4.88.1 Examination Issues Pertaining to ITG Cases

Manual Transmittal

March 07, 2019

Purpose

(1) This transmits revised IRM 4.88.1, Indian Tribal Governments Examination Issues and Procedures, Examination Issues Pertaining to ITG Cases.

Material Changes

(1) This manual has been substantially revised and the subsections reorganized for greater clarity.

(2) Incorporates new text, reissues existing information, and reflects editorial and/or numbering changes throughout the subsections. Checked and corrected (where necessary) web addresses, IRM and legal resources. See table below for significant changes to this IRM:

IRM Reference Description of Change
Throughout IRM Updated manual to change references to certain positions in ITG/TEB because of the TE/GE reorganization. Changed references to:
  • the Director, Indian Tribal Governments to Director, Indian Tribal Governments/Tax Exempt Bonds (ITG/TEB).

  • Compliance and Program Management (CPM) to Compliance Planning and Classification (CP&C) or ITG/TEB Technical depending on where the program/process was realigned within TE/GE.

4.88.1.1, Program Scope and Objectives Changed Title to Program, Scope and Objectives, formerly Overview. Inserted new content for Internal Controls as required by IRM 1.11.2.
4.88.1.1.1, Background Moved and updated content formerly included in the Manual Transmittal Background section.
4.88.1.1.2, Authority Added new section.
4.88.1.1.3, Responsibilities Added new section.
4.88.1.1.4, Program Management and Review Added new section.
4.88.1.1.5, Program Controls Added new section.
4.88.1.1.6, Acronyms Compiled a list of frequently used acronyms and their definitions used in ITG/TEB.
4.88.1.2, Federal Tax Status of Indian Tribal Governments Moved content; formerly IRM 4.88.1.4. Revised text throughout. Paragraph (2) remove wording “or not” and “in order” in the fifth and sixth sentences. Moved paragraph 5 (b) and (c), which pertain to corporations, to paragraph 4. For clarity purposes, modified the sentence in the second bullet as follows: Changed “disregarded” to “not recognized” and added “Indian”. The sentence now reads: “These entities are not recognized as separate from the Indian tribe for income tax purposes, unless otherwise elected.”
4.88.1.3, Federal Tax Treatment of Indian Tribal Members Added new section.
4.88.1.4 Distributions from Gaming Revenue Moved content and changed title; formerly IRM 4.88.1.7.1, Distributions of Gaming Revenue.
4.88.1.4.1, Guidelines for Per Capita Distribution Plans Moved content and changed title; formerly IRM 4.88.1.7.2, Guidelines on Review and Approval of Per Capita Distribution Plans.
4.88.1.4.2, Reporting Requirements for Distributions of Net Gaming Revenue Moved content and changed title; formerly IRM 4.88.1.7.4, Reporting Requirements of Distributions.
4.88.1.4.3, Withholding Requirements for Distributions from Net Gaming Revenue Moved content and changed title; formerly IRM 4.88.1.7.6, Withholding from the Distributions of Net Gaming Revenue.
4.88.1.4.4, Minor Trusts Moved content; formerly IRM 4.88.1.7.5.2. Revised content throughout for clarity.
4.88.1.4.5, Abatement Procedures for Assessments Made Under IRC 3402(r) Moved content and changed title; formerly IRM 4.88.1.7.7, Reporting Requirements and Abatement Procedures.
4.88.1.5, Distributions to Tribal Members Moved content; formerly IRM 4.88.1.7.5. Revised content throughout.
4.88.1.6, Nontaxable Distributions and Statutory Exclusions from Income of Tribal Members Moved content and changed title; formerly IRM 4.88.1.7.5.1, Nontaxable Distributions and Benefits, and IRM 4.88.1.10, Nontaxable Income of Tribal Members: Combined these two sections and deleted duplications. Revised content throughout for clarity. Removed the link to Private Letter Ruling 2004200028 because it was not a working link and could not verify or locate valid link. Added text. Per capita distributions made from funds held in trust by the Secretary of Interior pursuant to Notice 2015-67, and changed (e) from 25 U.S.C. 1407 to 25 U.S.C 1401.
4.88.1.6.1, Income Derived from Land Moved content; formerly IRM 4.88.1.10.1. Updated link to the position paper Income Derived from Allotted Land.
4.88.1.6.2, Income from Per Capita Payments from Funds Held in Trust by the Department of Interior Added new section.
4.88.1.6.2.1, Income from Direct Pay and HEARTH Act Leases Added new section. Revised to reflect Interim Guidance Memorandum issued on Direct Pay Leases (including HEARTH Act leases).
4.88.1.6.3, Income Derived from Fishing Rights Moved content; formerly IRM 4.88.1.10.2. Revised text throughout for clarity.
4.88.1.6.3.1, Fishing Rights-Related Activity Moved content; formerly IRM 4.88.1.10.3. Revised text throughout for clarity.
4.88.1.6.3.2, Special Definitions Added new section.
4.88.1.6.3.3, Fishing Rights Claims Moved content and changed title; formerly IRM 4.88.1.10.4, Fishing Claims.
4.88.1.6.4, Income from Tribal Judgments and Settlements Added new section.
4.88.1.6.5, Income from Agreements Between the United States and an Indian Tribal Listed in Notice 2012-60 Added new section.
4.88.1.6.6, Medical Benefits Which Qualify for Exclusion IRC 139D Added new section.
4.88.1.6.7, General Welfare Benefits IRC 139E Moved content; formerly IRM 4.88.1.7.3.
4.88.1.7, Employment Taxes Moved content and changed title; formerly IRM 4.88.1.2, ITG Employment Tax Related Issues. Revised text throughout for clarity.
4.88.1.7.1, Employment Tax Reporting, Deposit Requirements and Related Issues Moved content and changed title; formerly IRM 4.88.1.2.1, Resources and Issues. Revised text throughout for clarity. Paragraph (2) Removed incorrect reference to “net FUTA tax liability less than $2,500” and replace with “total annual tax liability for social security, Medicare and withheld federal income taxes is $1,000 or less” since the information refers to Form 944, Employer’s ANNUAL Federal Tax Return, and not Form 940, Employer’s ANNUAL Federal Unemployment (FUTA) Tax Return.
4.88.1.7.2, Independent Contractor or Employee Added new section.
4.88.1.7.3, Wages Moved content; formerly IRM 4.88.1.2.3. Revised text throughout for clarity.
4.88.1.7.3.1, Exceptions Moved content; formerly IRM 4.88.1.2.4.
4.88.1.7.4, Federal Unemployment Tax Act (FUTA) Moved content; formerly IRM 4.88.1.2.2. Revised text throughout for clarity. Updated ITG/TEB’s address from the 5th Floor to 6th Floor when the State needs to advise ITG/TEB of a tribe’s failure to make required payments.
4.88.1.7.4.1, Form 940 Filing Requirements Added new section to assist specialists in determining if a tribe has a FUTA filing requirement.
4.88.1.7.5, Information Return Reporting Moved content; formerly IRM 4.88.1.3, Information Reporting. Revised text throughout for clarity.
4.88.1.7.5.1, Non-employees Moved content; formerly IRM 4.88.1.3.1. Revised text throughout for clarity.
4.88.1.7.5.2, Backup Withholding Moved content; formerly IRM 4.88.1.3.2. Revised text throughout for clarity. Updated to include 24% effective January 1, 2018. Paragraph (6) Updated citation 26 CFR 31.3406-0 and added et seq. Updated citation 26 CFR 31.3406-0 and added et seq. Added para (7).
4.88.1.7.6, Abatement Procedures Moved content; formerly IRM 4.88.1.3.4.
4.88.1.8, Indian Gaming Moved content; formerly IRM 4.88.1.5. Revised text throughout.
4.88.1.8.1, Background Moved content; formerly IRM 4.88.1.5.1. Made editorial changes throughout text.
4.88.1.8.2, Tribal Gaming Operational Responsibilities Moved content; formerly IRM 4.88.1.5.2.
4.88.1.8.2.1, Record-keeping Requirements Moved content and changed title; formerly IRM 4.88.1.5.2.1, Record-keeping.
4.88.1.8.3, Filing Requirements Moved content; formerly IRM 4.88.1.5.3.
4.88.1.8.3.1, Forms for Reporting Gaming Winnings Moved content; formerly IRM 4.88.1.5.3.1. Revised text throughout.
4.88.1.8.3.2, Withholding Requirements Added new section.
4.88.1.8.3.3, Failure to Pay Withholding Tax Moved content and changed title; formerly IRM 4.88.1.5.3.2, Cautions. Revised text throughout.
4.88.1.9, Bank Secrecy Act (BSA), Title 31 Moved content; formerly IRM 4.88.1.6. Revised content throughout and updated for organizational changes.
4.88.1.9.1, Authorities Moved content and changed title; formerly IRM 4.88.1.6.1.
4.88.1.9.2, Reporting Moved content; formerly IRM 4.88.1.6.2.
4.88.1.9.3, Record-keeping Requirements Moved content and changed title; formerly IRM 4.88.1.6.3, Record-keeping.
4.88.1.9.4, Compliance Programs Moved content; formerly IRM 4.88.1.6.4.
4.88.1.9.5, Suspicious Transactions Moved content; formerly IRM 4.88.1.6.5.
4.88.1.9.6, Other Requirements Moved content; formerly IRM 4.88.1.6.6. Text was revised and expanded throughout.
4.88.1.10, Tip Agreements Moved content; formerly IRM 4.88.1.8, Tip Agreements.
4.88.1.10 paragraph (2), Tip Agreements Removed reference to “The Tip Rate Determination Agreement (TRDA) for the gaming industry” and changed the number of tip agreement arrangements Indian tribal government employers can voluntarily enter into with the IRS from four to three. The ITG/TEB Tip Compliance program is governed by the National Tip Reporting Compliance Program (NTRCP) which is a SB/SE Specialty Program. SB/SE converted all of their gaming TDRAs to GITCAs and has requested ITG/TEB do the same with their gaming tip rate agreements. Removed "and gaming industry" from the end of "The Tip Rate Determination Agreement (TRDA) for industries other than the food and beverage and gaming industry."
4.88.1.10 paragraph (3), Tip Agreements Removed reference to deleted Exhibit 4.88.1-5, Tip Rate Determination Agreement, and added a sentence explaining that samples of Tip Rate Determination Agreement (TRDA) for food and beverage, and for industries other than food and beverage, can be requested from the ITG/TEB Tip Analyst.
4.88.1.10 paragraph (4), Tip Agreements Removed reference to deleted Exhibit 4.88.1-4, Comparison of TDRA and GITCA.
4.88.1.10.5, GITCA Required Employer Annual Reports Changed due dates throughout text to on or before March 31 of the year after the calendar year, or any portion thereof.. Added instruction that the number of tipped employees as of the last day of the calendar year should also be provided. Changed citation from IRM 4.88.1.8.8 to IRM 4.88.1.10.6.
4.88.1.10.12, Tip Rate Determination Agreements (TRDA) Requirements Paragraph (3) Removed the word "gaming" since ITG/TEB is no longer offering a gaming TRDA to casinos without an agreement. Also changed wording from "and other industries" to "and for industries other than food and beverage."
4.88.1.10.12.2, TRDA Annual Reporting and Tax Compliance Requirements Paragraph (2) Added "on or before March 31 for the preceding calendar year."
4.88.1.10.15, Authority to Sign Tip Agreements Paragraph (2) Change Delegation Order 4-34 (Rev. 1) to (Rev. 2). Paragraph (3) Add information that tribal representative signs and dates both agreements in blue ink. Paragraph (4) Add information that ITG/TEB group manager countersigns and dates both agreements in blue ink. Also, changed the paper case file goes directly to the Tip Analyst.
4.88.1.10.16, Tip Rate Reviews for Tip Agreements Paragraph (2) Change "venue that charge tips" to "venues with employees who receive charge tips" . Paragraph (11) Reword first sentence to "Rev. Rul. 2012-18 provides guidance on tips vs. service charges." In the last sentence, change "appendices" to "Appendix A, GITCA or Attachment A, TRDA," and delete remainder of sentence. Added the following statement: "Per Internal Revenue Service guidance Rev. Rul. 2012-18, any monies received for contractually fixed gratuity, auto-gratuity, service charges, bottle fees, etc., were not considered when calculating the tip rates reflected on this Appendix A. All monies distributed from contractually fixed gratuities, auto-gratuities, service charges, bottle fees, etc., are considered wages."
4.88.1.10.17, Tip Case File Closing Procedures for ITG/TEB Specialists Paragraph (1) Clarified text and added new material. If the case is a Tip Solicitation, consideration should be given to issuing a declination letter. If the case is a Tip Rate Review, consideration should be given to closing the case as is and allowing the current GITCA to expire without renewal or terminating the current TRDA. The ITG/TEB Tip Analyst should be advised of potential Tip Rate Review closures without a refreshed agreement prior to closing the case. Paragraph (2)c Added Note: The group manager may choose to do this step instead of the specialist. Changed references to Compliance and Program Management (CPM) and CPM to Technical Group II.
4.88.1.10.17.1, Closing Procedures for Managers Added new section with procedures for group managers closing tip agreement cases. Added Note: The group manager may choose to do this step instead of the specialist.
4.88.1.11, Excise Taxes Moved content; formerly IRM 4.88.1.9, Excise Tax. Text was revised and expanded throughout. Added material in paragraph (4) regarding Coordinated Industry Case Program (CIC).
4.88.1.11.1, Responsibilities and Procedures Moved content; formerly IRM 4.88.1.9.1. Revised and expanded text for clarity.
4.88.1.11.2, Tax on Wagering Added new section.
4.88.1.11.2.1, Wagering Excise Tax Added new section.
4.88.1.11.2.2, Occupational Tax Added new section.
4.88.1.11.3, Limited Exception for Certain Excise Tax Applicable to Tribal Governments Moved content and changed title; formerly IRM 4.88.1.9.2, Excise Taxes Applicable to Tribal Governments. Revised text throughout for clarity.
4.88.1.12, IRC 7871 Letter Request Procedures Added new section.
4.88.1.13, Abuse Detection and Prevention Team (ADAPT) Moved all content on ADAPT; formerly IRM 4.87.1.1 through IRM 4.87.1.1.9. Revised text throughout for clarity and organization changes.
4.88.1.14, Fraud Moved all content on Fraud; formerly IRM 4.88.1.11. Revised text throughout to reflect procedural and organization changes.
4.88.1.14.4, Administrative Joint Investigation Cases Added new section.
4.88.1.15, Collection Issues Moved content; formerly IRM 4.88.1.12. Text was revised and expanded throughout.
4.88.1.15.2, Interest Abatement and Adjustments Moved content; formerly IRM 4.88.1.12.2. Updated citations throughout.
4.88.1.15.3.1, Coordination with SB/SE Updated examples of doubt as to liability offers in paragraph (4) to include Civil Penalties and changed “Income Tax Withholding” to “Federal Income Tax Withholding” (FITW).
4.88.1.15.5, Trust Fund Recovery Penalty Moved all sections; formerly in IRM 4.88.1.12 through IRM 4.88.1.12.4.5, Revised and expanded text throughout.
IRM 4.88.1.16, Account Resolution Moved all sections and content; formerly in IRM 4.88.1.13. Updated organizational references and citations throughout.
Exhibit 4.88.1-1, Gaming Withholding and Reporting Thresholds – Forms Needed Updated notes after chart, Final Treas. Reg. 1.6041-10 26 CFR 1.6041-10 replaces Treas. Reg. 7.6041-7 26 CFR 7.6041-7 of the Temporary Income Tax Regulations under the Tax Reform Act of 1976 for person who make reportable payments of bingo, keno, or slot machine winnings.
Exhibit 4.88.1-3, General Welfare Exception Summary of Authority Added a Caution statement at the beginning of the exhibit indicating all rulings and memoranda, except for Notice 2015-34, were issued prior to the enactment of the Tribal General Welfare Exclusion Act of 2014. These ruling and memoranda should be interpreted considering that Act and caution should be applied. If uncertain, consult with your manager. Any general welfare-related questions received from tribes should be forwarded to your group manager.
Exhibit 4.88.1-3, General Welfare Exception Summary of Authority Rev. Ruling 57-1. Removed "general welfare exception rulings distinguished" from sentence.
Exhibit 4.88.1-3, General Welfare Exception Summary of Authority Notice 2002-76. Removed the word "extra" from the first sentence.
Exhibit 4.88.1-4, Tax Audit Guidelines for Internal Revenue Examiners - Indian Fishing Rights - IRC 7873 Formerly Exhibit 4.88.1-6; Re-numbered exhibit after exhibits related to TRDA and GITCA were removed,
Exhibit 4.88.1-5, Gaming Industry Tip Compliance Agreement (GITCA) Formerly Exhibit 4.88.1-7; Re-numbered exhibit after exhibits related to TRDA and GITCA were removed,

