at the highest corporate rate. Neither the net operating loss deduction nor the special deductions allowed for corporations are allowable pursuant to IRC 527(c).

  2. An IRC 501 (c) organization, on the other hand, is taxed under IRC 527 on the lesser of the amount expended for political purposes (exempt function), or the organization’s net investment income.

  3. Net investment income, for purposes of IRC 527 (f), means the gross amount of interest, dividends, rents, royalties, plus the excess (if any) of gains from the sale or exchange of assets over the losses from the sale or exchange of assets, over the deductions directly connected with the production of this income. To avoid double taxation (and double deductions), IRC 527 (f)(2) provides that income and deductions taken into account for purposes of the tax on UBI of IRC 501 (c) organizations under IRC 511 aren't to be included as either income or deductions in determining net investment income under IRC 527(f).

  4. For purposes of IRC 527, expenditures for an "exempt function" (political purposes), are expenditures for the purpose of influencing the outcome of an election to public office. Political expenditures don't include any expenditures for the purpose of influencing legislation regardless of whether those "lobbying" expenditures are for germane lobbying, non-germane lobbying, or grass roots lobbying.

  5. Review Schedule C, Form 990, Political Campaign and Lobbying Activities.

  6. Review Schedule R, Form 990, Related Organizations and Unrelated Partnerships, for identifying related organizations.

  7. Determine whether a separate segregated fund described in IRC 527(f)(3) is maintained by the organization. Also, determine if the organization has expended any amount from its funds during the taxable year directly (or through another organization) for an exempt function under IRC 527(e)(2). If so, a Form 1120-POL, U.S. Income Tax Return For Political Organizations, may be required. Check the minutes and other correspondence files for indications of political contributions. Also check disbursements for possible political expenditures.

  8. Compare the amount of political expenditures reported on Form 990, Schedule C, Part I, Line 2, to the amount of political expenditures on Form 1120-POL. Also, reconcile the investment income and expenses per return with those reported on Form 1120-POL. Establish Form 1120-POL for examination if adjustments are required.

  9. If the IRC 501(c) organization has $100 or less of net investment income for the tax year, no return or tax is due from the IRC 501(c) organization under IRC 527 regardless of the amount of its political expenditures.

  10. See K-Net for additional technical guidance on audits involving political organizations.

Tax Exempt Bonds

  1. The Tax Exempt Bond (TEB) program, normally associated with large IRC 501(c)(3) organizations, was established to ensure compliance with the provisions of the Internal Revenue Code applicable to tax-advantaged bonds. Prior to considering a referral to Tax Exempt Bonds via the Specialist Referral System (SRS), be alert for the following transactions:

    1. The sale of assets financed with tax-exempt bonds

    2. The proceeds from tax-exempt bonds were invested, resulting in earnings from "materially higher" investments

      Note:

      The definitions of "materially higher" investments (arbitrage) can be found in Treas. Reg. 1.148-2(d).

    3. The assets financed with tax-exempt bonds were used for personal gain

    4. A change in the original intended use of the assets

    5. The assets financed with tax-exempt bonds were used for an unrelated trade or business

      Note:

      Exceptions to EO law for UBI don't alter a determination of UBI under TEB law (e.g. Volunteer labor may affect the designation of UBI for EO, but not for TEB determinations).

    6. Forms 8038 series are delinquent

    7. A for-profit developer or manager privately benefits from and controls the facility financed with tax-exempt bonds

      Note:

      If proposing revocation of an IRC 501 (c)(3) organization issuing tax exempt bonds, a referral to Tax Exempt Bonds is mandatory.

  2. Review Schedule K, Form 990, Supplemental Information on Tax-Exempt Bonds

  3. The revocation of the issuing organization’s tax-exempt status may adversely impact the bonds. Consult with a TEB specialist.

Report of Foreign Bank and Financial Accounts (FBAR)

  1. FBAR is an information report required when a "U.S. Person" owns or has signature or other authority over foreign financial accounts worth over $10,000 in any year.

  2. Certain tax-exempt entities may be required to file FBARs:

    1. A pension plan or an exempt organization formed under U.S. laws which meets the definition of a U.S. person.

    2. A pension plan or an exempt organization may have a direct or indirect financial interest in reportable financial accounts.

      Note:

      See IRM 4.26.16, Bank Secrecy Act, Report of Foreign Bank and Financial Accounts (FBAR), for legal definitions, foreign account valuation, account authority, etc.

