4.75.40 Employment Tax Audit Procedures 4.75.40.1 Program Scope and Objectives 4.75.40.1.1 Authority 4.75.40.1.2 Responsibilities 4.75.40.1.3 Terms/Definitions/Acronyms 4.75.40.1.4 Related Resources 4.75.40.2 Survey of Employment Tax Return Before Assignment 4.75.40.3 Survey of Employment Tax Return After Assignment 4.75.40.4 Return Documents for Examinations and Surveys 4.75.40.5 Establishing Related, Prior and Subsequent Period Returns 4.75.40.6 Delinquent Returns and Substitute for Returns 4.75.40.6.1 Processing Delinquent Employment Tax Returns 4.75.40.6.1.1 Processing Delinquent Employment Tax Returns (No TC 150) 4.75.40.6.1.2 Processing Delinquent Employment Tax Returns After TC 150 SFR Posts 4.75.40.6.2 Substitute for Employment Tax Returns 4.75.40.6.3 Delinquent Information Return Procedures 4.75.40.6.3.1 Delinquent Forms 1099 Identified in Examinations 4.75.40.6.3.2 Delinquent Forms W-2/W-2c Secured by Examiner During Examination 4.75.40.6.3.3 Delinquent Forms W-2/W-2c Not Secured by Examiner During Examination 4.75.40.6.3.4 Delinquent Forms W-2/W-2c Secured by Examiner Post-Examination 4.75.40.6.3.5 Procedures for Failure to File Form W-2 (Unagreed Case) 4.75.40.7 Pre-Contact Analysis, IDRs, Taxpayer Contact, POAs/TIAs, Initial Interview Preparation 4.75.40.8 Third-Party Contacts 4.75.40.9 Workpapers 4.75.40.9.1 Purpose of Workpapers 4.75.40.10 Specialist Referral System 4.75.40.10.1 Referrals to Employee Plans 4.75.40.10.2 PCORI Referrals to Excise Tax 4.75.40.11 Procedures for Processing Suspense Cases 4.75.40.12 Ad Hoc Closing Agreement Procedures and Policy 4.75.40.12.1 AD Hoc Closing Agreement Procedures for Walk In Cases/Cases not Under Examination 4.75.40.12.2 Role of FSL/ET Ad Hoc Closing Agreement Coordinator 4.75.40.12.3 Case Closing Procedures for Ad Hoc Closing Agreements for Walk In Cases/Cases not Under Examination 4.75.40.13 Classification Settlement Program 4.75.40.13.1 CSP Offer Case Closing Procedures 4.75.40.13.2 Role of the FSL/ET CSP Coordinator 4.75.40.14 Tip Compliance Agreements 4.75.40.15 Penalties 4.75.40.16 IRC 3402(d) Tax Reduction Procedures 4.75.40.16.1 IRC 3402(d) When No Penalties Are Proposed 4.75.40.16.2 IRC 3402(d) When Penalties are Proposed 4.75.40.17 Report Writing 4.75.40.17.1 Employment Tax Examination Reports 4.75.40.17.2 No-Change Cases 4.75.40.17.2.1 No-Change Report 4.75.40.17.3 Examination Resulting in Both Change and No-Change Periods 4.75.40.17.4 Unagreed Cases 4.75.40.17.5 30-day Letters 4.75.40.17.6 Special Procedures for Notices of Determination of Worker Classification or Section 530 Relief 4.75.40.17.7 Fast Track Settlement (FTS) 4.75.40.17.8 530 Limitation Language 4.75.40.17.8.1 530 Limitation Language on IDRs 4.75.40.17.8.2 530 Limitation Language on Form 4666 4.75.40.18 Letters 4.75.40.19 Remittance Processing Procedures 4.75.40.19.1 Processing Check Payments 4.75.40.19.2 Advanced Payments 4.75.40.19.3 EFTPS Option 4.75.40.20 Procedures for Processing Related Returns 4.75.40.21 Information Return Examinations 4.75.40.22 Backup Withholding 4.75.40.23 Penalty Overview 4.75.40.23.1 Assessment of Penalties 4.75.40.23.2 Information Return Penalties 4.75.40.23.3 Trust Fund Recovery Penalty 4.75.40.23.4 Preparer Penalties 4.75.40.23.5 Promoter Penalties 4.75.40.24 Information Return Penalty Case (Civil Penalty Case) 4.75.40.24.1 Computation of Information Return Penalties 4.75.40.24.2 Information Return Penalty Case Processing Procedures Part 4. Examining Process Chapter 75. Exempt Organizations Examination Procedures Section 40. Employment Tax Audit Procedures 4.75.40 Employment Tax Audit Procedures Manual Transmittal December 18, 2019 Purpose (1) This transmits new IRM 4.75.40, Exempt Organization Examination Procedures, Employment Tax Examination Procedures. Material Changes (1) Introduced the program scope and objectives in IRM 4.75.40.1 for this new manual. (2) Moved content from IRM 4.90.4 and IRM 4.90.9 as indicated below. Old IRM Section New IRM Section 4.90.9.1 4.75.40.2 4.90.9.2 4.75.40.3 4.90.9.3 4.75.40.4 4.90.9.4 4.75.40.5 4.90.9.5 4.75.40.6 4.90.9.6 4.75.40.7 4.90.9.7 4.75.40.8 4.90.9.8 4.75.40.9 4.90.9.9 4.75.40.10 4.90.9.10 4.75.40.11 4.90.9.11 4.75.40.12 4.90.9.12 4.75.40.13 4.90.9.13 4.75.40.14 4.90.9.14 4.75.40.15 4.90.9.15 4.75.40.16 4.90.9.16 4.75.40.17 4.90.4.3 4.75.40.18 4.90.4.4 4.75.40 .19 4.90.4.5 4.75.40.20 4.90.4.6 4.75.40.21 Effect on Other Documents IRM 4.75.40 updates, consolidates and obsoletes the following manuals: IRM 4.90.4, Information Return Examinations and Penalties, dated May 3, 2017. IRM 4.90.9, Procedures, Workpapers and Report Writing, dated September 26, 2014. Audience Tax Exempt and Government Entities Exempt Organizations and Government Entities Effective Date (12-18-2019) Margaret Von Lienen Director, Exempt Organizations and Government Entities Tax Exempt and Government Entities 4.75.40.1 (12-18-2019) Program Scope and Objectives Purpose: This IRM discusses the procedures and policy for employment tax, backup withholding and information return examinations, as well as applicable penalties. Audience: The procedures in this IRM apply to the following Exempt Organization employees: FSL/ET Examiners Tax Law Specialists Reviewers Front-line examination and mandatory review group managers Policy Owner: Small Business/Self Employed (SB/SE): Operations Support, Servicewide Operations: Office of Servicewide Penalties. Program Owner: Exempt Organizations Contact Information: To recommend changes or make any other suggestions to this IRM section, email the EO Examinations Mandatory Review office at tege.eo.review.staff@irs.gov. 4.75.40.1.1 (12-18-2019) Authority IRM 4.23.3, Employment Tax, Examination Programs and Procedures. IRM 4.23.4, Employment Tax, General Procedures, Pre-Contact Analysis and Workpapers. IRM 4.23.6, Employment Tax, Classification Settlement Program (CSP). IRM 4.23.8, Employment Tax, Determining Employment Tax Liability, for additional guidance. IRM 4.23.10, Employment Tax, Report Writing Guide, for Employment Tax Examinations. IRM 4.23.14, Employment Tax, Statute Control and Extension. IRM 21.3.7, Taxpayer Contacts, Processing Third Party Authorizations onto the Centralized Authorization File (CAF). IRM 4.75.10, Exempt Organizations, Pre-Contact Procedures. IRM 20.1, Penalty Handbook, is the primary source of guidance for the administration of penalties by the IRS. IRS functions may develop additional guidance or reference material for their specific functional administrative needs. However, such reference material must receive approval from the Office of Servicewide Penalties (OSP) prior to distribution and must remain consistent with the policies and general procedural requirements set forth in IRM 1.2.1.12.1, Policy Statement 20-1 (Formerly P-1-18), and any other guidance relating to IRS penalties. See also IRM 20.1.1.1.2, Organization of IRM 20.1, Penalty Handbook. IRM 1.2.1.12.2, Policy Statement 20-2 (formerly P-2-4), for federal agencies. IRM 8.13.1, Appeals, Processing Closing Agreements in Appeals. 4.75.40.1.2 (12-18-2019) Responsibilities SB/SE is the program owner for employment tax issues and penalties. FSL/ET maintains responsibility for handling employment tax issues and penalties for government entities. The correct and timely reporting of employment taxes is the key to our voluntary compliance system as well as the cornerstone of the Social Security System. Studies show that the issuance of Forms W-2 greatly increases the likelihood that the income will be reported. Employment taxes include: Income Tax Withholding Social Security and Medicare taxes under FICA Unemployment tax Examiners are responsible for determining if penalties are applicable in cases such as, but not limited to: Form 941, Employer’s Quarterly Federal Tax Return, employment tax examinations. Form 945, Annual Return of Withheld Federal Income Tax, back-up withholding examinations Information Return Examinations IRC 6751 requires written managerial approval for all penalties except those imposed by IRC 6651, failure to file tax return or to pay tax, or other penalties automatically calculated. 4.75.40.1.3 (12-18-2019) Terms/Definitions/Acronyms See the table of terms and/or abbreviations used throughout this IRM Section below. Acronyms Acronym Definition AIMS Audit Information Management System AMDIS Audit Information Management System (AIMS) File ASED Assessment Statute Expiration Date BMFOLI Business Master File On-line Information BMFOLT Business Master File On-line Transactions BMFOLU Business Master File On-line CAWR BRTVU Business Return Transaction View CA Coordinator Closing Agreement Coordinator CFINK Centralized File Inquiry CP&C Compliance, Planning and Classification FICA Federal Insurance Contributions Act FSL/ET Federal, State, Local / Employment Tax FTS Fraud Technical Specialist IDR Information Document Request IDRS Integrated Data Retrieval System INOLES Information On-Line Entity Summary IRAS Information Report Analysis System IRC Internal Revenue Code IRPTRR Information Returns Processing Transcripts PMFOL (B,D,S) Payor Master File On-line POA Power of Attorney RCCMS Reporting Compliance Case Management System SSA Social Security Administration TIN Taxpayer Identification Number TRDBV Tax Return Database View TXMODA Tax Module Account WebETS Web-Based Employee Technical Time System 4.75.40.1.4 (12-18-2019) Related Resources Other helpful information resources may include: The Employment Tax K-Net - https://organization.ds.irsnet.gov/sites/tegekm/EmploymentTax/SitePages/Home.aspx. FSL/ET Knowledge Management Page - https://organization.ds.irsnet.gov/sites/tegekm/SitePages/FSLG.aspx. The Specialist Referral System home page – https://srs.web.irs.gov/. The SB/SE Employment Tax Small Business Knowledge Base Homepage – https://portal.ds.irsnet.gov/sites/vl014/pages/default.aspx. Document 11308, Exempt Organizations, Government Entities Examinations, Information Systems Codes. 4.75.40.2 (12-18-2019) Survey of Employment Tax Return Before Assignment See IRM 4.23.10.3, Survey of Employment Tax Return Before Assignment, for instructions on the required procedures to be completed. Close on RCCMS using disposal code 910. Surveys can generally be closed with a solely electronic case file. 4.75.40.3 (12-18-2019) Survey of Employment Tax Return After Assignment IRM 4.23.10.4, Survey of Employment Tax Return After Assignment, provides general instructions on procedures to be used for surveys of employment tax returns after assignment. Close the case with a disposal code of 32 on AIMS and 908 on RCCMS. Form 2503, Survey After Assignment-Excise or Employment Tax, must be completed on all FSL/ET cases surveyed after assignment to explain the reason for the survey action. If the original return is not in the file, a BRTVU or TRDBV print should be used. Surveys can generally be closed with a solely electronic file. When an Examiner establishes a subsequent period for the same taxpayer, they will complete the ESTABLISH steps for a new activity on RCCMS, using activity code 465 (for Forms 941) and the period. The Examiner should use the same source code that was used to establish the original case. They will also save necessary documents into the new RCCMS file for the subsequent period. See Document 11308, Information Systems Codes for more information about activity codes. In rare circumstances, a return may be surveyed after the taxpayer has been contacted, but before records have been requested or inspected. Normal survey procedures should be followed and Letter 1024-T, Return Accepted as Filed, should be issued. See IRM 4.23.10.4. Close the case with a disposal code of 36 on AIMS and 909 on RCCMS. 