(3) The following sections were removed from IRM 4.88.1 and were moved to and modified in the following manuals:

IRM Reference Description of Change
Former 4.88.1.3.3, Reporting and Deposit Requirements Moved paragraphs (1) and (2) to IRM 4.88.1.4.2 (3), and revised and moved paragraph (3) to IRM 4.88.1.7.1 (2).
Former 4.88.1.14, Private Letter Rulings and Technical Advice Requests Moved content to IRM 4.80.1, Indian Tribal Governments (ITG) and Tax Exempt Bonds (TEB) Examination Program and Procedures, Technical Assistance and Technical Advice Requests, and IRM 4.86.5.
Former IRM 4.88.1.14.1, Private Letter Rulings (PLR) Moved content to IRM 4.86.5.
Former IRM 4.88.1.14.2, Technical Advice Memorandums (TAM) Moved content to RM 4.80.1, Indian Tribal Governments (ITG) and Tax Exempt Bonds (TEB) Examination Program and Procedures, Technical Assistance and Technical Advice Requests.
Former 4.88.1.15, Coordination with Office of Professional Responsibility Moved content to IRM 4.86.5.
Former Exhibit 4.88.1-4, Comparison of TRDA and GITCA Removed the exhibit since we no longer offering a gaming TRDA to casinos without an agreement.
Former Exhibit 4.88.1-5, Tip Rate Determination Agreement Removed exhibit since no longer offering a gaming TRDA to casinos without an agreement.

(4) Updated to meet the requirements of P.L. 111-274 (H.R. 946), the Plain Writing Act of 2010. The Act provides that writing must be clear, concise, well-organized, and follow other best practices appropriate to the subject or field and intended audience.

Effect on Other Documents

This revision supersedes IRM 4.88.1 dated October 5, 2015. This section also incorporates Interim Guidance Memorandum TEGE-04-0617-0015, Direct Pay of Tribal Lease Funds (including HEARTH Act leases). Upon publication of this IRM Section, IRM 4.87.1, Indian Tribal Governments, Inventory Management, will be obsoleted.

Audience

Tax Exempt and Government Entities
Government Entities and Shared Services
Indian Tribal Governments

Effective Date

(03-07-2019)

Christie J. Jacobs
Director, Indian Tribal Governments/Tax Exempt Bonds
Government Entities and Shared Services
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose. This section provides an overview of federal tax issues unique to Indian tribal governments and provides guidance for specialists conducting employment tax, information reporting, excise wagering tax, and other types of audits of tribes. This manual also provides guidance on Bank Secrecy Act (BSA) requirements, fraud and abuse in Indian tribal governments, research and account services, and collection issues involving tribes and their entities.

  2. Many of the basic techniques for examining returns of Indian tribal entities are similar to those required of revenue agents (examiners) under Small Business/Self Employed (SB/SE) and Large Business and International (LB&I) Divisions when examining individual, partnership, and corporate returns. Find these procedures in IRM Part 4, Examining Process. See IRM 25, Special Topics, for procedures that apply to more than one IRS process, including the exam process.

  3. Portions of this manual may discuss the taxability of payments made to tribal members and non-tribal member individual taxpayers from interactions with tribal governments. Sometimes specialists may examine Form 1040 taxpayer cases because of information received from a related examination of an Indian tribal entity. Procedures for examining Form 1040 cases, if needed, can be found in IRM Part 4, Examining Process.

  4. Audience. The procedures in this manual apply to Indian Tribal Government/Tax Exempt Bond (ITG/TEB) employees.

  5. Policy Owner. Small Business/Self Employed (SB/SE) Division is the policy owner and is responsible for delivering Service-wide procedural guidance and policies for the following programs:

    • Employment Tax Program, SB/SE Examination - Specialty Policy

    • Bank Secrecy Act Program, SB/SE Examination - Specialty Policy

    • Excise Tax Program, SB/SE Examination - Specialty Policy

    • National Fraud Program, SB/SE Operations Support

    • Office of Servicewide Penalties, SB/SE Operations Support

    • National Tip Reporting Compliance Program, SB/SE Examination - Specialty Programs, Employment Tax

      Note:

      The ITG/TEB function coordinates with these policy owners.