  3. The determination to file the FBAR is made annually.

  4. FBAR is due on or before June 30.

  5. The FBAR is now filed electronically through the Financial Crimes Enforcement Network (FinCEN) BSA E-File system.

  6. The FBAR shouldn’t be filed with the filer’s federal tax return. Don’t discuss filing FBAR with a taxpayer.

    Note:

    First, contact the FBAR Coordinator for more information. Refer to IRM 4.26.17.2 for further guidance.

Form W-4 Compliance Program

  1. IRC 3401 and IRC 3402 set forth the requirements for withholding and claiming exemption from withholding. Employers must comply with the W-4 requirements in accordance with Treas. Reg.31.3402(f)(2)-1 and Treas. Reg. 31.3402(f)(5)-1.

  2. Under IRC 6001 and Treas. Reg. 31.6001-5(a), employers are required to keep records of all remuneration paid to (including tips reported by) employees and make them available for inspection by authorized IRS personnel. When an employer is reluctant or refuses to permit an inspection of payroll records, advise them of their obligations under the Code and Regulations.

  3. Refer to for information to determine when a filing check is required for Form W-4.

W-4 Compliance Techniques

  1. If you identify potential noncompliance, review only the most recent Forms W-4 on file with an employer, using analysis of the Forms W-2 as provided by IRPTR:

    1. Identify those employees whose taxes withheld are less than 10 percent of the wages or who had no withholding whatsoever.

    2. Sample the Forms W-4 for those employees to identify the marital status and number of exemptions.

    3. Prepare a workpaper recording the results of the sampling.

  2. In order to be exempt from withholding the employee must:

    • Have had no income tax liability in the previous year,

    • Expect to not have any in the current year, and

    • Submit a new Form W-4 each year before February 15.

  3. For those employees who claimed "exempt," check the date of the signature. Advise the employer of their obligation to obtain a new Form W-4, if the Form W-4 is dated from an earlier year.

  4. Under Treas. Reg. 31.3402(f)(5)-1(b), any unauthorized change or addition to Form W-4 makes Form W-4 invalid. This includes taking out any language by which the employee certifies the form is correct.

  5. Invalid Forms W-4 can be recognized by:

    1. Deletion of the language of the jurat.

      Example:

      Crossed out penalty of perjury statement above the signature.

    2. Defacement of the certificate.

    3. Any writing on Form W-4 other than the entries requested.

  6. Under Treas. Reg. 31.3402(f)(2)-1(e) and Rev. Rul. 80-68, 1980-1 C.B. 225, a Form W-4 is also invalid if, by the date an employee gives Form W-4 to the employer, he or she indicates in any way it is false.

  7. The employer may treat a Form W-4 as invalid if the employee wrote "exempt" on line 7 and also entered a number on line 5 or an amount on line 6.

  8. An employer who receives an invalid Form W-4 from an employee must take the following actions:

    1. Inform the employee that the Form W-4 is invalid.

    2. Request another Form W-4 from that employee.

    3. Withhold tax from employee wages as single with zero allowances until the employee furnishes a valid Form W-4.

      Note:

      If a prior valid Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4.

  9. IRC 6682 and Treas. Reg. 31.6682-1 allow the assessment of a $500 civil penalty on an individual for furnishing a false Form W-4 if:

    1. The statement made on the Form W-4 results in less income tax withheld than would’ve been withheld if the Form W-4 had been correctly completed, and

    2. There was no reasonable basis for such a statement at the time that the statement was made.

  10. False Forms W-4 are subject to a civil penalty of $500 for each Form W-4. Accordingly:

    1. Secure copies of any false Forms W-4.

    2. Send a referral for each Form W-4 for which the penalty assessment is being requested. Submit these using Form 9045, Withholding Compliance Referral Form. The form may be faxed to (855) 202-8300 and must include copies of the Forms W-4.

