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.

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:

Examiners are responsible for determining if penalties are applicable in cases such as, but not limited to:

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.

See the table of terms and/or abbreviations used throughout this IRM Section below.

Other helpful information resources may include:

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.

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.

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.

During employment tax examinations, Examiners frequently identify information returns that were not furnished or filed. This subsection provides various procedures to be followed.

Workpapers provide documentation to support all IRS positions taken when conducting examinations and making adjustments. Fully developed workpapers serve the following purposes:

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.

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 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.

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 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.

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:

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.

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.

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:

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.

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.

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.

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.

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.

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:

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:

Unagreed cases, without protest to Appeals, will be closed to EO Mandatory Review.

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.

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.

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.

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:

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.

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.

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:

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:

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.

Reasonable cause must be considered when issues arise during the examination concerning the assertion of penalties. The examiner:

Reasonable cause is discussed in IRM 20.1.1.3.2, Reasonable Cause.

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:

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.

The purpose of IRC 6672 is to:

For guidance, see IRM 4.23.9.14, Trust Fund Recovery Penalty.

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:

Promoter penalty sections include:

For guidance, see IRM 20.1.6, Preparer, Promoter, Material Advisor 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.

If it is determined that information return penalties should be assessed due to an employment tax examination, the examiner will:

The time spent on:

An information return penalty case should include the following:

Case procedures:

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).