  6. Program Owner. The Director, Indian Tribal Governments/Tax Exempt Bonds (ITG/TEB), under TE/GE is responsible for overseeing federal tax administration as it applies to Indian Tribal Governments.

  7. Program Goals. ITG/TEB combines compliance and enforcement initiatives with outreach and educational activities to accomplish its goals. The processes and procedures provided in this IRM are consistent with the objectives and goals for ITG/TEB. Refer to IRM 1.1.23, Organization and Staffing, Tax Exempt and Government Entities Division.

  8. Contact Information. To recommend changes or make any other suggestions to this IRM section, email the "Product Content Owner" on the Product Catalog Information page for this IRM.

Background

  1. The IRS established the Indian Tribal Governments’ function in 2000 under the TE/GE Division to serve as the primary contact in the IRS for federally recognized Indian tribes. In May 2017, the TE/GE Division reorganized and combined the Indian Tribal Governments (ITG) and Tax Exempt Bonds (TEB) functions. The scope and mission of ITG/TEB remains the same.

  2. ITG/TEB provides tribes with a single point of contact for assistance with federal tax compliance. ITG/TEB uses partnership opportunities with Indian tribal governments, tribal associations, and other federal agencies to respectfully and cooperatively meet the needs of both governments and to simplify the tax administration process. All IRS employees are required to contact the local area ITG specialist before making initial contact on Indian tribal government cases.

  3. Specialists are trained to address issues and provide guidance unique to Indian tribal governments. Issues may relate to tribal governments as employers, to distributions to tribal members, and to the establishment of governmental programs, trusts and businesses. ITG/TEB has an assigned specialist for each tribe, who is available to help the tribe with any questions.

  4. Since 2000, ITG/TEB has compliance responsibility for employment tax and all other aspects of federal tax administration as it applies to federally recognized Indian tribes. Federal tax administration includes audits. ITG/TEB conducts audits to determine federal tax liabilities and filing requirements. Although federally recognized tribes are not subject to income tax, they are subject to employment taxes, information reporting requirements and excise taxes in the same manner as all other government entities.

  5. This is the sixth revision to IRM 4.88.1, Examination Issues Pertaining to ITG Cases.

Authority

  1. ITG/TEB’s examination authority to resolve issues is derived from its authority to make determinations of tax liability under IRC 6201.

  2. IRC 7602 gives specialists the authority to:

    1. Examine any books, papers, records or other data necessary to complete an audit.

    2. Take testimony under oath to secure additional information needed.

    3. Issue summons for information necessary to complete an audit.

    4. Inquire into any offense connected with the administration or enforcement of the Internal Revenue laws.

Responsibilities

  1. The Director, ITG/TEB, is responsible for overseeing federal tax administration as it applies to Indian tribal governments and is responsible for maintaining a functional and interactive government-to-government relationship between the IRS and Indian tribal governments. In addition, the Director, ITG/TEB has compliance responsibility for coordinating an effective employment tax program.

  2. In accordance with Policy Statement 4-117, specialists and managers:

    1. Have been given broad authority to consider and weigh conflicting information, data, and opinions.

    2. Will use professional judgment in accordance with auditing standards to make findings of fact and apply the Service’s position on issues of law to determine the correct tax liability.

    3. Will exercise this authority to obtain the greatest possible number of agreements to tax determinations without sacrificing the quality or integrity of those determinations, and to dispose of tax differences at the lowest level.

      Note:

      See IRM 1.2.13.1.34, Policy Statement 4-117, Examination authority to resolve issues.

  3. ITG/TEB employees must be familiar with and act according to the Taxpayer Bill of Rights. Every employee must consider these rights in carrying out their duties. See IRC 7803(a)(3).

  4. IRS employees working tax related matters must identify themselves per The Restructuring and Reform Act of 1998 (RRA 98) Section 3705(a). They’re required to:

    1. Give their name and unique identification number during taxpayer telephone, face-to-face, and written contact.

    2. Put a telephone number on all taxpayer correspondence. This gives taxpayers enough information to identify an employee who has previously helped with a tax related matter.

  5. All examinations will be done in accordance with Policy Statement 1-236, Fairness and Integrity in Enforcement Selection. See IRM 1.2.10.37, Policy Statement 1-236, Fairness and Integrity in Enforcement Selection.

Program Management and Review

  1. Program Reports: Information on reporting program objectives are included on, but not limited to, the following reports:

    • Headquarters Examination Monthly Briefing,

    • Program Manager Monthly Briefing,

    • Examination Operational Review, and

    • Business Performance Reviews.

  2. Program Effectiveness: Tax Exempt Quality Measurement System (TEQMS) is the quality control system used to oversee the entire examination program.

Program Controls

  1. Specialists should consult the Knowledge Management Network (K-Net) to ensure proper issue development and consistent application of tax law.

Acronyms

  1. Common acronyms and their definitions:

    Acronym Definition
    ADAPT Abuse Detection and Prevention Team
    AIMS Audit Information Management System
    ASED Assessment Statute Expiration Date
    AT Abusive Tax
    ATAT Abusive Tax Avoidance Transactions
    BIA Bureau of Indian Affairs
    BMF Business Master File
    BMFOL Business Master File Online
    BOD Business Operating Division
    BSA Bank Secrecy Act
    BUWH Backup Withholding
    CI Criminal Investigation Division
    CIC Coordinated Industry Case
    CP&C Compliance, Program & Classification
    CSP Classification Settlement Program
    CTR Currency Transaction Report
    DATL Doubt as to Liability
    DC Disposal Code
    DOI Department of Interior
    ECS Examination Case Selection
    EIN Employer Identification Number
    EIR Examiner Injunction Referral
    ECTRP Employer-Computed Tip Reporting Process
    EFTPS Electronic Federal Tax Payment System
    EO Exempt Organizations
    ETER Employment Tax Examiner’s Report
    FAQ Frequently Asked Questions
    FICA Federal Insurance Compensation Act
    FinCEN Financial Crimes Enforcement Network
    FITW Federal Income Tax Withholding
    FO Field Operations
    FOIA Freedom of Information Act
    FR Filing Requirement
    FRC Federal Record Center
    FTA Fraud Technical Advisor
    FUTA Federal Unemployment Tax Act
    GITCA Gaming Industry Tip Compliance Agreement
    GWE General Welfare Exception
    ICE Informant Claims Examination
    ICN Inventory Control Number
    IDR Information Document Request
    IDRS Integrated Data Retrieval System
    IGRA Indian Gaming Regulatory Act
    IMF Individual Master File
    IRA Indian Reorganization Act
    IRC Internal Revenue Code
    IRM Internal Revenue Manual
    IRS Internal Revenue Service
    ITG Indian Tribal Governments
    ITG/TEB Indian Tribal Governments/Tax Exempt Bonds
    ITIN Individual Taxpayer Identification Number
    ITW Income Tax Withholding
    K-Net Knowledge Management Network
    LB&I Large Business & International
    LDC Lead Development Center
    LUQ Large, Unusual, Questionable
    MF Master File
    MFT Master File Tax
    MICS Minimum Internal Control Standards
    MOIC Monitoring OIC Unit
    MOU Memorandum of Understanding
    NFTL Notice of Federal Tax Lien
    NIGA National Indian Gaming Association
    NIGC National Indian Gaming Commission
    NTRCP National Tip Reporting Compliance Program
    OPR Office of Professional Responsibility
    PIF Public Inspection File
    PLET Personal Liability for Excise Tax
    PLR Private Letter Ruling
    POA Power of Attorney
    RCCMS Reporting Compliance Case Management System
    ROs Revenue Officers
    RRA Restructuring and Reform Act
    RSED Refund Statute Expiration Date
    SAR Suspicious Activity Report
    SB/SE Small Business/Self Employed
    SC Source Code
    SECA Self-Employment Contributions Act Tax
    SFR Substitute for Return
    SOL Statute of Limitations
    SPC Submission Processing Campus
    SRS Specialist Referral System
    SSN Social Security Number
    SUTA State Unemployment Tax Act
    TC Transaction Code
    TE/GE Tax Exempt and Government Entities
    TE/GE DC Tax Exempt Government Entities Division Counsel
    TEB Tax Exempt Bonds
    TEDB Tribal Economic Development Bonds
    TEPA Tipped Employee Participation Agreement
    TFRP Trust Fund Recovery Penalty
    TIN Taxpayer Identification Number
    TRDA Tip Rate Determination Agreement
    TRD/EP Tip Rate Determination and Education Program
    WebETS Web-based Employee Technical Time System
  2. See ReferenceNet Acronym Database for additional acceptable acronyms and abbreviations.

Federal Tax Status of Indian Tribal Governments

  1. The IRS is responsible for Indian tribal governments’ federal taxation issues.

    1. Specialists interpret federal tax laws for tribal entities and enterprises, and work with Indian tribes on a government-to-government basis to administer federal tax laws for tribal entities and enterprises.

    2. One type of tribal enterprise that may have federal tax consequences is gaming. Indian gaming may be subject to state oversight or other regulations because of a negotiated gaming compact with the state. However, specialists are responsible only for federal tax issues related to a tribal entity.

  2. Indian tribes aren’t entities subject to federal income tax because they aren’t :

    1. Included in IRC 1 (individuals, trusts and estates) or IRC 11 (corporations).

    2. Subject to income taxes per Rev. Rul. 67-284.

  3. To be considered a tribe for federal income taxes, a tribe must be recognized by the Department of the Interior as one. See Rev. Proc. 2008-55. Tribal governments provide certain services to their members. In certain specific areas, IRC 7871 places tribal governments on the same footing as state and local governments that provide similar services to their citizens, but IRC 7871 has no impact on whether the tribe is federally recognized. Consequently, an Indian tribe doesn’t need to meet the requirements of IRC 7871 to be treated as an Indian tribe for federal income tax purposes.

  4. A tribe may operate businesses either on or off its reservation. The tribe, and any unincorporated business it wholly owns, isn’t subject to federal income tax, regardless of where the business is located. However, a corporation formed by a tribe may be subject to federal income tax. See Rev. Rul. 94-16, 1994-1 C.B.19, as amplified in Rev. Rul. 94-65, 1994-2 C.B.14.