4.75.40.4 (12-18-2019) Return Documents for Examinations and Surveys All examinations and surveys must be closed with a return document. If there is an original return, then it is the return document. The Examiner must document in RCCMS that the case is closed with an original return. Select the tab "Closing General" , then select the "Closing With" screen, then select #1, "Original Return." Original returns must be closed in paper case files. If there is no original return, then a BRTVU or TRDBV print, if available, should be used to close an examination. If neither BRTVU nor TRDBV are available, (e.g. closing an examination based upon a substitute for return) the Examiner must prepare Form 2275, Records Request, Charge and Recharge, (Parts A and B only) with "In Lieu of Return" written or typed across the top. Attach a BMFOLR. Form 3198-A, TE/GE Special Handling Notice, should identify the case file as being closed on the basis of an electronic print. The Examiner must document in RCCMS that the case is closed on an electronic print by selecting the tab "Closing General," selecting the "Closing with" screen, then selecting #3 "Electronic print" or #4 "Paperless Examined." #4 should be used when the case is fully electronic. The Examiner should verify tax payments and credits claimed on the return. An IDRS transcript should be secured when necessary to determine the true liability. 4.75.40.5 (12-18-2019) Establishing Related, Prior and Subsequent Period Returns When the Examiner identifies an issue that requires establishment of additional periods or related returns managerial approval is required prior to establishment of the return or period in RCCMS. The source code to use when establishing additional tax periods or related returns depends on the source code that was used on the primary case. For example: Source Codes - Document 11308 Primary Case Source Code Prior/Subsequent Year (Multi-Year Audit) Related Pick-Up (e.g., F 945) 92 - RICS General 25 - Substitute for Return 95 - RICS Related Pick-Up 90 - RICS New Project 94 - RICS Multi-Year 95 - RICS Related Pick-Up 60 - Information Report 40 - Multi-Year Audit 05 - Related Pick-Up 72 - Informant's Report 40 - Multi-Year Audit 05 - Related Pick-Up 74 - Media Lead 40 - Multi-Year Audit 05 - Related Pick-Up 77 - State Agency 40 - Multi-Year Audit 05 - Related Pick-Up 94 - RICS Multi-Year 40 - Multi-Year Audit If not filed, use 25 05 - Related Pick-Up If not filed, use 25 Note: See Document 11308, Information Systems Codes for more information about source codes. 4.75.40.6 (12-18-2019) Delinquent Returns and Substitute for Returns Employment tax non-filers can be addressed using either Delinquent Return or Substitute for Return (SFR) procedures. Examiners should generally use SFR procedures when conducting examinations and making assessments of non-filed employment tax returns, but may use Delinquent Return procedures when appropriate. However, once SFR procedures have been started, they cannot be changed. The return controlled with an SFR must be processed to final closure. Prior to establishing controls, ensure that the entity has a filing requirement for the type of return being established, e.g. if a Form 945, Annual Return of Withheld Federal Income Tax, is being secured or established, use ENMOD to determine there is a filing requirement. If there is none, submit Form 2363, Master File Entity Change, immediately to have the filing requirement added to the entity's account prior to establishing controls on RCCMS. 4.75.40.6.1 (12-18-2019) Processing Delinquent Employment Tax Returns Before processing a delinquent return, the Examiner should review an account transcript (BMFOLT). Procedures for processing a delinquent return depend upon whether or not a TC 150 has posted. 4.75.40.6.1.1 (12-18-2019) Processing Delinquent Employment Tax Returns (No TC 150) If no TC 150 has posted, then the Examiner will date stamp the delinquent return. If a date stamp is not available, the Examiner will write in the upper left side margin of the return: "RECEIVED" , the date received, and the Examiner's name and title. Also, the Examiner will write "DELINQUENT RETURN SECURED BY TE/GE" in red on the top margin of the original return. Leave room in the upper right corner so the Campus will be able to enter the DLN. Write in red on the bottom margin of the original delinquent return "TC 599- CC 094." . Attach a separate Form 3198-A, TE/GE Special Handling Notice, to each return being submitted to indicate if the delinquency penalty should or should not be assessed. Also attach a separate Form 13133, Expedite Processing Cycle, to the front of each return being submitted, noting the following items: Delinquent Return: Check the box indicating that it is a delinquent return. Contact Person: This will be the Examining Officer. If penalties are to be assessed, no notations in the BMF or IMF Penalty boxes are required. If penalties are not to be assessed, enter an "X" in the BMF or IMF Penalty box for the appropriate penalties not assessed. If the normal ASED has expired or is within three months of expiration, enter an "X" in the box to the left of "W," Bypass Submissions Processing Statute List. To prevent tax deposits, withholding, or payments from refunding when the TC 150 posts, place an "X" in the BMF or IMF box to the left of "Hold Credits on Module-Generates TC 570" . The Examiner will prepare Form 4844, Request for Terminal Action, to close collection controls and suppress notices requesting the return. Write "TC 599 CC 094" in the "Remarks" section of the form. Explain why the action is requested. Digitally sign Form 4844 and forward to the FAST Unit for input. If a payment is secured, prepare a Form 3244-A, Payment Posting Voucher-Examination, for each delinquent return. Post the payment as TC 610, Remittance with Return. Attach the copy of Form 3244-A to the delinquent return. The original Form 3244-A is sent with the payment for processing.Submit original delinquent return packages to the Campus indicated below. The following forms are required: Form 13133, Expedite Processing Cycle A current BMFOLT or IMFOLT showing no return posted Form 4844, Request for Terminal Action Form 3198-A, TE/GE Special Handling Notice Form 3244-A, Payment Posting Voucher, if necessary Form 3210, Document Transmittal Scenario Mailing Address Send returns secured without remittance to: Internal Revenue Service 1973 North Rulon White Blvd. Mail Stop 6052 Ogden, UT 84404 Send returns secured with remittance to: Internal Revenue Service 1973 North Rulon White Blvd. Mail Stop 1999 Ogden, UT 84404 Send excise tax returns to: Internal Revenue Service 201 West Second Street Mail Stop 281 Covington, KY 41019 Send foreign tax returns to: Internal Revenue Service 2970 Market Street Philadelphia, PA 19104 If the delinquent return will be part of the examination, then the Examiner will make a copy of the return for the case file and establish the AIMS record via RCCMS by completing the following steps: In the "Validate for:" field, select "Establish" and make sure there is a check mark in the "Update AIMS" box. Update the following fields: --"Return Received" date under General tab --"Statute Date" under General tab --"Source Code" to "44 Delinquent Return" under Codes tab --"Push Code" to 020 Delinquent Return under Codes tab --"Reason for Request" enter "Delinquent Return Secured by FSL/ET" "Save and Close" Highlight the activity in the List View pane. From Actions menu, select "Request Establishment" and synchronize. The AIMS record will establish once the Field Manager approves the action. The examination may not be closed from the group until the TC 150 posts and a full AIMS record is established. 4.75.40.6.1.2 (12-18-2019) Processing Delinquent Employment Tax Returns After TC 150 SFR Posts When delinquent returns are secured and the SFR TC 150 has already posted, the examiner will need to determine the accuracy of the submitted returns by examining them. If the Examiner accepts the delinquent return without making additional adjustments, prepare: Form 2504 series, as applicable, Agreement to Assessment and Collection of Additional Tax (taxpayer signature is not necessary because the report matches the amounts reflected on the signed delinquent return); Form 4666, Summary of Employment Tax Examination; and Form 4668, Employment Tax Examination Changes Report, to reflect the amounts shown on the delinquent return. Prepare Form 2275 with BMFOLR as the return document and attach a copy of the signed delinquent return. The examination will be closed using normal closing procedures. Note: On Form 3198-A indicate "Case is agreed based on taxpayer signature on delinquent return." If the Examiner does not accept the delinquent return without making additional adjustments then the return must be processed as a partial assessment in RCCMS unless the return shows no tax due. If the return shows no tax due see paragraph (4) below since partial assessment procedures are not required. For returns showing a tax due amount the following partial assessment procedures are required. Prepare reports matching the submitted delinquent returns and send them along with copies of the delinquent returns, Form(s) 5599, TE/GE Examined Closing Record, and 3198-A to the Field Manager for processing of the partial assessment. The Field Manager will forward the partial assessment package to the GE Closing Unit. Complete partial assessment in RCCMS. Once the corrected figures are determined, prepare a report for any adjustments not reported on the delinquent returns. The case will then be processed using regular agreed and unagreed procedures depending on whether or not the taxpayer signs the report. Prepare Form 3198-A. In the Other Instructions section, enter "SFR TC 150 Posted - Process Delinquent Return(s) as Final Closures." If the taxpayer submits a delinquent return to the Examiner showing no tax due then the secured return will be incorporated into the final audit report. Also, even though the delinquent return is not being processed, the receipt of a valid return does start the running of the statute of limitations. Update the “Return Received” date to the date the delinquent return was received and update the “Statute Date” in RCCMS. Master File must be updated to show a delinquent return was secured after an SFR TC 150 was posted. Form 3177, Notice of Action for Entry on Master File, must be completed as follows: Enter an "X" in the box marked "Other" at the bottom of the form. Enter "TC 971 AC 013 Return Received Date MM/DD/YYYY" on the line next to the "Other" box. Forward Form 3177, Notice of Action for Entry on Master File, to the FAST Unit via encrypted E-mail (*TEGE FAST). 