Returns Within the Jurisdiction of TE/GE Exempt Organizations

Form(s) Description
990 Return of Organization Exempt from Income Tax
990-T Exempt Organization Business Income Tax Return
990-PF Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation
990-BL Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons
Form 990-N Electronic Notice (e-postcard) for Tax Exempt Organizations Not Required to File Form 990 or 990-EZ. This form is technically not a return, but rather a non-return unit (NRU).
1041 U.S. Fiduciary Income Tax Return (when filed by 4947(a)(1) and (a)(2) trusts)
1041-A U.S. Information Return--Trust Accumulation of Charitable Amounts (when filed by 4947(a)(2) Trusts)
1065 U.S. Partnership Return of Income (when filed by section 501(d) religious and apostolic organizations)
1120 U.S. Corporation Income Tax Return (when filed by a private foundation whose exemption has been revoked)
Form 1120-POL U.S. Income Tax Return For Certain Political Organizations
4720 Return of Certain Excise Taxes on Charities and Other Persons under Chapters 41 and 42 of the Internal Revenue Code
5227 Split-Interest Trust Information Return
940, 941, 942, 943 and 944 Employment Tax Returns (relating to the employment tax liability of organizations under the jurisdiction of EO, and also including Form CT-1 and Form CT-2)
945 Annual Return of Withheld Federal Income Tax

Form 4632-A, Employee Plans Referral Checksheet

Employee Plans Referral Checksheet Forward to: IRS-TE/GE Division
EP Classification Unit
(See Instructions on reverse) 9350 Flair Drive, 2nd Floor
El Monte, CA 91731–2885
Employer’s Name TIN
King Homes Inc. 00-0000000
Tax Year Ending Plan Number
Plan Name 201112 001
King Homes Defined Benefit Plan Date of most recent
determination letter Referral Referral
10/10/2000 Not Required Required
1 Have all Forms 5500, 5500-C/R or 5500-EZ been filed, if required? N/A [ ] Yes [x] No [ ]
2 Does the plan have a determination letter issued after 02-28-02?
If no - Is the plan a regional or Master prototype for which an individual determination letter won't be issued?
N/A [ ] Yes [ ] No [x]
3 If the plan has a determination letter, has the plan been substantially amended since the date of the last letter? N/A [ ] No [x] Yes [ ]
4 If the plan has terminated:
i) Has the Service issued a determination letter on the termination
ii) Did the termination result in a reversion to employer of more than $10,000? Include a copy the Form 5330, if filed?

N/A [ ] Yes [x]
N/A [x] No [ ]

No [ ]
Yes [ ]
iii) Have all assets been distributed?
iv) Has any participant received a distribution in excess of $1,000,000?
N/A [x] No [ ]
N/A [x] No [ ]
Yes [ ]
Yes [ ]
5 If the employer is a member of a controlled group of corporations, do all employees of all members of the controlled group participate in this plan? N/A [x] No [ ] Yes [ ]
6 Has the number of participants in the plan decreased more than 20% from the prior year? N/A [ ] Yes [x] No [ ]
7 Were any independent contractors converted to employees? N/A [ ] No [x] Yes [ ]
8 Do any employees participate in both defined contribution and a defined benefit plan which received significant contributions? N/A [ ] No [x] Yes [ ]
9 Are there any significant adjustments to compensation or any unreasonable compensation issues involving plan participants? N/A [ ] No [ ] Yes [x]
10 Was the contribution made on or before the due date of the taxable returns with extensions? N/A [ ] No [ ] Yes [x]
11 Were any contributions made in a form other than cash to a plan subject to the minimum funding requirements of IRC 412? N/A [ ] No [ ] Yes [x]
12 Does the plan have a minimum funding deficiency?
If yes - provide a copy of the Form 5330, if filed.
N/A [ ] No [x] Yes [ ]
13 For a defined contribution plan, did the contribution exceed the IRC 415 limits considering all plans? N/A [ ] No [ ] Yes [x]
14 Were any plan assets used to secure employer loans? N/A [ ] No [ ] Yes [x]
15 Has the plan and/or trust incurred any acquisition indebtedness liability in excess of $20,000 for which it hasn't filed a Form 990-T? N/A [ ] No [x] Yes [ ]
16 Has the plan and/or trust incurred any acquisition indebtedness liability in excess of $20,000 for which it hasn't filed a Form 990-T? N/A [ ] No [x] Yes [ ]
17 Has the plan and/or trust engaged in a trade or business for which it has received in excess of $1,000 and for which it hasn't filed a Form 990-T? N/A [ ] No [ ] Yes [x]
18 If this is an IRC §401(k) plan, did any of the elective deferrals exceed the limits of IRC §402(g)? If the error was corrected by the taxpayer, answer N/A. N/A [ ] No [ ] Yes [x]
19 Other issues that warrant referral? (Attach explanation). N/A [x] No [ ] Yes [ ]
Form 4632-A (12-2004) Catalog No. 23241T publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 4632, Employee Plans Referral