  5. A tribe may choose to form a corporation in different ways, including:

    Law provision to form a corporation Description Governed by
    Indian Reorganization Act of 1934 (IRA) Section 17. See CFR 301.7701-1(a)(3). This type of corporation isn’t recognized as separate from the Indian tribe for federal tax purposes. The Department of the Interior (DOI)
    Oklahoma Indian Welfare Act. Section 3. See 26 CFR 301.7701-1(a)(3) Tribes located in Oklahoma aren’t eligible to incorporate under Section 17 of the IRA. Instead, Oklahoma tribes may incorporate under Section 3 of the Oklahoma Indian Welfare Act, 25 U.S.C. Section 503 (Section 3 corporation). This type of corporation isn’t recognized as separate from the Indian tribe for federal tax purposes. DOI
    State-Chartered Corporation The tribe may form a corporation under state law. This type of corporation is ordinarily subject to federal tax on income earned on or after October 1, 1994, regardless of where the business is located. A state-chartered corporation formed by a tribe is taxed just like any other corporation because the state charter creates a separate entity from the tribe. A Certificate of Incorporation issued by the state is evidence of incorporation under state law.
    • In addition, many tribes form corporations using their own corporate code or resolution process. The tax status of wholly-owned corporations chartered under tribal law is unclear. It’s recommended that tribal governments adopt one of the incorporation methods having clear tax consequences. See Rev. Rul. 94-65 and Rev. Rul. 94-16.

    • Rev. Rul. 2004-50 provides information that a federally recognized Indian tribal government is not an eligible S corporation shareholder for purposes of the IRC.

  6. In addition, a tribe or a corporation formed by a tribe may be a partner in a partnership:

    1. A tribe that is a partner in a partnership isn’t subject to federal income tax. However, a tribally owned state-chartered corporation that is a partner is subject to federal income tax on its distributive share of partnership income.

    2. Tribes may wholly own a limited liability company. These entities aren’t recognized as separate from the Indian tribe for income tax purposes, unless otherwise elected. See 26 CFR 301.7701-2(a); 301.7701-3(b)(ii).

Federal Tax Treatment of Indian Tribal Members

  1. The Supreme Court ruled that members of Indian tribes are subject to taxes upon income as any other citizen of the United States. Consequently, income a tribal member receives is taxable under IRC 61 unless specifically excluded by treaty or law (Squire v. Capoeman, 351 U.S. 1, 76 S. Ct. 611 (1956)).

  2. Tribal income the tribe distributes or that a tribal member constructively receives is taxable to the tribal member if the income is not otherwise exempted from income taxation (Rev. Rul. 67-284).

  3. Members of federally recognized Indian tribes may receive taxable income from several sources including but not limited to the following:

    • Wages

    • Non-employee Compensation

    • Interest, Dividends and Other Investment Income

    • Prizes, Awards and Gambling Winnings

    • Distributions of Net Gaming Revenue

  4. Wages individual tribal members receive are subject to federal income tax regardless of whether they are earned inside or outside of Indian territory unless a specific treaty or statute exempts those wages. Gambling winnings, even if they are won at a tribally-owned casino, also are subject to federal income tax. Likewise, cash prizes to dance contest winners at pow-wows or similar cultural events are taxable. Tribes have cited pow-wow prizes as cultural promotion per the 2014 General Welfare Exclusion Act; see IRM 4.88.1.6.7 (4).

  5. Generally, individual tribal members should include payments that they receive from their tribes in their gross income for all U.S. tax purposes. Some common examples of taxable tribal payments that individual tribal members receive are:

    • Income received from the reinvestment of payments originally from allotted trust land distributions

    • Income that is compensation for services

    • Distributions of business profits

    • Gaming revenues (Class II and Class III under IGRA)

  6. The taxability of income federally recognized Indian tribe members receive is determined the same way as any other taxpayer. Income received is taxable unless exempted or excluded from income by:

    • treaty

    • Internal Revenue Code (IRC) section

    • revenue ruling

    • revenue procedure

    • court case

  7. Sometimes, the source and taxability of payments Indian tribes make isn’t identified when they make them. As a specialist, you may need to determine whether a payment a tribe makes is taxable to the recipient, subject to information reporting, subject to employment taxes, or subject to regular or backup withholding.

Distributions from Gaming Revenue

  1. Under the Indian Gaming Regulatory Act (IGRA) of 1988, net revenues from any Class II or Class III gaming activities an Indian tribe conducts or licenses may be used to make per capita payments to members of the tribe only if four conditions are met:

    1. The tribe must prepare a plan to allocate revenues only to uses authorized under IGRA. These uses are to:

      1. Fund tribal government operations or programs

      2. Provide for the general welfare of the tribe or its members

      3. Promote tribal economic development

      4. Donate to charitable organizations

      5. Help fund operations of local government

    2. The plan must be approved by the Secretary of the Interior as adequate, particularly for the use of revenues to fund tribal government operations or programs and to promote tribal economic development.

    3. The interests of minors and other legally incompetent persons entitled to receive any of the per capita payments must be protected and preserved, and payments disbursed to the parents or legal guardian of those persons as necessary for their health, education, or welfare under a plan approved by the Secretary and the governing body of the Indian tribe.

    4. The per capita payments are subject to federal taxation and the tribe must notify members of this tax liability when they make the payments.

Guidelines for Per Capita Distribution Plans

  1. In December 1992, the Department of Interior issued "Guidelines to Govern the Review and Approval of Per Capita Distribution Plans" (Guidelines). The guidelines, revised, effective April 1, 2014, give the procedures on the submission, review, and approval of tribal revenue allocation plans or ordinances for distributing net revenues from a gaming activity (Title 25, Chapter 1, Part 290). Under the guidelines:

    1. A tribal revenue allocation plan or ordinance (allocation plan) specifying the distribution of net gaming revenues must be approved by the Department of Interior if it gives sufficient detail to determine that it complies with the Guidelines and IGRA.

    2. The tribe must list a percentage breakdown of the uses for which the tribe intends to allocate its net gaming revenues and the allocation plan must state that the tribe plans to dedicate a significant portion of its net gaming revenues to one or more of the purposes in 25 U.S.C. Section 2710(b)(2)(B).

  2. The Guidelines define "per capita" payments as those payments made or distributed to all members of the tribe or to identifiable groups of members which are paid directly from the net revenues of any gaming activity.

  3. Per capita payments don’t include benefits for special purposes or programs, such as social welfare, medical assistance, or education. Even if a tribe improperly designates any of these benefits as per capita payments, it doesn’t determine their tax status.

Reporting Requirements for Distributions of Net Gaming Revenue

  1. The IGRA mandates that the member includes the gaming revenue distributions in computing his/her income tax. See 25 U.S.C. section 2710(b)(3)(D). For those who receive distributions outright, they must include it in the year they receive it. See Rev. Rul. 67-284.

  2. Tribes file Form 1099-MISC to report distributions, including cash and the fair market value of any property or benefit received, to tribal members. They report income in Box 3 and the federal income tax withheld, if any, in Box 4.

  3. Tribes report withholding on distributions to tribal members on Form 945, Annual Return of Withheld Federal Income Tax. IRM 20.1.4.8, Deposit Rules for Forms 941, 943, 944, 945, and CT-1, has information on Form 945, including deposit requirements. Pub 15, Circular E, is a good source on deposit requirements for the tribes.

Withholding Requirements for Distributions from Net Gaming Revenue

  1. Tribes must withhold from distributions of net gaming revenue. Pub 15-A, Employer's Supplemental Tax Guide, includes tables to determine the correct amount of withholdingIRC 3402(r). During outreach visits, compliance efforts and examinations, review these tables and discuss them with the tribe.

  2. Advise the tribe that, when they issue distributions subject to IRC 3402(r) at certain intervals and make an additional separate payment (e.g., bonuses), they must aggregate this additional payment with the regular payment for withholding computation purposes.

    Example:

    A tribe issues regular monthly per capita payment of $5,000, subject to IRC 3402(r) to all tribal members. The tribe makes an additional per capita payment of $5,000, also subject to IRC 3402(r), during December. For the month of December, the tribe must compute withholding on monthly per capita payments based on the aggregate payment amount of $10,000. If the computations were based on separate $5,000 payment amounts, they would have underwithholding and the tribe would be potentially liable under IRC 3402(r).

  3. The tribe is potentially liable for:

    1. The difference between the amount required to be withheld per the tables and the actual amount withheld from the payment (IRC 3402(r)).

    2. Backup withholding provisions (IRC 3406).

Minor Trusts

  1. One of the IGRA requirements for gaming revenue distribution to tribal members requires protection of the minors’ interest. To satisfy this requirement, many tribes have established trusts for minors and legal incompetents. See Rev. Proc. 2011-56 for more information.

  2. Rev. Proc. 2011-56 also clarifies that deposits into a trust:

    1. Generally, are taxable when made.

    2. If left in the account until the beneficiary reaches the age of majority, the beneficiary doesn’t report the principal and interest as taxable income.

    3. Plus earnings aren’t required to be included in the beneficiary’s gross income. However, when beneficiaries receive trust distributions, they would include the amounts as taxable income when they actually or constructively received it.

      Note:

      When a beneficiary has the unqualified right to the funds in a trust, the beneficiary must include it as taxable income.

  3. Tribes considering establishing trusts for minors should consider the potential tax imposed on certain unearned income of minor children at the allocable parental tax rate. See IRC 1(g) and Temp. Treas. Reg. section 1.1(i)-IT. Importantly, young adults and children who receive a distribution from their tribal trust account might be required to file their own return and could be subject to, for tax years:

    1. Before 2018, tax at their parent’s highest tax rate.

    2. After 2017, the "kiddie tax" rules.

Abatement Procedures for Assessments Made Under IRC 3402(r)

  1. See abatement procedures for IRC 3402(r) assessments under IRC 3402(d). These provisions are discussed under Information Reporting. See IRM 4.88.1.7.5, Information Return Reporting, IRM 4.88.1.7.6, Abatement Procedures, and IRM 4.23.8.4, IRC 3402(d) - Relief for Employer When Employees Have Paid Income Tax on Wages.

  2. Refer to the "ITG Specialist Adjustment Desk Guide Form 3870" on the TE/GE Intranet at Form 3870 Adjustments Guide ITG Specialists.

Distributions to Tribal Members

  1. Per capita payments and other distributions are generally made in cash, but also may be in kind, (for example, services, property, or relief of debt). Identifying the initial source of funds used for the distributions is an important aspect of the reporting and withholding requirements.

  2. Unless specifically exempt from taxation, the amounts that make up the distributions are taxable and subject to the filing requirements for Forms 1099. A distribution could be derived from many sources. Examples include the following:

    • Distributions of profits from Class II and III gaming activities under IGRA

    • Profits from a tribal business other than a Class II or III gaming operation

    • Interest income on investments

    • Rental payments from improvements on tribal lands

    • Revenue sharing programs

  3. All these payments would require the tribe to prepare a Form 1099 when they pay the tribal member.

    Exception:

    See IRM 4.88.1.6 for exceptions.