4.75.40.6.2 (12-18-2019) Substitute for Employment Tax Returns FSL/ET Examiners generally use SFR procedures when conducting examinations and making assessments of non-filed employment tax returns. Before establishing an SFR, the Examiner should conduct IDRS research to ensure no return has posted to the Master File module. Research and print a current INOLES, AMDISA, and BMFOLI for each non-filed return to determine if a TC 150 is present. If TC 150 is present, SFR procedures will not be used. Establish an AIMS record and complete the examination using regular examination procedures. If there is no TC 150 present, request establishment of the return period(s) for AIMS on RCCMS. Prepare Form 2275 with BMFOLR as the return document. In the "Validate for" field, select "Establish" and make sure to place a check mark in the "Update AIMS" box. Complete all fields in RED with an asterisk. The following is specific information for these fields: --"Source Code" to "25- Substitute for Return" under Codes tab --"Alpha Day" to "EE No Return Filed" under Codes tab --"Push Code" to "036 Substitute for Return (Computer Generated TC 150)" under Codes tab --"Reason for Request" enter "Exam-SFR" --"Save and Close" --Highlight the activity in the List View pane. From Actions menu, select "Request Establishment" and synchronize. Conduct the examination, determining the proper amount of wages, withholding, and taxes. Prepare the reports and complete the examination using normal closing procedures for either agreed or unagreed cases. A current AMDISA print should be included in the Office Documents folder to show the AIMS record is fully established. If the taxpayer submits a delinquent return, follow the procedures in IRM 4.75.40.6.1.2 to incorporate the delinquent return into the final audit report. Even though the delinquent return is not being processed, the receipt of a valid return does start the running of the statute of limitations. The Examiner should consider fraud potential. If the Examiner identifies potential fraud, they should coordinate with their manager, Area Manager and the TE/GE Fraud Coordinator. 4.75.40.6.3 (12-18-2019) Delinquent Information Return Procedures During employment tax examinations, Examiners frequently identify information returns that were not furnished or filed. This subsection provides various procedures to be followed. 4.75.40.6.3.1 (12-18-2019) Delinquent Forms 1099 Identified in Examinations When conducting an examination, if the Examiner determines that the taxpayer failed to file required Forms 1099, they should secure the delinquent Forms 1099. The Examiner should require the payer to furnish the delinquent returns to payees and file them with the Examiner. In the alternative, the taxpayer should submit substantiation that the returns have been filed electronically through the Filing Information Returns Electronically (FIRE) system. If a payer refuses to file the delinquent returns, information return penalties should be considered using the rates for intentional disregard. The payer should be given a reasonable time, e.g. 30 days, to prepare the delinquent information returns, furnish them to the payees, and file the information returns with the Examiner or through the FIRE system. Examiners securing delinquent paper Forms 1099 should refer to IRM 4.23.8.10.4 for detailed processing instructions. The Form 1096, Annual Summary and Transmittal of U.S. Information Returns, should be date stamped and the delinquent Forms 1099 should be sent to the following address: If principal business, office or agency, or legal residence in the case of an individual, is located in: Use the following address: Alabama, Arizona, Arkansas, Delaware, Florida, Georgia, Kentucky, Maine, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Texas, Vermont, Virgini Department of the Treasury Internal Revenue Service Center Austin, TX 73301 Alaska, Colorado, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, Wyoming Department of the Treasury Internal Revenue Service Center P.O. Box 219256 Kansas City, MO 64121-9256 California, Connecticut, District of Columbia, Louisiana, Maryland, Pennsylvania, Rhode Island, West Virginia Department of the Treasury Internal Revenue Service Center Ogden, UT 84201 If the taxpayer files the delinquent returns electronically through the FIRE system, the Examiner should secure substantiation of the transmission to include in the workpapers. The FIRE system sends an e-mail to the filer that contains the FILE STATUS and "Count of Payees" included in the file. A FILE STATUS of either "Good, Not Released" or "Good, Released" indicates that the file is, or will be, released for mainline processing. Files uploaded to FIRE are held for ten days to afford the taxpayer an opportunity to correct them, if necessary. A copy of this e-mail verification may serve as sufficient substantiation to be included in the workpapers. High dollar delinquent Forms 1099 should be considered by the Examiner for potential income tax underreporting. The Examiner should prepare Form 5666, TE/GE Referral Information Report, and attach a copy of the delinquent Form 1099 for referral to SB/SE. Copies of all delinquent Forms 1096 and 1099 are not needed in the examination case file however they are needed when information return penalties are being proposed. Scanned or electronic copies of Form(s) 1096 and 1099 secured should be named "CIVPEN.33.3. Delinquent. 1096&1099.YYYY" (where "YYYY " represents the year of the returns submitted). Evaluate and address whether backup withholding applies when Forms 1099 were required but not filed or furnished and the taxpayer didn’t have the payee’s TIN at the time of making a reportable payment. Prepare an Excel spreadsheet including the payee names, TINs, amounts paid to them and amounts eligible forIRC 3402(d)relief on the spreadsheet for payees who should have been, but were not, issued Form 1099-MISC. Scan Forms 4669into the RCCMS case file when feasible. If you are unable to scan all the Forms 4669 into RCCMS, place the original Forms 4669 in a paper case file and close the paper file with the RCCMS case. Name the Excel worksheet 34.2204.1 Delinquent F1099 BUWH and name the Forms 4669 34.2204.2.F4669. 4.75.40.6.3.2 (12-18-2019) Delinquent Forms W-2/W-2c Secured by Examiner During Examination Examiners are expected to secure delinquent Forms W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, prior to closing an exam. Per Treasury Regulations, Forms W-2c, Corrected Wage and Tax Statement, and Forms W-3c, Transmittal of Corrected Wage and Tax Statements, are not required to be filed until January 31st of the year following the year the examination is completed but the taxpayer should be encouraged to file them earlier. If the employer is expected to file 250 or more Forms W-2c during a calendar year, the employer is required to file them electronically. Taxpayers should be referred to the SSA website for the current versions of Specifications for Filing Forms W-2 Electronically (EFW2) and Specifications for Filing Forms W-2c Electronically (EFW2C). If the taxpayer files the delinquent Forms W-2, W-3, W-2c, or W-3c electronically through the SSA Electronic Wage Reporting (EWR) system, then the Examiner should secure documentation from the taxpayer verifying the transmission. After submitting the file, the taxpayer can print the "Confirmation Receipt-Your File was Received" page and submit this to the Examiner as documentation of the transmission. The confirmation receipt includes the Wage File Identifier (WFID) and should be included in the workpapers as sufficient filing substantiation. 4.75.40.6.3.3 (12-18-2019) Delinquent Forms W-2/W-2c Not Secured by Examiner During Examination If Forms W-2, W-3, W-2c, or W-3c are not obtained from the employer prior to the exam being closed, the Examiner will notify the employer that the returns must be filed with the Social Security Administration by the due date prescribed on Form 4668, or a civil penalty may apply. If the taxpayer refuses to file delinquent Forms W-2 and W-3 then the Examiner should consider whether or not the Failure to File and Failure to Furnish penalties should be recommended using the intentional disregard provisions under IRC 6721(e) and IRC 6722(e). The taxpayer's appeal rights are post-assessment; the taxpayer will not be able to appeal the civil penalties until Forms W-2 & W-3 have been filed. The Examiner will attach a list of employees who should receive Forms W-2 or W-2c to Form 4668 providing the: Worker's name Amount of adjustment to total compensation, social security wages, and Medicare wages Related employment tax adjustments If the case is fully electronic, the file should be named "31.3F4668.EE LIST" 4.75.40.6.3.4 (12-18-2019) Delinquent Forms W-2/W-2c Secured by Examiner Post-Examination If delinquent Forms W-2, W-2c, W-3, or W-3c are provided to the Examiner after the case is closed, it is the responsibility of the Examiner to date stamp the Form W-3 or W-3c and forward copies of these items to SSA. 4.75.40.6.3.5 (12-18-2019) Procedures for Failure to File Form W-2 (Unagreed Case) When the Examiner recommends assessment of penalties for failure to file and failure to furnish Form W-2 involving reclassification of workers to employee status and the case is unagreed, the appropriate Information Return Penalty package will be prepared. When neither Form 1099 nor Form W-2 was filed, follow the procedures in IRM 4.23.8.10.3. 4.75.40.7 (12-18-2019) Pre-Contact Analysis, IDRs, Taxpayer Contact, POAs/TIAs, Initial Interview Preparation Refer to IRM 4.75.10, Exempt Organizations Examination Procedures, Exempt Organization Pre-contact Procedures as applicable, with the FSL/ET additions below: IRM 4.75.10.3(4) - Workpaper Quality – Accurate. Use the ET Report Workcenter for employment tax assessments. IRM 4.75.10.6.3(5) - Request and Review of IDRS Information – Add: Document 11308, Exempt Organizations, Government Entities Examinations, Information Systems Codes provides an explanation of various codes. IRM 4.75.10.8(3)a - Initial Taxpayer Contact by Letter – Add: FSL/ET mail initial contact letter, Letter 3850. Exhibit 4.75.10-1 – Basic IDRS Information - #7 – Add: Document 11308, Exempt Organizations, Government Entities Examinations, Information Systems Codes provides an explanation of various codes. 