Employee Plans Referral
1. Employer's Name and Address 2. EI Number Forward to: IRS-EP Classification
King Homes, Inc. 00-0000000 9350 Flair Drive, 2nd Floor
1 Fayette Street 3. Return Number El Monte, CA 91731–2885
City, State 00000-0000 5500 EP Examination Use Only
4. Employer Phone No. 15. Date Received EP Examination
000-000-0000
5. Plans Referred 16. Date Received EP Group
Plan No. Type of Plan Name of Plan
001 DB King Homes Defined Benefit Plan 17. Date Assigned EP Specialist
18. EP Specialist's Signature
19. Time Applied Date
6. Plan(s) Not Referred 20. Group Manager's Signature Date
Plan No. Type of Plan Name of Plan
21. Date Received EP Review
22. Reviewer's Signature Date
23. Date Closed EP Examination
7. Summary of All Employer Plans 24. Adjustments
Year Ending Number of Participants Deduction Claimed Participants Deduction
201112 399 482,000
8. Other Information (Include dates payments made to plan) 25. List of Attachments
Employer Payments
Date
01/01/11
02/01/11
03/01/11
04/01/11
05/01/11
06/01/11
07/01/11
08/01/11
09/01/11
10/01/11
11/01/11
12/01/11
Total
Amounts
32,000
40,000
40,000
40,000
42,000
45,000
45,000
45,000
30,000
45,999
45,000
30,000
577,000
Form 4653-A, Employee Plans Referral Checksheet

Form 5500, Annual Return/Report of Employee Benefit Plan for the year ending 201112


Current Determination letter dated 10/10/2000.

Schedule of Independent Contractors converted to Employees
9. Audit Examiner 9a. Group Mgr. In. 10. Date Submitted
Harris Anderson DGM 12/11/2012
11. Telephone Number 12. Group Number 13. Post of Duty 14. Area Office
000-000-0000 7900 Dallas Gulf Coast
Form 4632 (Rev. 5-2003) Dispose of all prior issues. Cat. No. 23240I Department of the Treasury-Internal Revenue Service

Form 4632-B, Employee Plans Referral Checksheet-For EO IRC 403(b)/457 Plans

Employee Plans Referral Checksheet
For EO IRC 403(b)/457 Plans
Forward to: IRS - TE/GE Division
EP Classification Unit
9350 Flair Drive, 2nd Floor
(See Instructions on reverse) El Monte, CA 91731-2885
Employer’s Name Taxpayer Identification Number
Plan Number Examiner
Plan Name Plan Year(s) Ending Tax Year(s) Ending
Referral Not Required Referral Required
1 403(b)/457 - Does the employer sponsor an IRC 403(b) plan or an IRC 457 plan? If "yes" continue with this checksheet [] No
2 403(b) - Did the employer have a written plan document by December 31, 2009 [] N/A [] Yes [] No
3 403(b) - Does the organization qualify as a public educational organization or is it exempt under IRC 501(c)(3) [] N/A [] Yes [] No
4 403(b) - Do you intend to propose a revocation or a modification of the tax-exempt status of the organization [] N/A [] No [] Yes
5 403(b) - Do all employees of the organization (who work more than 20 hours per week) have the right to make salary reduction contributions [] N/A [] Yes [] No
6 403(b) - Did any employee make a salary reduction contribution of more than IRC 402(g) limitation plus the IRC 414(v) age 50 catch up limitation in a calendar year? ($22,000 for 2009, 2010, and 2011; $22,500 for 2012, indexed thereafter) [] N/A [] No [] Yes
7 403(b) - Did the total of employer contributions and employee contributions exceed the IRC 415(c) limits? (Lesser of 100% of compensation or $49,000 for 2009, 2010, and 2011; $50,000 for 2012, indexed thereafter). Note: Do not include age 50 catch up contributions in item 6 above [] N/A [] No [] Yes
8 457(b) - Is there a written plan document [] N/A [] Yes [] No
9 457(b) - Is participation in the plan limited to management and highly compensated employees [] N/A [] Yes [] No
10 457(b) - Did the total of employer and employee contributions exceed the IRC 457(b)(2) limits? (Lesser of 100% of compensation or $16,500 for 2009, 2010, and 2011; $17,000 for 2012, indexed thereafter). Note: Age 50 catch up contributions under IRC 414(v) are not allowed [] N/A [] No [] Yes
11 457(b) - Does the employer have an IRC 457(f) plan? If the answer is "yes" it is preferred that the EO examiner contact the EP 403(b)/457 Area Coordinator to discuss. (If thecoordinator cannot be reached then a written referral should be made) [] N/A [] Yes [] No
12 Is there any employee reclassification issue [] N/A [] No [] Yes
13 Other issues which warrant referral? (Attach explanation.) [] N/A [] No [] Yes
14 Other issues
Form 4632-B (12-2004) Catalog No. 29256A publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Filing Check Guidance Table