  4. Individuals must include taxable distributions on their individual income tax return. If a tribal member receives a Form 1099-MISC for a distribution of net gaming revenue, he/she should report it on his income tax return as Other Income on Line 21 for the year he receives the payment using the description "Indian Gaming Proceeds."

  5. In addition, each tribal member may be required to submit Form 1040-ES, Estimated Tax Payment Voucher, and make quarterly estimated tax payments for taxable distributions received.

  6. If a tribal member receives property, services, or relief of debt, he/she must include the fair market value of the item in gross income. Only the amount the tribe distributes from the net revenues of Class II or III gaming activity, the tribe conducts or licenses, that is subject to withholding under IRC 3402(r). See IRM 4.88.1.4.3, Withholding Requirements for Distributions from Net Gaming Revenue for withholding provisions.

Nontaxable Distributions and Statutory Exclusions from Income of Tribal Members

  1. Individual tribal members are citizens of the United States and in ordinary affairs of life, not governed by treaty or remedial legislation, they are subject to payment of income taxes as are other citizens. See Squire v. Capoeman, 351 U.S. 1, 76 S. Ct. 611 (1956). Individual tribal members are subject to tax on income they receive regardless of source, unless the income is exempted by a treaty or statute.

  2. The following items of income have been specifically excluded from an individual tribal member’s taxable income:

    1. Income directly derived by the Indian allottee from restricted allotted land that is held in trust by the United States Government, see Rev. Rul. 67-284.

    2. Per capita distributions to tribal members made from funds held in a tribal trust account by the Secretary of the Interior pursuant to Notice 2015-67.

    3. Income derived from a fishing rights-related activity, which is exempt under IRC 7873.

    4. Income received from judgments of the Indian Claims Commission or the US Court of Federal Claims, including investment income earned on it, isn’t subject to tax per 25 U.S.C. 1401 et seq., but income from non-Indian Claims Commission or Court of Federal Claims cases are usually subject to tax.

    5. Income from the proceeds of settlement agreements between the United States and Indian tribes that settle the tribes’ claims that the United States mismanaged trust assets are not subject to tax, as described in Notice 2012-60 and later updates.

    6. Medical benefits which qualify for exclusion under IRC 139D.

    7. Indian general welfare benefits which qualify for exclusion under IRC 139E.

  3. See Exhibit 4.88.1-3, General Welfare Exception -- Summary of Authority for a list and synopsis of past general welfare guidance. The guidance’s applicability listed in the Exhibit, however, is unclear after enactment of IRC 139E. Until such guidance is issued, consult with your group manager and the National Office on all issues with general welfare implications.

Income Derived From Land

  1. Restricted allotted land is land that is allotted to a tribal member but restricted as to alienation. Income directly derived from restricted allotted land includes the proceeds from sales of timber harvested from the land, grazing fees, and income from mineral rights.

  2. The following, even if conducted on restricted allotted land, are examples of income not directly derived from restricted allotted land are income from:

    • Smoke shops

    • Motels

    • Thrift shops

    • Gaming

  3. Once a tribal member gets fee simple title to restricted allotted land, any income derived from the land, including the sale of the land, is subject to federal income tax.

  4. The tribal member's tax basis in the allotted land is determined using the fair market value as of the date the tribal member receives fee simple title, unless that value is less than the tax basis computed under the rules in Rev. Rul. 58-341.

  5. Refer to "position paper" "Income Derived from Allotted Land" on the TE/GE Intranet at Income Derived from Allotted Land.

Income from Per Capita Payments from Funds Held in Trust by the Department of Interior

  1. A general rule states that per capita distributions the Secretary of the Interior makes from funds held in a tribal Trust Account are generally excluded from tribal members’ gross income receiving the per capita distributions (Notice 2015-67). The general rule applies to both per capita distributions from DOI and Indian tribes.

Income from Direct Pay and HEARTH Act Leases
  1. The Bureau of Indian Affairs (BIA) within DOI manages tribal leases and other contracts on Indian trust lands. Under current BIA regulations

    1. The BIA may approve the leases and contracts' operators directly paying the tribe rather than depositing these payments into a DOI-maintained tribal trust account.

    2. Funds acquired through these direct pay leases and other contracts (including leases the tribe executes under tribal regulations approved under 25 USC 415(h), "HEARTH Act leases") are derived from tribal trust resources, per 25 CFR § 115.702, and authorized by BIA regulations (e.g., 25 CFR, Chapter I, Subchapter H (Land and Water), 25 CFR, Chapter I, Subchapter I (Energy and Minerals), etc.).

    3. These direct pay leases and contracts (including HEARTH Act leases) are approved by the same process or are subject to the same BIA-approved standards as leases and contracts under which the funds are deposited into tribal trust accounts. (Both tribes and DOI often prefer direct pay arrangements because payments are faster and DOI doesn’t have to manage the funds.)

  2. Don’t seek information reporting on per capita distributions of direct pay tribal lease funds (including HEARTH Act leases) that, if paid from the trust, would satisfy Notice 2015-67. Apply the Notice 2015-67 examples of mischaracterized distributions to all per capita distributions, including those from direct pay leases.

    Example:

    A tribe distributes mischaracterized gaming revenues to tribal members. This requires information reporting and any appropriate withholding for those amounts regardless of whether the tribe distributes them from a trust account or pays them directly.

Income Derived From Fishing Rights

  1. Any income derived by a member of a Indian tribe, either directly or through a "qualified Indian entity" , or by a "qualified Indian entity" from a fishing rights-related activity of that member’s or entity’s tribe is exempt from federal taxation (i.e., income, employment, and self-employment) under IRC 7873.

  2. Wages aren’t exempt if paid:

    1. By an employer, who is not a member of the same tribe or is not a qualified Indian entity.

    2. To an employee who is not a member of the tribe whose fishing rights are exercised. Tribal members must fish in their own waters to be exempt.

  3. A recognized fishing right must have been secured as of March 17, 1988, by a treaty between the tribe and the United States, by an Executive Order or an Act of Congress.

Fishing Rights-Related Activity
  1. A fishing rights-related activity is any activity (including aquaculture) directly related to harvesting, processing or transporting fish harvested in the exercise of recognized fishing rights of the tribe or selling fish, but only if members of the tribe perform substantially all the harvesting. This includes administrative, judicial, and enforcement activities. See Exhibit 4.88.1-4, Tax Audit Guidelines for Internal Revenue Examiners - Indian Fishing Rights -- IRC 7873.

  2. Find information on Fishing Rights-Related Activities at IRC Section 7873 - Treaty Fishing Rights-Related Income.

Special Definitions
  1. A "qualified Indian entity" under IRC 7873 with respect to an Indian tribe, is any entity if:

    • Engaged in fishing rights-related activity of the tribe

    • Owned 100% by one or more qualified Indian tribes, their members, or their spouses

    • Members of qualified Indian tribes perform substantially all the entity’s management functions.

      Note:

      A qualified Indian entity may be jointly owned by more than one tribe, or members of more than one tribe, so long as the entity is engaged in fishing rights-related activities of each of the tribes.

  2. 90% rule for processors and transporters - If the entity engages to any extent in any substantial processing or transporting of fish, then at least 90% of the entity’s annual gross receipts must be derived from exercising protected fishing rights of tribes whose members own at least 10% of the entity’s equity interests.

    Note:

    If a processor or transporter fails to meet the 90% rule, all income from that year is taxable.

Fishing Rights Claims
  1. Employers should send abatement requests on Form 3870, Request for Adjustment, that pertain to "fishing rights" to:
    Ogden Submission Processing Campus
    1973 North Rulon White Blvd.
    M/S 6552, BMF Adjustments
    Ogden, Utah 84404

  2. The Ogden Campus needs the following information to process fishing rights claims:

    • Signed statement from the employer, indicating they will not repay the over-collected amount to the employee, nor file a claim for a refund of the over-collected amount

    • Employer Identification Number (EIN) and name of employer

    • Copies of the Form(s) W-2 involved

    • Certification of tribal membership, obtained from either the tribal council or the Bureau of Indian Affairs (a photocopy of tribal membership is acceptable)

    • Certification of treaty fishing rights-related employment

  3. If one or more of the above items is missing, the IRS will return the claim to the taxpayer, requesting the missing information.

Income from Tribal Judgments and Settlements

  1. Income received from judgments of the Indian Claims Commission or the US Court of Federal Claims, including investment income on it, isn’t subject to income tax or reporting, per 25 U.S.C. 1401 et seq.

  2. Income received from judgments from courts other than the Indian Claims Commission or the US Court of Federal Claims are subject to tax.

Income from Agreements Between the United States and an Indian Tribe in Notice 2012-60

  1. Notice 2012-60 lists 55 tribes that are exempt from tax on their settlement proceeds. Although these funds were never taken into trust, the proceeds aren’t subject to tax because the settlement proceeds are treated as if they were funds held in trust, and these funds would normally be exempt under the Per Capita Act discussed in Notice 2015-67.

  2. Notice 2017-02 modified and superseded Notice 2012-60 Appendix. It lists 96 tribes with trust settlement agreements with the United States, but the list may be updated occasionally, as tribes continue settling their cases.

Medical Benefits Which Qualify for Exclusion IRC 139D

  1. Gross income doesn’t include the value of any qualified Indian health care benefit.

  2. A qualified health care benefit is:

    1. Any health service or benefit provided or purchased, directly or indirectly, by the Indian Health Service through a grant to or a contract or compact with an Indian tribe or tribal organization, or through a third-party program funded by the Indian Health Service.

    2. Medical care provided or purchased by, or amounts to reimburse for such medical care provided by, an Indian tribe or tribal organization for, or to, a member of an Indian tribe, including a spouse or dependent of such member.

    3. Coverage under accident or health insurance (or an arrangement having the effect of accident or health insurance), or an accident or health plan, provided by an Indian tribe or tribal organization for medical care to a member of an Indian tribe, including a spouse or dependent of such member.

    4. Any other medical care provided by an Indian tribe or tribal organization that supplements, replaces, or substitutes for a program or service for medical care the federal government provides to Indian tribes or its members.

General Welfare Benefits IRC 139E

  1. The general welfare doctrine was codified in part as IRC 139E. Generally, it states that Indian general welfare benefits aren’t included in gross income.

  2. The term "Indian general welfare benefit" includes any payment made or services provided to or on behalf of a member of an Indian tribe (or any spouse or dependent of that member) per an Indian tribal government program, but only if the program is administered under specified guidelines and doesn’t discriminate in favor of members of the government body of the tribe, and the benefits provided under such program are:

    • Available to any tribal member who meets such guidelines

    • For the promotion of general welfare

    • Not lavish or extravagant

    • Not compensation for services.