4.75.40.8 (12-18-2019) Third-Party Contacts In general, Examiners will receive information directly from the taxpayer under examination; contacts with third parties are made when the Examiner is unable to obtain the information from the taxpayer or when it is necessary to verify the information provided by the taxpayer. The provisions of IRC 6103(k)(6) and corresponding regulations apply to all third-party contacts. See IRM 25.27.1 for Servicewide procedures relating to third-party contacts. Third-party contact procedures do not apply to Whistleblower Claims. Case files involving Whistleblowers should not contain any reference to the Whistleblower in the primary case documentation. Even making reference to Form 11369, Confidential Evaluation Report on Claim for Award, or to the Whistleblower in the activity record is prohibited because the administrative case file is subject to FOIA and could lead to disclosure. 4.75.40.9 (12-18-2019) Workpapers Workpapers and reports provide the basis for the decision reached by the FSL/ET Examiner. Only on the basis of the material in the workpapers can a reviewer determine whether the examination was complete and correct. Workpapers should show explanations, analysis and conclusions that the Examiner developed and should be sufficient to show that, generally, no additional comments will be needed in the transmittal letter for any items covered. Workpapers should document that all forms are correctly filed and that potential employer/employee relationships were considered. All notes made before, during, and after the compliance contact should be included in the workpapers. All guidance provided in this section, and which is referenced in this section, should be applied to compliance contact workpapers. The same general theories and principles are to be applied equally to all case files that are generated by an FSL/ET Examiner. 4.75.40.9.1 (12-18-2019) Purpose of Workpapers Workpapers provide documentation to support all IRS positions taken when conducting examinations and making adjustments. Fully developed workpapers serve the following purposes: Documentation of actions taken. Form the basis of necessary reports. Facilitate managerial or technical review. Facilitate other reviews, for example, when technical advice is requested or results are appealed. Facilitate authorized review by other governmental agencies. Provide information to be used to determine the audit trail and scope of subsequent examinations. The importance of workpapers in every case is critical, as they serve to effectively explain the areas covered during an examination. Workpapers should include all the evidence gathered by the Examiner to show the work performed, methods and procedures followed and conclusions reached. Workpapers should cite legal authority, such as the Internal Revenue Code, applicable regulations and/or court cases to support conclusions. Workpapers prepared by an Examiner may be used in the preparation and review of the report as a reference in cases where the determination is to be litigated, and also as a source of more detailed information about a case, which may be requested later in writing. Workpapers are the best evidence of the scope of the examination and the diligence with which it was completed. Further, they constitute the background for the determination of the tax liability. Documentation of transactions or other significant events should be complete, accurate, and facilitate tracing the transaction or event and related information from the beginning through completion. 4.75.40.10 (12-18-2019) Specialist Referral System See IRM 4.75.10.6.9 – Requesting Assistance from Specialists. 4.75.40.10.1 (12-18-2019) Referrals to Employee Plans As part of an examination, the Examiner must determine whether or not an organization has a 403(b), 457, or Social Security Alternative Plan with any potential compliance problem that warrants a referral to Employee Plans. Employee Plans developed Form 4632-C, Employee Plans Referral Checksheet - For FSL/ET - IRC 403(b)/457 and Social Security Alternative Plans, to assist in FSL/ET Examiners in making this determination. If a referral is indicated or if the Examiner has a question about a pension issue, then the Examiner should submit a request for assistance per IRM 4.75.10.6.9 as noted in IRM 4.75.40.10. If a concurrent examination is recommended, the Examiner should not close the case until a response is received. If a concurrent examination is not necessary but future compliance action may be appropriate, then the Examiner should complete Form 5666 and attach Form 4632-C, which will be included in the closed examination case file. The recommendation should be documented in the case file and a copy of Form 4632-C may be used as a workpaper. If there is no, or a de minimis, compliance issue, then the Examiner should document the recommendation in the case file. Form 4632-C may be used as a workpaper. If a referral is not warranted, then completion of Form 4632-C is not mandatory. However, Form 4632-C asks the basic questions necessary to determine whether or not a referral is warranted. A completed Form 4632-C provides documentation that the Examiner asked the appropriate questions. Therefore, Form 4632-C can serve as an excellent workpaper related to this issue. 4.75.40.10.2 (12-18-2019) PCORI Referrals to Excise Tax As part of the package audit process, the FSL/ET Examiner will determine whether the taxpayer is self-insured for employee health insurance and subject to excise taxes reportable and payable on a Form 720, Quarterly Federal Excise Tax Return. This excise tax is associated with the Patient-Centered Outcomes Research Institute (PCORI). Few FSL/ET entities are expected to be insurers with PCORI obligations. Next steps will be determined based on the number of lives covered by the self-insurance. If the taxpayer covers fewer than 5,000 lives and has not filed the required Forms 720, then the Examiner will provide the taxpayer with resources to assist in preparing and filing these returns. If the taxpayer covers 5,000 or more lives and has not filed the required Forms 720, then the Examiner will advise the taxpayer and refer the case to Excise Tax via the Specialist Referral System (SRS). 4.75.40.11 (12-18-2019) Procedures for Processing Suspense Cases Case files requiring suspension of action will normally be held in the group until such time as action on the case can resume. Two examples include a request for technical advice, or a request to the SSA for a formal interpretation of a Section 218 Agreement. The case should remain in Status Code 12 until no further issue development can be completed. Once no further issue development occurs, the AIMS/RCCMS status should be updated to Status Code 38. At the time the response is received and further issue development proceeds, the case should be placed back in Status Code 12. Prior to suspending the case, the group has responsibility for ensuring that the statute of limitations is protected for at least one year. Refer to IRM 4.23.14 for additional guidance. Upon closing the case, indicate on Form 3198-A a note to update to Status Code 55. Also include a comment to the same effect in the RCCMS closing dialog box. 4.75.40.12 (12-18-2019) Ad Hoc Closing Agreement Procedures and Policy Refer to IRM 8.13.1. The FSL/ET Closing Agreement Coordinator, Director, Government Entities and Counsel, as needed, may consider an ad hoc closing agreement to resolve a taxpayer’s prior tax year compliance issue. The taxpayer would not be under examination. The Director, Government Entities signs all ad hoc closing agreements. FSL/ET closing agreements will generally require Forms W-2/W-2c to be furnished and filed as part of the agreement, unless a specific dollar amount per employee cannot be determined. Any deviation from such policy will be rare and will require the approval from both Chief Counsel and the Director of Government Entities. Closing agreement tax assessments for barred assessment statute years (i.e. Section 218 retroactive pay issues) will be made per current Chief Financial Officer’s guidance. Taxpayers will generally pursue the assessment of tax on all open years for the closing agreement issue via amended tax returns (for example, Form 941-X) and provide a copy to the FSL/ET Closing Agreement Coordinator. Facts and circumstances will govern any exceptions to this general policy. 4.75.40.12.1 (12-18-2019) AD Hoc Closing Agreement Procedures for Walk In Cases/Cases not Under Examination If a taxpayer, not under examination, approaches FSL/ET field personnel seeking a closing agreement to resolve a prior tax year compliance issue, the matter will be handled by the FSL/ET Closing Agreement (CA) Coordinator. The request for a closing agreement, and any information received from the taxpayer, should be sent by secure e-mail to the CA Coordinator. The CA Coordinator receives and reviews all written requests for ad hoc closing agreements from taxpayers or representatives who are not under examination The CA Coordinator will request establishment of a closing agreement case via normal establishment procedures on RCCMS. The CA Coordinator will complete the “Ad Hoc Walk-In Closing Agreement Initial Memo” explaining the facts, taxpayer’s proposal and voluntary disclosure. The memo will be sent to the FSL/ET Director, Government Entities and EO Mandatory Review Group Manager. The Director will approve or disapprove whether or not the agreement process is the right solution. The Director will provide comments and direction, if necessary. If the Director has questions or needs additional information not provided in the memo, a conference call will be set up with the CA Coordinator and the EO Mandatory Review Group Manager to address the inquiries. The CA Coordinator will include updates on all ad hoc closing agreements in-process in the EO Mandatory Review Monthly Briefing. The Director and EO Mandatory Review Group Manager will review the Briefing and contact the CA Coordinator if new circumstances arise. The CA Coordinator will contact the EO Mandatory Review Group Manager if a high profile/sensitive issue arises. The EO Mandatory Review Group Manager will coordinate with the Director as to the direction to take. If the Director approves the agreement, then the CA Coordinator will work with the taxpayer and/or representative to complete the closing agreement. All files will be uploaded to RCCMS and all case related activity will be recorded on Form 9984, Examining Officer's Activity Record. The Director will receive the closing agreement for approval and signature. The CA Coordinator will follow established procedures to close the case, process the payment and send a copy of the case to the C&L Monitor. The EO Mandatory Review Group Manager will approve final processing of the case in RCCMS. If the Director rejects the agreement, then the CA Coordinator will close the case according to established procedures and upload all electronic files received from the taxpayer into the RCCMS case file. Hard-copy documents will be scanned and imported, and the CA Coordinator will record all case-related activity on Form 9984. The EO Mandatory Review Group Manager will approve final processing of the case in RCCMS and annotate Form 9984, Examining Officer's Activity Record. 