Return Categories
(including prior/subsequent year returns)
Filing Check Requirement
(regardless of audit scope)
Form 990, 990-EZ, or 990-N (not a return) for all audits of IRC 501(c), 4947(a)(1) and 527 organizations.
Form 990-PF, only for audits of private foundations
Form 990-BL, only for audits of IRC 501(c)(21) trusts
Form 5227, only for audits of IRC 4947(a)(2) split interest trusts
Form 1065, only for audits of IRC 501(d) religious and apostolic associations
IRM 4.75.12.9; IRM 4.76.4.6; IRM 4.76.5.3.1
Always Required
Form 990-T, for all audits of IRC 501(c) organizations and government-owned colleges and universities
Form 1120, only for audits of taxable private foundations (PFs)
Form 1041, only for audits of IRC 4947(a)(1), IRC 4947(a)(2) charitable lead trusts, taxable PFs (trusts)
IRM 4.75.12.9; IRM 4.75.22.2; IRM 4.76.4.6; IRM 4.76.51.14.2
Employment Tax Returns and Withholding
(Forms 940, 941-series and 945)
IRM 4.75.12.8; IRM 4.75.12.10; IRM 4.75.22.2; IRM 4.76.50.13; IRM 4.10.5.5
Information Returns
(Forms W-2, W-2G, 1042-S, 1094-B, 1094-C, 1095-B, 1095-C, 1098-series, 1099-series, 8027, 8282, 8300, 8870, 8871, 8872, 8886, 8886-T, or 8899)
IRM 4.75.12.8; IRM 4.75.12.12; IRM 4.75.27.4; IRM 4.75.22.10; IRM 4.76.50.13; IRM 4.10.5.6; IRM 4.10.5.9
Required but Waiver Eligible**
Bond Returns
(8038-series)
IRM 4.75.12.15; IRM 4.75.22.8; IRM 4.75.31.7.4
Employee Benefit Returns
(Form 5500-series)
IRM 4.75.12.8; IRM 4.75.12.13; IRM 4.75.22.8; IRM 4.75.31.7.3; IRM 4.10.5.11
Other Related Tax Returns
(Forms 4720, 4720-A, 1120-POL, 730, 11-C, 1042)
IRM 4.75.12.8; IRM 4.75.12.14; IRM 4.75.22.2; IRM 4.76.50.13
FBAR (Title 31)
Don’t discuss filing of FBAR with taxpayer.
IRM 4.10.5.8; IRM 4.26.15.6.3; IRM 4.26.16; IRM 4.26.17; IRM 4.76.4.6(6)
Related Persons’ Returns (including "controlled organizations" )
(Forms 1040,1041, 1120-series, 1065)
IRM 4.75.22.8
Optional/Not Required***
Withholding Compliance Program
(Questionable W-4s)
IRM 4.75.12.8; IRM 4.75.12.11; IRM 4.10.5.5.4

Legend:

* Always Required- Complete the filing check per IRM guidelines. Document your conclusions on Form 5773, Section G. These filing checks can’t be waived.

** Required but Waiver-Eligible- These filing checks are required, but can be waived with managerial approval. Documentation of the authorization and reason is required on Form 5773, Section G.

*** Optional/Not Required- These filing checks aren’t required; explanations aren’t needed. However, if information developed during the audit indicates a potential for noncompliance, you may conduct the filing check and document actions taken.

Related Return- Any return of the same taxpayer. However, a return subject to a discrepancy adjustment in IRM 4.75.28, such as a Form 1040 or 1120, and any Form 4720-A, filed by a disqualified person with respect to the organization under audit, is treated as a "related return." See IRM 4.75.16.1(3)c.