  3. A program is an Indian tribal government program even if it’s established by tribal custom or government practice.

  4. Any items of cultural significance, reimbursement of costs, or cash honorarium for participation in cultural or ceremonial activities for the transmission of tribal culture isn’t treated as compensation for services.

  5. Ambiguities in IRC 139E are resolved in favor of Indian tribal governments for the programs administered and authorized by the tribe to benefit the general welfare of the tribal community. Deference is given to tribes in administering their programs.

  6. The Tribal General Welfare Exclusion Act of 2014, which enacted IRC 139E, suspended all audits and examinations of Indian tribal governments and tribal members to the extent that any audit or examination relates to a general welfare payment or benefit until IRS field staff and tribal financial officers receive further training.

    Reminder:

    Until the suspension is lifted, consult with your group manager and the National Office on all issues with general welfare implications.

Employment Taxes

  1. This section is a brief overview of employment taxes for specialists to handle Indian tribal governments’ employment taxes. Find general employment tax procedures in IRM 4.23, Employment Tax. See also Pub 4268, ITG Employment Tax Guide.

  2. Indian tribes, in their role as employers, are subject to federal employment tax laws and procedures. Where a business enterprise or political subdivision of an Indian tribe is organized and operated by the tribe itself, the enterprise is considered a private tribal activity. When workers perform services in the employ of a private tribal activity, these services constitute employment. The federal statutes, regulations, case law, revenue rulings and other sources of tax authority establish the role of Indian tribal governments as employers. As such, tribal governments are required to follow substantially the same procedures as other employers, with some exceptions.

  3. Employers are required to withhold and pay employment taxes. Employment taxes include:

    • Federal Income tax withholding (FITW)

    • Social Security and Medicare taxes (also known as Federal Insurance Contributions Act (FICA) taxes) withheld from the employee’s wages, plus the employer’s share of FICA taxes

    • Additional Medicare Taxes

    • Unemployment taxes (also known as Federal Unemployment Tax Act (FUTA))

  4. In order for an employment tax liability to exist, three conditions must be present:

    1. The relationship of employer-employee must exist.

    2. The remuneration paid by the employer must constitute "wages" for purposes of the tax.

    3. The employee must perform services that constitute "employment" as defined by the respective code sections.

  5. Employment tax provisions are found at Internal Revenue Code Subtitle C - Employment Taxes and Collection of Income Tax:

    • Chapter 21, Federal Insurance Contributions Act (FICA) — IRC 3101 through IRC 3128

    • Chapter 22, Railroad Retirement Tax Act (RRTA) — IRC 3201 through IRC 3241

    • Chapter 23, Federal Unemployment Tax Act (FUTA) — IRC 3301 through IRC 3311

    • Chapter 24, Federal income tax withholding (FITW) — IRC 3401 through IRC 3406

    • Chapter 25, General Provisions relating to employment taxes and collection of income taxes at source

  6. This section also discusses the income tax on self-employment income and the income tax on nonresident aliens and foreign corporations. Although not true employment taxes, Self-Employment Contribution Act (SECA) tax and Withholding of Tax on Nonresident Alien and Foreign Corporations are found at Internal Revenue Code Subtitle A - Income Taxes:

    • Chapter 2, Tax on Self-Employment Income — IRC 1401 through IRC 1403.

    • Chapter 3, Withholding of Tax on Nonresident Aliens and Foreign Corporations — IRC 1441 through IRC 1442.

  7. The IRS administers the employment taxes imposed by IRC Chapters 21 through 25 of Subtitle C and the self-employment taxes imposed by Chapter 2 of Subtitle A. An important phase of employment tax administration, including the self-employment tax, is issuing rulings and technical advice that clarify the intent of these sections. However, the IRS refers all questions on:

    1. Eligibility for and computation of social security benefits - to the Social Security Administration, Baltimore, Maryland, or to their nearest local field office.

    2. Unemployment benefits - to the appropriate State Unemployment Compensation Board.

    3. Railroad employee retirement benefits - to the Railroad Retirement Board, Chicago, Illinois.

  8. The Employment Tax Program is governed by Policy Statements and other internal guidance that apply to all IRS employees regardless of operating division. The Policy Statements in IRM 1.2, Servicewide Policies and Authorities, Policies of the Internal Revenue Service, apply to all employment tax issues and examinations. Examiners should review these Policy Statements to properly perform their examination duties.

  9. IRM 4.23, Employment Tax, provides Service-wide instructions for all operating divisions with employees involved with the correct filing, reporting, and payment of employment taxes. IRM 4.23 serves as IRS’s foundation for consistent administration of employment taxes. By having one authority source for all operating divisions, the IRS greatly reduces philosophical inconsistencies.

  10. When processing these cases, follow TE/GE exam guidelines for forms and procedures in IRM Part 4, Examining Process:

    • IRM 4.5, TE/GE AIMS Manual, for procedures specific to TE/GE exam cases.

    • IRM 4.4, Audit Information Management System (AIMS) Procedures and Processing Instructions, for general AIMS procedures.

    • IRM 4.4.10, Employment/Excise Tax Adjustments, for detailed procedures on AIMS processing procedures.

    • IRM 4.86.5, Indian Tribal Governments (ITG) Procedures, Conducting Indian Tribal Government Examinations.

  11. Send questions to ITG K-Net or the Employment Tax K-Net.

  12. See also Pub 4268, Employment Tax for Indian Tribal Governments. This guide has employment tax information specific to tribal governments. It also includes information about recordkeeping, deposit rules and related penalties. It is for general information only and should not be cited as legal authority.

Employment Tax Reporting, Deposit Requirements and Related Issues

  1. Employment taxes represent the income tax and Social Security and Medicare (FICA) taxes (including Additional Medicare Tax) withheld from wages of an employee plus the employer’s share of social security taxes and federal unemployment (FUTA) taxes. If the tribe is required to withhold income or Social Security and Medicare taxes (including Additional Medicare Tax), the tribe must file a return reporting the amounts withheld, as shown below:

    Description of Taxes Form Reported On
    Federal Income Tax Withholding (FITW) from an employee’s wages Form 941, Employer’s Quarterly Federal Tax Return

    Form 943, Employer’s Annual Federal Tax Return for Agriculture Employees

    Form 944, Employer’s Annual Federal Tax Return
    Social Security and Medicare taxes (FICA) withheld from wages of an employee plus the employer’s share Form 941, Employer’s Quarterly Federal Tax Return

    Form 943, Employer’s Annual Federal Tax Return for Agriculture Employees

    Form 944, Employer’s Annual Federal Tax Return

    Form 4137, Social Security and Medicare Tax on Unreported Tip Income
    Unemployment Insurance, Federal Unemployment Tax Act (FUTA) Form 940, Employer’s Annual Federal Unemployment (FUTA)Tax Return
    Employer tax and employee tax, and the railroad employee representative’s tax under the Railroad Retirement Tax Act (RRTA) Form CT-1, Employer’s Annual Railroad Retirement Tax Return

    Form CT-2, Employee Representative’s Quarterly Railroad Tax Return
    Federal Income Tax Withholding on all non-payroll payments, i.e. gambling winnings, pensions, individual retirement accounts, per capita payments, backup withholding, etc. Form 945, Annual Return of Withheld Federal Income Tax
  2. Qualifying employers whose total annual tax liability for social security, Medicare and withheld federal income taxes is $1,000 or less may qualify for annual filing and payment rather than making quarterly deposits. See IRM 4.23.8.14, Form 944 Examinations and Filing Requirements, and the instructions for Form 944, Employer's Annual Federal Tax Return.

  3. See Pub 15, Circular E, Employer’s Tax Guide, for deposit requirements for Employment Tax (Forms 941, 943, 944, 945, and CT-1).

  4. Taxpayers use "X" forms to report adjustments to employment taxes and to claim refunds of overpaid employment taxes. The "X" forms correspond and relate line-by-line to the employment tax return they are correcting.

    • Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund

    • Form 943-X, Adjusted Employer’s Annual Federal Tax Return for Agriculture Employees or Claim for Refund

    • Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund

    • Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund

    • Form CT-1 X, Adjusted Employer’s Annual Railroad Retirement Tax Return or Claim for Refund

    Note:

    There is no "X" form for the Form 940, Employer’s Annual Federal Unemployment (FUTA)Tax Return, and the taxpayer uses a Form 940 for amended returns.

  5. The Form 1042, Annual Withholding Tax Return for U.S. Source of Income of Foreign Persons is used to report the withholding of tax on nonresident aliens under IRC 1441 and the withholding of tax on foreign corporations under IRC 1442. See Pub 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for additional information.

    Note:

    This is an income tax return, not an employment tax return, and IRS prepares assessments for tax, penalties and interest on a Form 4549, Income Tax Examination Changes.

  6. Consider referring technical questions in employment tax cases that involve interpreting and applying tax laws, regulations, or other IRS published precedents to a specific set of facts to an employment tax specialist through the Specialist Referral System. Also, see IRM 4.80.1, Indian Tribal Governments (ITG) and Tax Exempt Bonds (TEB) Examination Program and Procedures, Technical Assistance and Technical Advice Requests.

  7. Requests for technical advice must include the:

    1. Facts

    2. Issues for which technical advice is requested

    3. Applicable law

    4. The IRS’s position

    5. Taxpayer's position

  8. An employer who makes or has made an under-collection or an underpayment of employee taxes (FICA/RRTA) or income tax (withholding), may make interest-free payments of the tax due when certain conditions are met (IRC 6205). These provisions apply to per capita withholding assessments made under IRC 3402(r) and certain back-up withholding assessments under IRC 3406.

  9. If an employer doesn’t deduct and withhold income tax or the employee's share of FICA tax because they erroneously treat an employee as a non-employee (for example, an independent contractor), the employer may be entitled to reduced rates to determine its employment tax liability. See IRM 4.23.8.5, IRC Section 3509.

  10. After IRS assesses employment tax in an exam action, the employer will generally be required to pay the assessment and file a claim for refund before we further consider the case (Policy Statement 4-103). However, there may be other circumstances to consider for a claim for abatement on its merits.

Independent Contractor or Employee

  1. It is important that the tribe and its wholly-owned entities correctly determine whether the individuals providing services for them are employees or independent contractors. Worker classification affects an employee’s eligibility for social security and Medicare benefits and determines a tribe’s tax responsibilities. Generally, tribes as employers must withhold income taxes, additional Medicare Tax, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The Tribe does not generally have to withhold or pay any employment taxes on payments to an independent contractor.