4.75.40.12.2 (12-18-2019) Role of FSL/ET Ad Hoc Closing Agreement Coordinator The role of the CA Coordinator is to ensure the closing agreement process is consistent throughout FSL/ET and to provide a contact point for FSL/ET. The CA Coordinator has the following responsibilities: Reviewing all draft ad hoc closing agreements and obtaining initial concurrence from the Director, Government Entities. Working directly with the taxpayer and their representative as the taxpayer is not under examination. In these cases, the final closing agreement will be reviewed by the EO Mandatory Review Group Manager and may be reviewed by Chief Counsel. Maintaining an FSL/ET closing agreement spreadsheet. Sending a hard copy file of closed closing agreements, and any necessary supporting documentation, to CP&C for monitoring and file retention purposes. 4.75.40.12.3 (12-18-2019) Case Closing Procedures for Ad Hoc Closing Agreements for Walk In Cases/Cases not Under Examination When the CA Coordinator receives a check payment with an executed closing agreement, a Form 3244-A, Payment Posting Voucher, must be prepared and sent with a scanned copy of the check via email to the EO Mandatory Review Group Manager to review and sign. Once approved, the CA Coordinator can mail the payment to Ogden. The CA Coordinator will close the RCCMS case to the EO Mandatory Review Group Manager. The EO Mandatory Review Group Manager will review the case, annotate the Form 9984 and close it. The CA Coordinator will forward one signed copy of the agreement to the taxpayer and retain a copy of the closing agreement in the electronic file sent to CP&C. 4.75.40.13 (12-18-2019) Classification Settlement Program The Classification Settlement Program (CSP) establishes procedures that will enable taxpayers and the IRS to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. The procedures also ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied. By using the CSP, the FSL/ET Examiner can offer a government entity under examination a worker classification settlement using a standard closing agreement. All examinations that involve worker classification issues must follow the CSP Procedures as explained in IRM 4.23.6. 4.75.40.13.1 (12-18-2019) CSP Offer Case Closing Procedures Generally, regular examination case closing procedures apply with a few additional requirements. Those additional requirements are outlined in IRM 4.23.6.14. In part, the additional instructions provide for preparation of a CSP Settlement Memorandum; preparation of a Form 14490,14491 or 14492, Closing Agreement; use of standard CSP language; and changes to the examination report. The examiner will send the CSP Settlement Memorandum, the Closing Agreement, the complete examination report, the list of reclassified workers, and Forms 886-Ato the designated FSL/ET CSP Coordinator in a secured email. 4.75.40.13.2 (12-18-2019) Role of the FSL/ET CSP Coordinator The role of the CSP Coordinator is to ensure the CSP closing agreement process is consistent throughout FSL/ET and to provide a contact point for FSL/ET. The CSP Coordinator has the following responsibilities: Assisting FSL/ET Examiners and Managers with their CSP Offer. Maintaining an FSL/ET CSP spreadsheet. Sending a copy of the CSP package, as outlined in 4.75.40.13.1(2) above, and any necessary supporting documentation to CP&C for monitoring and file retention purposes. 4.75.40.14 (12-18-2019) Tip Compliance Agreements IRM 4.23.7 provides information about employment taxes on tip income, tip agreements, employment tax tip examinations, etc. While tip income among government employees is not common, FSL/ET Examiners should consider, as a possible area of non-compliance, tips provided to employees of a food and beverage establishment that is operated by a government, such as a city- operated museum or convention center restaurant. Baggage handlers at a city- operated airport and employees at a city-operated golf course, recreation center, or tourist service are additional examples of positions that may receive tip income as well. Developing a tip compliance agreement using the parameters outlined in IRM 4.23.7 may be appropriate. 4.75.40.15 (12-18-2019) Penalties In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in the IRM must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations (Treas. Regs.), Policy Statements, and IRM 20.1, Penalty Handbook. During examinations, you must consider and develop reasonable cause when issues arise for the assessment of penalties. Reasonable cause replaced due diligence as the standard for abatement of a penalty. Reasonable cause is discussed in depth in IRM 20.1.1 and in Policy Statement 3-2, formerly 2-7 (see IRM 1.2.1.4.2). If the taxpayer provides a valid reasonable cause argument, the Examiner must document his or her position and should not proceed with assessment of the penalty. If upon review of the taxpayer's argument the Examiner determines that reasonable cause does not exist, then he or she should recommend assessment of the applicable penalties and seek managerial approval. The Examiner should also focus on educating the entity about the errors and on gaining future compliance. FSL/ET maintains an ongoing effort to develop, monitor, and revise programs designed to assist taxpayers in complying with legal requirements, thus, avoiding penalties. Note: Federal agencies are not subject to penalties per Policy Statement 20-2, formerly P-2-4. (See IRM 1.2.1.12.2). However, backup withholding is a tax and not a penalty and should be considered when issues arise related to failure to file or furnish information returns. 4.75.40.16 (12-18-2019) IRC 3402(d) Tax Reduction Procedures To properly assess both income taxes under IRC 3402 or backup withholding under IRC 3406, together with any applicable penalties and interest, examiners will follow a modified Partial Assessment procedure when penalties are to be assessed. The procedures described below supplement IRM 4.23.10.15.2. IRC 3402(d) does not apply to the portion of federal income tax computed using IRC 3509 rates. If only IRC 3509 rates are used, line 12 of Form 4668 "Maximum tax available for abatement under IRC 3402(d)" should contain the word "NONE." 4.75.40.16.1 (12-18-2019) IRC 3402(d) When No Penalties Are Proposed The Partial Assessment procedures are not used if penalties are not being proposed based on the amount of tax. The examiner will compute the tax due on Form 4668, or Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G, based on the net adjustment using amounts from valid Form 4669, Statement of Payments Received. The amount on line 12 of Form 4668 or line 20 of Form 4668-B will reflect the remaining amount of tax available for abatement after the IRC 3402(d) credit has been allowed during the examination. Forms 4666 and the Forms 2504 series, as applicable, will also show this net figure. The assessment information and the credits and tax adjustments section of the RCCMS closing record will also reflect the net adjustments using amounts from the valid Forms 4669. 4.75.40.16.2 (12-18-2019) IRC 3402(d) When Penalties are Proposed The modified Partial Assessment process must be used if penalties are to be assessed. This is a two-step process which ensures that the gross amount of tax, penalties, and interest are computed and assessed. The IRC 3402(d) credit is allowed only against this gross amount. The two-step process results in the generation of an initial billing notice for the gross amounts shown on the Form 2504 series, as applicable. The taxpayer will subsequently receive a second notice containing the abatements allowed in the examination upon final processing of Forms 4669 during the closing process. The examiner should discuss the two-step process with the taxpayer using the statement included on Form 4666. This should alleviate taxpayer concerns that Forms 4669 were not properly processed upon receipt of the first notice. See IRM 4.23.10.15.3. The first step is to create a partial closing record to assess full tax and penalties as reflected on the Form 2504 series, as applicable; (Form 2504-T if IRC 3509 rates are not used). In RCCMS, create a Closing Record for the Partial Assessment, following the procedures in the RCCMS Case Closing Guide. On the Closing Record for the Partial Assessment, make sure that the "Partial" box is checked. On the Closing Record, complete just the fields that are necessary for the Partial Assessment: ARDI code, disposal code, assessment information, and credit/tax adjustments. All examination adjustments, including any other employment tax issues other than the IRC 3402(d) items (fringe benefits, IRC 3509, penalties, etc.), are to be included on the Partial Assessment Closing Record. Enter "TC 308" (or "TC 300" if interest is to be assessed) for the gross tax amount. Enter the appropriate transaction code for the assessment of penalties based on the gross tax amount. Enter applicable reference fields for all adjustments of social security/Medicare wages and FICA/income tax/backup withholding taxes reflected on the Forms 2504 series, as applicable. The second step is to create a "full" closing record. The IRC 3402(d) credit and all closing record items will be entered on this "full" closing record. The "Partial" box will not be checked. Enter ARDI, Disposal Code, Examiner's Time, Technique Code, and Examiner’s Name. The adjustment on the "full" closing record will reflect only amounts related to the IRC 3402(d) credit-allowed portion. For the transaction code, enter the amount of tax credit allowed based on valid Forms 4669 as a "309" (or "301" if interest is to be assessed) and the corresponding reduction in the income tax withholding or backup withholding in the reference number fields. Other sections to complete include related return information, principal issue codes, and employment tax/GE (under additional data). Examiners should follow the instructions provided in IRM 4.23.10.15.3 to prepare Forms 4666, 4668, and 2504 series, as applicable, when IRC 3402(d) applies. 4.75.40.17 (12-18-2019) Report Writing This subsection discusses instructions for preparation of examination reports covering employment tax examinations. It also references certain related procedures which are not purely of a report writing nature but which are necessary both for an efficient report writing system and to reduce examination time. The Examiner’s report is the record of findings and recommendations regarding the investigation of a taxpayer’s liability for tax. It is the document from which reviewers may determine whether the Examiner has properly developed the case and has correctly applied the law, regulations, etc., to the facts in the particular case. Also, it may become the evidence on which the Government relies in a court case. Since the taxpayer ordinarily receives a copy of the report, it serves as a formal presentation to the taxpayer of the findings and recommendations of the Examiner. Preparation of an examination report is a very important part of the Examiner’s duties. The examination report should be clear, concise, and to the point. All adjustments must be properly explained and supported by appropriate references to the applicable laws, regulations, court decisions, rulings, etc., on which the Examiner based the findings. 4.75.40.17.1 (12-18-2019) Employment Tax Examination Reports See IRM 4.23.10 – Report Writing Guide for Employment Tax Examinations, for instruction on the preparation of reports covering examination of employment tax returns. The Examiner prepares and provides the examination report to the taxpayer and solicits agreement. If necessary, various closing letters are available for the Examiner to use when the report is issued by mail. The letter should remain undated until issued. Where possible, all correspondence with taxpayers should be prepared using standard forms and letters, since the specific language in these documents has been approved for general use. Examiners are never authorized to modify the context of National letters and forms except for short-term changes. (IRM 4.10.1.3.2, Written Communication.) Any executed Form 2504 series, as applicable, received from a taxpayer must be date stamped on the day received. Original paper Forms must be date stamped in the upper right corner If the Form is received via EEFax then the file itself contains the date and time stamp it was sent to IRS and no further action is required to evidence receipt. If the Form is received via facsimile and the date and time stamped by the sender’s fax machine is correct no further action is required to evidence receipt. If the sender’s date and time stamp is not correct you must treat it as a paper form and use the procedures in (1) above. The Examiner should include on Form 4668 that the taxpayer needs to send to the Social Security Administration any Forms W-2/W-3 or W-2c/W-3c that are required to be filed, but that are not secured during the exam. Generally, the Examiner should attach to the Form 4668 a listing of each affected worker and, for each worker, the wage and employment tax adjustment. The list should provide: the worker's name, SSN, amount of adjustment to total compensation, FICA and Medicare wages, as well as related employment tax adjustments. 4.75.40.17.2 (12-18-2019) No-Change Cases In general, FSL/ET examines all quarters of a calendar year concurrently; books and records for the entire year are requested and examined. The taxpayer is entitled to a report that addresses all quarters examined. When an examination results in no changes to all quarters, all quarters will be closed "no- change." If the Examiner notifies a taxpayer that only one period is under audit and limits the examination to that period, then it is appropriate to issue a no-change report on only that quarter. 4.75.40.17.2.1 (12-18-2019) No-Change Report The Examiner will provide the taxpayer a no-change report on Form 4666 indicating the year(s) and return form(s) examined and closed as no-change. The report should indicate that the findings are subject to managerial approval. Letter 3381 should be prepared and issued to the taxpayer (unless some periods are changed and others are not changed) with a copy of Form 4666, including the appropriate Section 530 limitation language. The Examiner may draft a custom letter, if needed, as a transmittal if the no change report is issued by mail. 4.75.40.17.3 (12-18-2019) Examination Resulting in Both Change and No-Change Periods In general, when an agreed examination results in changes to some quarters and no change to others, treat the employment tax case as an agreed "change" case. One letter and one report will be issued that addresses the no-change periods, and the periods with the changes, following the procedures outlined in IRM 4.23.10.10.3(9). Specifically, the following guidance should be followed: Always use Form 4666 to summarize all examined periods. Report the no-changes in the summary section of Form 4666 by entering the period and return form number, writing "No-Change" in the tax column, and entering a dash in the page column. Do not complete Forms 4668 for the quarters no-changed. Enter the adjustment information on Form 4668 for only the quarters being changed. On a multiple-year examination, if no quarter during the year is changed, then no Form 4668 is necessary. 4.75.40.17.4 (12-18-2019) Unagreed Cases IRM 4.23.10.16, Unagreed Employment Tax-Examination Reports, provides general instructions on procedures to be used for unagreed employment tax returns. This section provides information about additional procedures that must be followed, and additional documents included in case file prior to closing: Examiner’s rebuttal to taxpayer’s protest Taxpayer’s protest Form 5599 for protested unagreed issues & periods only No Form 5599 for unagreed w/o protest is required Use L950-C for Section 7436 issues (worker classification) & L950-D for non-Section 7436 issues Include a Form 886-A, Explanation of Items for: Each issue. Each different class of worker in Section 7436 cases (be sure to include Section 530 discussion in all). Each penalty asserted. Unagreed cases, without protest to Appeals, will be closed to EO Mandatory Review. 4.75.40.17.5 (12-18-2019) 30-day Letters IRM 4.23.22 explains the procedures for unagreed cases, including the preparation of 30-day letters; i.e. Letters 950-C & 950-D. Examiners are responsible for preparing and sending 30-day letters. Refer to the table in IRM 4.75.40.18, Letters, for more information on 30-day letters. 4.75.40.17.6 (12-18-2019) Special Procedures for Notices of Determination of Worker Classification or Section 530 Relief IRM 4.23.10.10 provides general information about IRC 7436, which provides Tax Court review when a part of the examination includes a controversy involving a determination that at least one worker should be reclassified as an employee of the taxpayer for employment tax purposes and/or that the taxpayer is not entitled to relief under section 530 of the Revenue Act of 1978. Special procedures must be followed when unagreed issues are subject to IRC 7436. 4.75.40.17.7 (12-18-2019) Fast Track Settlement (FTS) FTS offers examination personnel a way to resolve audit issues utilizing the settlement authority and mediation skills of Appeals while retaining jurisdiction of the case. The FTS process is designed to be completed within 120 days, thus reducing burden for the taxpayer and the Service. Offer Fast Track Settlement as soon as possible during the examination when an unagreed issue is identified. For Procedures, see Pub 5092 and IRB 2012-36, Announcement 2012-34. 4.75.40.17.8 (12-18-2019) 530 Limitation Language The examination of a taxpayer’s employment tax returns may or may not include the classification of the taxpayer’s workers as employees rather than independent contractors. Section 530 of the Revenue Act of 1978, as amended, provides that: Taxpayer may not rely on an audit begun after December 31, 1996, for purposes of subparagraph (B) [of subsection (a)(2), past IRS audit] thereof "unless such audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer." Language must be included on information document requests and examination reports to address Section 530 including identification of or development of worker classification issues, the specific classes of workers examined, etc. The purpose of this language is to limit Section 530 exposure for subsequent periods to only classes of workers examined. Information on the location of worker classes is needed only when the examination was limited to worker classes within a particular agency, department, or school, in order to limit Section 530 prior audit exposure to the particular agency, department, or school examined. 4.75.40.17.8.1 (12-18-2019) 530 Limitation Language on IDRs Whenever worker classification issues are raised on an information document request (IDR), the IDR must specify the worker classification(s) (including location(s)) that are being examined. In addition, language should be used that limits Section 530 exposure to only classes of workers being examined and that are not reclassified. The following is an example of language that is appropriate when requesting information related to a specific class of workers: Please answer the following questions related to [CLASS OF WORKER(S)/LOCATION(S)]. The only class of worker that will be examined based upon information provided in response to this document request is [CLASS OF WORKER(S)/LOCATION(S)]. 