  2. The Classification Settlement Program (CSP) establishes procedures under an optional classification settlement program that allows Indian tribal governments and specialists to resolve worker classification cases early in the administrative process. See IRM 4.23.6, Classification Settlement Program (CSP) and IRM 4.86.5.28, ITG/TEB Classification Settlement Program (CSP).

  3. In determining whether a worker is an independent contractor or employee under common law rules, consider three main categories:

    • behavioral control

    • financial control

    • relationship of the parties

  4. Consider all the facts as no single fact provides the answer. It is not a choice how an employer classifies a worker. For federal tax purposes, federal law determines whether a worker is an employee, independent contractor, or another category. Pub 1779, Independent Contractor or Employee, provides basic information about the three categories of evidence used to determine whether workers are employees or independent contractors. See Pub 4268, Employment Tax for Indian Tribal Governments.

  5. See IRM 4.23.5, Employment Tax, Technical Guidelines for Employment Tax Issues, for guidance on technical issues in employment taxes.

Wages

  1. Generally, service performed by employees of tribal governments or tribal business enterprises constitutes employment and their wages are subject to federal employment taxes. Payments to tribal and non-tribal employees are to be reported on Form W-2, Wage and Tax Statement.

  2. The IRC states that for purposes of FICA, FUTA, and federal income tax withholding, the term "wages" means all payments received for "employment" with certain specified exceptions. Therefore, unless payments to employees are excepted from the term "wages" or the services performed by the employee are excepted from the term "employment" , these payments are subject to FICA, FUTA, and federal income tax withholding.

  3. Employers must give employees the tax return copy and the employee’s copy of Form W-2, Wage and Tax Statement, to report wages, tips and other compensation paid to them during the calendar year. The Form W-2 must show, among other information, the total amounts of:

    • Wages paid subject to withholding of income tax.

    • Wages paid subject to FICA tax (including Additional Medicare Tax).

    • Federal income tax withholding and FICA tax (including Additional Medicare Tax) deducted and withheld.

    Note:

    Employers have until January 31 of the next year to give employees Form W-2, Wage and Tax Statement. Employers must also file Form W-2 showing the wages paid and taxes withheld for the year for each employee with the Social Security Administration by January 31. This includes Forms W-3, Transmittal of Wage and Tax Statements and applies to both e-filed and paper filed W-2s.

  4. Employers are required to use e-file if they file 250 or more Forms W-2 or W-2c and failing to do so may incur a penalty.

  5. Questions often come up on services performed for the tribe on tribal land by a tribal member who lives on the reservation. Individual tribal members are citizens of the United States and are subject to federal income tax, unless specifically exempted by a treaty or statute (Rev. Rul. 67-284, 1967-2 C.B. 55).

    Note:

    State income tax rules for tribal members may differ from federal law.

Exceptions
  1. A limited exception from employment tax is found in IRC 7873. Employment tax isn’t imposed on remuneration paid for services performed in an Indian tribe member in that tribe’s fishing rights-related activity for another member of that tribe or for a qualified Indian entity (IRC 7873(a)(1).

  2. There’s a narrow exception for salaries paid to tribal council members for services they performed as council members. Rev. Rul. 59-354,1959-2 C.B. 24, holds that while these amounts are includible in the council members' gross income, they do not constitute wages for purposes of FICA, FUTA, and income tax withholding.

  3. Although amounts paid to tribal council members aren’t subject to employment taxes, services that other salaried employees of Indian tribal councils and the employees of tribal business enterprises perform constitute employment and their wages are subject to federal employment taxes (Rev. Rul. 59-354).

Federal Unemployment Tax Act (FUTA)

  1. Beginning January 1, 2000, Indian tribes are not required to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, if they chose to participate in the State Unemployment Tax Act (SUTA). This is due to the Consolidated Appropriations Act, (CAA, 2001) signed into law on December 21, 2000. (Public Law 106-554 codified as IRC 3306(c)(7)).

  2. Services rendered after December 20, 2000, by employees of a federally recognized Indian tribal government employer are exempt from FUTA, and no Form 940 is required. This includes any:

    • Subdivision

    • Subsidiary

    • Wholly owned business enterprise of the tribal government.

    Note:

    The tribe must have participated in the state unemployment system for the full year and comply with state unemployment law.

  3. The FUTA exemption applies to all enterprises wholly owned by an Indian tribe even if they compete with similar private businesses. The FUTA exemption doesn’t apply to entities that are jointly owned by an Indian tribe and another entity that is not tribally owned. In other words, the enterprise must be owned 100% by the tribe or tribes.

  4. The tribe must participate in the state unemployment system via one of these methods:

    • Make required payments to the state (tax contribution method)

    • Reimburse the state or unemployment system for actual benefits paid to former employees (reimbursement method)

      Note:

      Each subdivision, subsidiary, or wholly owned business enterprise will need to make a separate election.

  5. States may enact safeguards (including requiring the tribe to post a payment bond) to ensure that tribes using the reimbursement method make the required payments to the state. To make sure that FUTA liability is properly determined, the State must advise IRS and the Department of Labor of any determination it has made concerning a tribe's failure to make required payments or post a required bond and whether the tribe has subsequently satisfied these liabilities.

  6. If a tribe fails to make payments required (including assessments of interest and penalty) within 90 days of final notice of delinquency, the State immediately notifies both:

    United States Department of Labor

    Internal Revenue Service
    Indian Tribal Governments SE:T:GE:ITG/TEB
    NCA-6th Floor
    1111 Constitution Avenue, NW
    Washington, DC 20224-0002

Form 940 Filing Requirements
  1. Verify the Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, filing requirement (FR) on INOLES is correct. The filing requirement for ITG entities is either "3" (compliant - not required to file) or "4" (non-compliant - required to file). Most of the time, the Form 940 Filing Requirement is "3" , indicating that the organization has elected not to be subject to Federal Unemployment Tax Act (FUTA) by participating in the state unemployment system.

  2. ITG/TEB must ensure Indian tribal governments and related business/enterprises’ FR is correct. If the FR isn’t correct, update the necessary changes using the "Tribal Entity Input Form" . After you complete the form, click "Submit" to send for input.

Information Return Reporting

  1. Present law imposes information reporting requirements that enable the IRS to verify the correctness of taxpayer’s returns. In general, every person engaged in a trade or business is required to file information returns for each calendar year for payments of $600 or more made in the course of the payor’s trade or business.

  2. The term “information return” means any statement, return, form or schedules described in IRC 6724(d)(1). While the most common information return is Form 1099, other information returns may be required.

  3. Indian tribes are required to file information returns for payments to various recipients. They must furnish the forms to the recipient and file them with the IRS. See IRM 4.88.1.7.1, Employment Tax Reporting, Deposit Requirements and Issues, for a discussion of reporting requirements.

  4. Specialists assist tribal governments with tax-related information reporting requirements. The requirements are broken down into gaming and non-gaming sections. There may be cross-over filing between the sections.

    • Non-gaming: Indian tribes are required to file, and provide to the recipient, information returns for various non-gaming payments to recipients.

    • Gaming: Indian tribes engaged in the business of gaming are required to provide information returns for certain payments to gaming patrons who have won.

  5. Be familiar with Form 1099 issuance and withholding requirements when conducting outreach, compliance checks, and exams of Indian tribes in the following two areas:

    • Distribution of net gaming revenue to tribal members. See IRM 4.88.1.4, Distributions from Gaming Revenue.

    • Payments to non-employees other than net gaming revenue.

Non-employees
  1. Tribes may make payments to multiple non-employees (for example, service providers, rents, etc.) during the year. When their payments to a non-employee of fixed or determinable gains, profits and income aggregate to $600 or more, they must file a Form 1099-MISC, Miscellaneous Income, (IRC 6041).

  2. Tribes must report non-employee compensation to independent contract workers on Form 1099-MISC (Box 7, Non-employee Compensation) by January 31, of the next year. The deadline to file these Form 1099-MISC with the IRS is also by January 31 of the next year.

  3. See IRM 4.10.5, Required Filing Checks, for reportable payments to be included on the Form 1099.

Backup Withholding
  1. IRC 3406, generally requires payors to withhold income tax on reportable payments of interest, dividends, and other payments, including payments reported on Form 1099-MISC under certain conditions. IRC 3406(a) also provides for backup withholding on certain reportable payments, if:

    1. The payee fails to furnish a taxpayer identification number (TIN) to the payor in the manner required.

    2. The Secretary notifies the payor that the TIN furnished by the payee is incorrect.

    3. There has been a notified payee under-reporting described in IRC 3406(c).

    4. There has been a payee certification failure described in IRC 3406(d).

    Note:

    Generally, a specialist will encounter backup withholding issues when either (a) or (b) occurs.

  2. Backup withholding provisions apply to Indian tribal governments (IRC 3406). See relevant sections of IRM 4.23.8.13, IRC 3406 - Backup Withholding, and IRM 20.1.7.8.3, Information Return Penalties, Exceptions and Special Rules. These sections describe the tribe’s backup withholding requirements when the payee doesn’t supply its TIN prior to the payment and lists requirements when the IRS notifies the tribal government that a payee is subject to backup withholding.

  3. Before determining whether a payor is subject to backup withholding, specialists must first consider whether a potential worker classification issue exists with regard to the payees. If the payees are determined to be employees, backup withholding is not applicable even if the payor would have been subject to backup withholding based on failing to secure the payees’ TINs. Failure to consider worker classification issue first may provide the payor with a prior audit safe haven under section 530 for subsequent year.

    Note:

    The non-filing or late filing of information returns eliminates the section 530 safe haven for that year. See IRM 4.23.5.3.3, Establishing Section 530 Relief.

  4. You may use Form W-9, Request for Taxpayer Identification Number and Certification, to secure the TIN.

  5. The backup withholding rate is 28% of applicable payments made after December 31, 2002 through December 31, 2017. Effective January 1, 2018, the backup withholding rate is 24%.

  6. To determine when backup withholding applies, see 26 CFR 31.3406-0 et seq. See 26 CFR 301.6721 and 26 CFR 301.6722 for applicable penalties under IRC 6721, failure to file correct information returns, and IRC 6722, failure to furnish correct payee statements.

  7. A Form 1099 must be filed for each payee for whom any federal income tax was withheld under the backup withholding rules, regardless of the amount of the payment.

Abatement Procedures

  1. Under IRC 3402(d), IRS may abate the income tax portion of:

    • Employment tax assessments

    • Back-up withholding assessments under IRC 3406, and

    • Withholding assessments under IRC 3402(q) and IRC 3402(r)

  2. IRM 4.23 provides procedures to use in the abatement process, Form 4669, Statement of Payments Received, and Form 4670, Request for Relief of Payment of Certain Withholding Taxes. See IRM 4.23.8.4.2, Forms 4669/4670, IRM 4.23.8.4.3, Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3), and IRM 4.23.8.13, IRC 3406 - Backup Withholding. This involves the payee attesting to having filed the return and paying the resulting liability.