4.75.40.17.8.2 (12-18-2019) 530 Limitation Language on Form 4666 Upon closing an examination, 530 limitation language must be inserted on all Form(s) 4666. This applies regardless of whether or not worker classification was an issue identified during the exam. The appropriate 530 limitation language to use will vary depending upon whether any worker issues were audited, and whether a worker classification examination resulted in a worker reclassification. The following scenarios capture the most common examination results. Scenario #1: The results of the examination include an employment tax assessment, but the examination did not include either the identification of or the development of the worker classification issue, including requests for information or discussion regarding a reclassification issue. The following language will be inserted in the "other information" section of Form 4666. "The examination of your employment tax returns as reflected on this Agreement did not include an examination for employment tax purposes of whether any individuals should be treated as your employees for purposes of Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996." Scenario #2: An examination assessment will be made, and includes identification of or the development of worker classification issues, including requests for information or discussion regarding a reclassification issue but there will be no change related to the worker classification issue. Language will be inserted in the "other information" section of Form 4666 that specifies the classes of workers examined and limits Section 530 exposure to those classes of workers examined. For example, the following language is appropriate: "The examination of your employment tax returns as reflected on this Agreement included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may rely only on the audit of [CLASS OF WORKER(S)/LOCATION(S)] for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530." Scenario #3: An examination assessment will be made and the examination included identification of or the development of worker classification issues, including requests for information or discussion regarding a reclassification issue, and there will be a Notice of Determination of Worker Classification; specify classes of workers examined, limits of Section 530 exposure. Language will be inserted in the "other information" section of Form 4666 that specifies the classes of workers examined and limits Section 530 exposure to those classes of workers examined and not reclassified. For example, the following language is appropriate: "The examination of your employment tax returns as reflected on this Agreement included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may rely only on the audit of [CLASS OF WORKER(S)/LOCATION(S)] that did not result in a reclassification for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530." Scenario #4: Where the results of the examination includes reclassification of all workers examined. This language specifies the classes of workers examined and indicates that no worker classifications are covered under Section 530 , because all workers audited were reclassified. For example, the following language is appropriate: "The examination of your employment tax returns as reflected on this Agreement included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may not rely on any classes of workers for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530, because all workers audited were reclassified as employees." Scenario #5: The examination results in no-change, and the examination did not include either the identification of or the development of the worker classification issue, including requests for information or discussion regarding a reclassification issue. The following language will be inserted in the "other information" section of Form 4666: "The examination of your employment tax returns did not include an examination for employment tax purposes of whether any individuals should be treated as your employees for purposes of Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996." Scenario #6: The examination results in no-change, but the examination included identification of or the development of worker classification issues, including requests for information or discussion regarding a reclassification issue. Language should be inserted in the "other information" section of Form 4666 that specifies the classes of workers examined and limits Section 530 exposure to those classes of workers examined. For example, the following language is appropriate:" The examination of your employment tax returns included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, for Section 530 purposes when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may rely only on the audit of [CLASS OF WORKER(S)/LOCATION(S)] for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530." 4.75.40.18 (12-18-2019) Letters Examiners are not authorized to develop local letters that will be sent to more than 10 taxpayers. These letters must be approved by Headquarters. See IRM 1.17, Publishing, for these requirements and procedures. The following table provides a list of the most commonly used closing letters and indicates who is responsible for preparing and mailing the letter. Letter Number Prepared By Mailed by Letter 5376 (Full or Partial Claim Disallowance - Employment Tax) Examiner Examiner Letter 570, (Claim Allowed In Full) Examiner (undated) Manager Letter 3381 (No Change) Examiner (undated) Manager Letter 905 (Letter Notifying Taxpayer of Partial Refund Claim Disallowance) Examiner Manager Letter 906 (Certified Claim Disallowance Letter) Examiner Manager Letter 950-C or Letter 950-D Examiner Examiner L-3382 (Notification Letter- Agreed Audit Changes) Examiner Manager Letter 3523, (Notice of Determination of Worker Classification) Mandatory Review Mandatory Review 4.75.40.19 (12-18-2019) Remittance Processing Procedures The following procedures should be followed for processing payments. 4.75.40.19.1 (12-18-2019) Processing Check Payments Upon receipt of a payment, the Examiner should prepare Form 3244-A. Complete a separate Form 3244-A for each tax year and class of tax involved. See Exhibit 4.4.24-1 Preparation of Form 3244-A for detailed instructions. Checks should be made payable to "United States Treasury" . If the payee section is blank or illegible, it must be over-stamped "United States Treasury" . The Examiner will transmit the payment(s) and related Form(s) 3244-A to Ogden via Form 3210 within 24 hours. All payments must be double-wrapped (with the payment placed in a security envelope inside of the overnight mail envelope) and marked or delivered via overnight traceable method. (A receipted copy of Form 3244-A may be used in lieu of Form 3210 only for payments which are hand-carried to a local remittance processor. This occurrence is not common.) If a remittance must be held overnight, it must be stored securely in a locked container. Form 3210 should be prepared in triplicate. Two copies should accompany a payment being sent to the processing center. If the payment applies to more than one tax period, the breakdown should be on Form 3210. The payment should be stapled to the front of Form 3244-A, and sent with Form 3210 by overnight mail. The mail service tracking number should be included on Form 3210. Form 3210 should also include taxpayer name, TIN, tax return form number, payment amount, and check number. Copies of all forms should be retained in the case file. Electronic copies may be imported to RCCMS. To comply with the concept "segregation of duties" copies of Form 3210, 3244-A, and the checks should be faxed (or scanned/e-mail) to the employee's manager. The manager will approve the copies and alert the employee to transmit the originals to Ogden. Maintain a log at the managerial level. The Examiner should maintain a separate log of Forms 3210. The remittance package will consist of the payment(s), Form(s) 3244-A, and Form 3210. Send the package to the Ogden address shown in Case Closing Desk Guide. The sender must establish a control to ensure delivery of tax receipts. The control must include amounts of taxpayer receipts by TIN, correlated to the package tracer information. Copies of Form 3244-A are not required to be attached to the return document in a paper case file as long as electronic copies are in the RCCMS file. However, if a paper case is going to Appeals, attach Form 3244-A to the return document. Submission processing centers must return acknowledgment copies of transmittals to originators within five workdays. The Examiner must follow up with the processing center within ten workdays if payment packages have not been acknowledged. 4.75.40.19.2 (12-18-2019) Advanced Payments Payments of less than $100,000 secured as "Advance Payment on Deficiency" (TC 640) - secured as part of an audit should be sent (overnight delivery) with Form 3244-A via Form 3210 to: Internal Revenue Service 1973 North Rulon White Blvd. Receipt & Control Operations Manager Mail Stop: 1999 Ogden UT 84404 Payments of $100,000 and more secured as "Advance Payment on Deficiency" (TC 640) - secured as part of an audit require additional steps. E-mail a copy of Form 3210 to &CTR ODN Ogden Tellers. The payment should be sent overnight with Form 3244-A via Form 3210 to: Internal Revenue Service 1973 North Rulon White Blvd. Receipt & Control Operations Manager Mail Stop: 2003 Ogden, UT 84404 4.75.40.19.3 (12-18-2019) EFTPS Option Taxpayers have the option to pay deficiencies using EFTPS (Electronic Federal Tax Payment System). Although not required, EFTPS streamlines payment processing. Payments will post to IDRS within days if the taxpayer uses EFTPS. Verify the payments have posted to the proper periods on IDRS before closing the case from the group and document Form 9984 that EFTPS payments posted properly. 4.75.40.20 (12-18-2019) Procedures for Processing Related Returns Related cases generally should be closed simultaneously with the primary return. The Examiner may consider closing related cases separately, where issues are not interrelated, and separate closing(s) would avoid unnecessarily long delays in processing no-change or agreed cases. The Examiner should include copies of all materials necessary to document any adjustment proposed in related case file(s) in the primary case file. 4.75.40.21 (12-18-2019) Information Return Examinations CP&C may assign Information Return Examinations that are limited in scope to a government entity’s compliance with information return reporting and filing (e.g. Form W-2, Form 1099, etc.). These examinations may be expanded to include Form 941 and other tax returns with Manager’s approval.Example: Information Return Examinations may be used when auditing a federal or state agency that files Forms 1099 but whose employee wages and employment taxes are reported by a different federal or state agency. Use activity code 520 on WebETS for time spent on Information Return Examinations. Normal examination opening procedures apply to Information Return Examinations. If the examination is expanded to include Form 941 or Form 945, the examiner establishes the activity on RCCMS for the appropriate periods and notifies the taxpayer. See Document 11308, Information Systems Codes FY 2020 for more information about source codes. If the taxpayer failed to file Forms 1099 and/or W-2, secure and process the delinquent returns. See IRM 4.75.40.6.3. If the taxpayer didn’t file correct information returns by the due date and cannot show reasonable cause, the examiner will: Prepare a spreadsheet that contains a list of payees (named “33.3 CIVPEN Payee List”) in the case file. Include: Payee names TINs Amounts paid to them that should have been but were not reported Address penalties under IRC 6721. See IRM 4.75.40.23. When a taxpayer did not provide correct payee statements and cannot show reasonable cause, penalties under IRC 6722 for failure to furnish correct payee statements must be addressed. Close the Information Return Examination using disposal code: 303 if a discrepancy report is issued. 801 if no discrepancy report is issued. 4.75.40.22 (12-18-2019) Backup Withholding IRC 3406 requires a payer to withhold income tax from reportable payments to recipients for any of these situations: The payee fails to furnish a TIN to the payer in the manner required. The Secretary notifies the payer that the TIN furnished by the payee is incorrect. There has been a notified payee underreporting with respect to interest and dividends described in IRC 3406(c). There has been a payee certification failure described in IRC 3406(d). Payments that may be subject to backup withholding include: Interest Dividends Rents Royalties Commissions Non-employee compensation Direct sales Broker proceeds Barter exchange transactions Reportable gross proceeds paid to attorneys Payment card transactions Certain payments made by fishing boat operators Taxable grants and agriculture payments Payers must pay any backup withholding required to be deducted and withheld under IRC 3406. If a payer withheld the tax from a payee but didn’t pay it, the Trust Fund Recovery Penalty may apply. Federal agencies and instrumentalities of the federal government are not exempt from backup withholding requirements. When it’s determined that the taxpayer did not have payees’ TINs at the time of making reportable payments, and that required information returns were not filed and/or furnished by the taxpayer, the examiner must: Include a spreadsheet in the case file containing a list (named “34.2204.1.BUW.F1099-MISC Payees”) of: Payee names. TINs. Amounts paid to them that should have been, but were not, reported. Amounts for each payee that are eligible for IRC 3402(d) relief. Scan Form 4669, Statement of Payments Received, and Form 4670,Request for Relief of Certain Withholding Taxes, into RCCMS (named 34.2204.2.F4670-F4669) when secured from a taxpayer for IRC 3402(d). For additional guidance, see: IRM 4.23.8.13, IRC 3406- Backup Withholding IRM 4.23.8.4, IRC 3402(d)- Relief for Employer When Employees Have Paid Income Tax on Wages. 4.75.40.23 (12-18-2019) Penalty Overview Abating or not asserting civil penalties based on reasonable cause or other relief provisions must: Be made in a consistent manner. Conform with the IRC, Treasury Regulations, and IRM 20.1, Penalty Handbook. Policy Statement 20-1, , located in IRM 1.2.1.12.1, provides that the IRS administers a penalty system that is designed to: Enhance voluntary compliance. Promote consistency in the application of penalties compared to similar cases. Promote unbiased analysis of the facts in each case. Promote the proper application of the law to the facts of the case. Approve a reduction of otherwise applicable penalties or penalty waiver for a group or class of taxpayers as part of a Service-wide resolution strategy to encourage efficient and prompt resolution of cases of noncompliant taxpayers. Ensure that penalties are used for their proper purpose and not as bargaining points in developing or processing cases. Generally, relief from penalties falls into four separate categories: Reasonable Cause Statutory Exceptions Administrative Waivers Correction of Service Error Note: See IRM 20.1.1.3, Criteria for Relief from Penalties, for guidance. Policy Statement 20-2, located in IRM 1.2.1.12.2, provides that penalties and interest will not be assessed against Federal agencies or instrumentalities of the United States. If errors are found during these examinations, the examiner should: Focus on helping correct the errors. Promote future compliance. Consider asserting backup withholding tax when issues arise related to failure to file or furnish Forms 1099. 4.75.40.23.1 (12-18-2019) Assessment of Penalties Reasonable cause must be considered when issues arise during the examination concerning the assertion of penalties. The examiner: Must document his or her position and should not proceed with asserting the penalty if taxpayer provides a valid reasonable cause argument. Should assert all applicable penalties if he or she determines reasonable cause does not exist. Should focus on educating the taxpayer about the errors and to foster future compliance. Reasonable cause is discussed in IRM 20.1.1.3.2, Reasonable Cause. 4.75.40.23.2 (12-18-2019) Information Return Penalties The Tax Increase Prevention Act of 2014 provides for inflationary adjustments to the penalty rates and maximums for returns and statements required to be filed after December 31, 2014 For guidance: Refer Provide For IRC 6721 Penalties for failure to file correct information returns. IRC 6722 Penalties for failure to furnish correct payee statements. IRC 6723 Failure to comply with other information reporting requirements. IRC 6724 Waiver/definitions and special rules. This section provides that penalties will not be assessed if the taxpayer has reasonable cause for failure to comply. IRM 4.23.9.13, Penalties for Failure to File Certain Information Returns or Furnish Certain Statements Information on return penalties. IRM 4.23.9.13.5, Information Penalty Rates Information penalty rates IRM 4.23.14.12, Penalties under IRC Sections 6721 and 6722 Information on extending statutes for information return penalties. IRM 20.1.7, Information Return Penalties Information on policies and procedures. IRM 4.23.14.12 Information on extending statutes for information return penalties. Beginning with tax year 2016, if payees report amounts in box 7 of Form 1099-MISC then the statute for those returns will correspond to the due date of January 31 of the year following payments. For other Forms 1099-MISC the statute remains February 28. 4.75.40.23.3 (12-18-2019) Trust Fund Recovery Penalty The purpose of IRC 6672 is to: Encourage the prompt payment of withheld and other collected taxes. Provide the Service with a secondary source of collection in the event that these taxes are not paid. Note: The withheld taxes are commonly referred to as “trust fund taxes”. When the trust fund taxes are not paid by the payee, the Trust Fund Recovery Penalty may be asserted against the responsible persons for willful failure to collect and pay over the taxes. The penalty is comprised of employee FICA and income taxes withheld by the payee but not deposited or remitted to the Treasury. For guidance, see IRM 4.23.9.14, Trust Fund Recovery Penalty. 4.75.40.23.4 (12-18-2019) Preparer Penalties The Small Business and Work Opportunity Tax Act of 2007 amended IRC 6694 and IRC 6695 to include any tax preparer. Preparer penalties became applicable to employment tax returns filed on or after May 25, 2007. For guidance, see: IRM 4.23.17, Preparer Penalty Procedures for SB/SE Employment Tax IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties 4.75.40.23.5 (12-18-2019) Promoter Penalties Promoter penalty sections include: IRC 6700, Promoting Abusive Tax Shelters, Etc IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability For guidance, see IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties. 4.75.40.24 (12-18-2019) Information Return Penalty Case (Civil Penalty Case) This subsection: Discusses information return penalties. Discusses the preparation of an information return penalty case, sometimes referred to as a civil penalty case. Applies when an examiner determines that information return penalties are applicable. 4.75.40.24.1 (12-18-2019) Computation of Information Return Penalties To compute the information return penalties for IRC 6721, IRC 6722 or IRC 6723, multiply the number of violations for each code section by the applicable dollar amount. 4.75.40.24.2 (12-18-2019) Information Return Penalty Case Processing Procedures If it is determined that information return penalties should be assessed due to an employment tax examination, the examiner will: Obtain Manager’s approval to propose information return penalties. Once approved, establish a separate Information Return Penalty case file on RCCMS using: Use activity code 520. Use Type – Information Return Penalties Use source code based on the source code of the original compliance activity. Close 100% electronically. Not control the case on AIMS Use activity code 520 on WebETS Note: If the examination is an Information Return Examination, don’t create a separate penalty case but assert penalties in the existing case on RCCMS. The time spent on: Reviewing books and records to determine if the taxpayers are complying with information return reporting and filing requirements will be charged to the original compliance activity (employment tax or information return examination). Preparing the penalty case will be charged to the penalty case. An information return penalty case should include the following: Form 3198-A, TE/GE Special Handling Notice Form 3645, Computation of Information Return Penalty Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties Form 9984, Examining Officer’s Activity Record Form 3244-A, Payment Posting Voucher - Examination, if payment received Form 4318, Examination Workpapers Index Form 886-A, Explanation of Items Spreadsheet with a complete list of payees, TINs and amounts that went unreported for each period in question. See IRM 4.75.40.21 (6)(a) for specific information to be included in the spreadsheet. Any other workpapers Note: See the FSL/ET Consolidated Case Closing Desk Guide. Case procedures: Use the RCCMS Naming Convention for all case documents. See IRM Exhibit 4.75.16-4. Do not provide Forms 3645 or 8278 to the taxpayer. Do provide the penalty calculations on Form 886-A and the spreadsheet that contains a complete list of payees, TINs, and amounts that went unreported for each period in question. Note: See IRM 4.23.8.11 for guidance in the use of Forms 8278, 3645 and 886-A. The information return penalty case should be included in and closed concurrently with the employment tax or information return examination case. On RCCMS, the penalty case is closed using disposal code 802. Payments of information return penalties secured by the examiner will be processed in the same way as other advanced payments. The original Form 3244-A with the payment should be forwarded via a separate Form 3210 for processing. A copy of Form 3244-A should be included in the RCCMS case file. Taxpayers have the option to pay penalties using EFTPS (Electronic Federal Tax Payment System). The statute of limitations for information returns and information return penalties is three years from the date the returns were due or filed, whichever is later. There is no statute for penalties on information returns that were never filed. See IRM 4.23.14, Statute Control and Extension, and IRM Exhibit 4.23.9-1, Instructions for Determining Civil Penalty Statute of Limitations, for statutes on information return penalties. Complete Form 895, Notice of Statute Expiration, and send it to the Group Manager for all Civil Penalty cases with non-filed Information Returns at the time the activities are established on RCCMS (e.g., for all activities with 1/EE/xx statute designation). Where appropriate, worker classification issues can be resolved via the classification settlement program governed by IRC 7121. See IRM 4.23.6 and IRM 8.13.1, and Delegation Order 8-3 (formerly DO-97) in IRM 1.2.47.4). More Internal Revenue Manual