  3. When you secure Form 4669, Statement of Payments Received, and Form 4670, Request for Relief of Payment of Certain Withholding Taxes, before you close the exam, use the procedures in this section.

Indian Gaming

  1. In 1988, Congress enacted the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. Sections 2701-2721, which establishes a detailed regulatory, recordkeeping, and reporting regime for Indian tribal gaming activity.

Background

  1. The intent of IGRA:

    • Provides a statutory basis for the operation of gaming by Indian tribes to promote tribal economic development, self-sufficiency, and strong tribal governments.

    • Provides a statutory basis for the regulation of Indian gaming to ensure the tribes are the primary beneficiaries.

    • Establishes the National Indian Gaming Commission (NIGC), an independent federal regulatory authority for Indian gaming, which meets congressional concerns regarding Indian gaming and protects gaming as a means of generating tribal revenue.

    • Shields gaming from organized crime and other corrupting influences.

    • Ensures that gaming is conducted fairly and honestly by both the operators and the players.

  2. Since IGRA's passage in 1988, tribes and states have successfully negotiated hundreds of tribal-state gaming compacts. Gaming provides significant revenues for many Indian tribes.

  3. The term "gaming" has been divided by IGRA into three classes:

    Class Description
    Class I Social games that have prizes of minimal value, and traditional tribal games played in connection with tribal ceremonies or celebrations.
    Class II Bingo, pull-tabs, lotto, punch boards, tip jars, instant bingo, any games similar to bingo, and any non-banking card games allowed by state law including the electronic versions of these games.
    Class III All gaming that is not Class I or Class II gaming, which includes slot machines, casino games, banking card games, dog racing, horse racing and lotteries.
  4. All Indian tribal governments conducting, or sponsoring gaming activities need to be aware of the federal requirements for income tax, employment tax and excise tax. See Pub 3908, Gaming Tax Law and Bank Secrecy Act Issues for Indian Tribal Governments.

Tribal Gaming Operational Responsibilities

  1. Tribal gaming operations have recordkeeping responsibilities for gaming income, payouts, and expenses.

  2. Tribal governments conducting gaming operations generate a substantial amount of income, primarily in the form of cash. The cash passes through many hands, which could result in numerous abuses. One of Congress's concerns was the potential for criminal abuse. As a result, IGRA provides the framework to handle the necessary recordkeeping when a tribe is involved in either Class II or Class III gaming.

  3. Whether the tribe has hired an operator to run its gaming operation, or handles the gaming operation itself, it must follow the NIGC regulations that cover the Minimum Internal Control Standards (MICS) for Indian gaming. These standards apply if they are more stringent than the standards included in a tribal-state compact. However, if the tribal-state compact is more stringent, then the compact standards apply.

  4. Gaming operations must comply when the operations begin. The tribal entity must also have an independent certified public accountant (CPA) verify that the internal control systems that are in place comply with the MICS of the NIGC's regulation, or with the tribal-state compact (25 CFR 542.3). Failure to meet these standards may result in temporary closure and/or NIGC civil fines.

  5. Find the NIGC Regulations from the NIGC, or at the NIGC website at www.nigc.gov.

  6. Find the memorandum of understanding between ITG and NIGC at: www.irs.gov/Government-Entities/Indian-Tribal-Governments/ITG-Memorandum-of-Understanding.

Record-keeping Requirements
  1. Whether the tribe has hired an operator to run the gaming operation, or runs the operation itself, it’s required to:

    1. Maintain all books and records it uses to determine gross and net income.

    2. Determine federal information return reporting responsibilities.

    Note:

    Record-keeping retention requirements are codified in IRC 4403 and IRC 6001 and the related Treasury regulations, 26 CFR 44.4403-1, and 26 CFR 44.6001-1.

  2. The NIGC regulations require that a tribe retain its Class II or Class III books and records of an operation for at least five years. They must keep records as long as the contents may be material in administration of any Internal Revenue law (25 CFR 571.7). This usually means as long as the statute of limitation hasn’t expired on the applicable tax year (generally three years from the later of the date filed or the due date of the return). In addition, Employment Tax regulations specify that records must be preserved for at least four years after the due date of employment tax returns, or four years from the date the tax was paid, whichever is later. Refer to 26 CFR 31.6001-1.

  3. Individual tribal-state compacts may contain additional recordkeeping and reporting requirements for a tribal gaming operation. NIGC and IRS hold the gaming facility to the higher MICS.

Filing Requirements

  1. This subsection describes the common filing requirements for tribal gaming activities. Tribal entities conducting gaming activities generally handle and prepare the following forms:

    Form Title Due
    Form 11-C Occupational Tax and Registration Return for Wagering To Register Annually, by July 1, and Upon Certain Changes in Ownership or Control
    Form 730 Monthly Tax Return for Wagers Monthly
    Form 941 Employer's Quarterly Federal Tax Return Quarterly
    Form 944 Employers' ANNUAL Federal Tax Return (if informed to do so by the IRS) Annual
    Form 945 Annual Return of Withheld Federal Income Tax Annual
    Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons Annual
    Form 1042-S Foreign Person's U.S. Source Income Subject to Withholding Annual
    Form 1042-T Annual Summary and Transmittal of Forms 1042-S Annual
    Form 1096 Annual Summary and Transmittal of U.S. Information Returns Annual
    Form 1099-MISC Miscellaneous Income Annual
    Form 5754 Statements by Person(s) Receiving Gambling Winnings None
    Form 8027 Employer's Annual Information Return of Tip Income and Allocated Tips Annual
    Form W-2 Wage and Tax Statement Annual
    Form W-2G Certain Gambling Winnings Annual
    Form W-3 Transmittal of Wage and Tax Statements Annual
    FinCEN SAR Suspicious Activity Report No later than 30 days after the date of initial detection
    FinCEN CTR Currency Transaction Report 15th day after transaction
  2. Using a promoter or contractor to operate gaming for a tribal government doesn’t relieve the tribe of its responsibility to file the appropriate forms.

Forms for Reporting Gaming Winnings
  1. The table below lists the form, its purpose, and who must file it for gaming winnings:

    Form Filed for Filed by
    Form W-2G, Certain Gambling Winnings Certain wagering transactions require Form W-2G, Certain Gambling Winnings, and Form 1096, Annual Summary and Transmittal of U.S. Information Returns. It’s filed when an individual(s) wins a prize with a minimum specific dollar amount at a gaming event. The winner must give the game operator proper identification including his/her name, permanent address and social security number (SSN). The tribal gaming operator.
    • Completes the Form W-2G upon paying the prize to the winner and provides it no later than January 31 of the following year.

    • Gives Copies B, C, and 2 of this form to the prize winner at the time they complete it.

    • Submits Copy A of Form W-2G and Form 1096 to the IRS by February 28 of the year following the year the gaming winnings were paid.

      Note:

      Electronic Form W-2G filers have until March 31 to file.

    • Submits Form W-2G Copy 1 to the State, and keeps Copy D.

    Form 945, Annual Return of Withheld Federal Income Tax — Withholding and Backup Withholding Withholding -- Tribal gaming operations making payment of certain gaming winnings may be subject to withhold a tax of 25% of the payment from these payments. The tribal gaming operation reports the amount of gambling withholding for federal purposes on Form 945, Annual Return of Withheld Federal Income Tax, Line 1.
    Report any tribal-state compact requirements for state withholding on the applicable state forms.
      Backup Withholding -- Backup withholding is withholding tax on reportable prizes when the recipient fails to provide a TIN. Payors who pay non-employee compensation have several resources to ensure that the TIN is correct. The Campus reconciles this information; specialists don’t have to. Backup withholding occurs if the entity hasn’t secured the recipient’s TIN. The backup withholding rate is 28% of applicable payments made after December 31, 2002 through December 31, 2017. Effective January 1, 2018, the backup withholding rate is 24%. The tribal gaming operation reports backup withholding on Form 945, line 2. File Form 945 annually by January 31st of the year following the year of the winnings.

    Note:

    If the gaming operation deposited full payment of the taxes for the year on time, file by February 10.

  2. The tribal gaming operation may be required to file the Forms W-2G, and Forms 1099 electronically. Generally, if you are required to prepare and file 250 or more information returns, you must file electronically. The 250 or more requirement applies separately to each type of form.

    Example:

    If you must file 500 Forms W-2G, Certain Gambling Winnings, and 100 Forms 1099-MISC, Miscellaneous Income, you must file Forms W-2G electronically, but you are not required to file Forms 1099-MISC electronically.

  3. To receive a waiver from the required filing of information returns electronically, submit Form 8508, Request for Waiver from Filing Information Returns Electronically, at least 45 days before the due date of the return

  4. The following table explains when withholding and backup withholding is required:

    GAME Regular gambling withholding winnings more than Backup withholding winnings equal to or more than (when no TIN is furnished)
    Bingo N/A $1,200
    Slot Machines N/A $1,200
    Keno N/A $1,500
    Any wagering transaction ($5,000 or less) N/A $ 600
    Lotteries, Sweepstakes, and wagering pools Over $5,000 $ 600
    Horse Races, Dog Races, Instant Bingo Game Prizes/Pull-Tabs, and Jai Alai Over $5,000 $ 600
    Other wagering transactions (when winnings are at least 300 times the amount wagered) Over $5,000 $ 600

    Note:

    See Exhibit 4.88.1-1, Gaming Withholding and Reporting Thresholds.

  5. Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

    1. Use Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding to report payments made to a nonresident alien for gambling winnings. Since there are no reporting thresholds for foreign individuals, the first dollar won is reportable. The withholding rate on nonresident aliens is 30% unless the foreign country has a treaty with the United States for a lower rate. For treaty benefits to apply, Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), must include an Individual Taxpayer Identification Number (ITIN), provide information as to whether an individual is a nonresident alien individual not subject to withholding. An ITIN must be provided on Form W-8 BEN to qualify for a lower rate or exempt status.

    2. Report the withholding to the IRS on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. File the Form 1042 with the Ogden Campus by March 15 of the year following the year of payment.

    3. Send Form 1042-T, Annual Summary and Transmittal of Forms 1042-S, with any paper Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, to the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409 by March 15 of the year following the year of payment.

    4. If a casino is required to file 250 or more Forms 1042-S during a year, they must be electronically filed.

    5. Use Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN), to apply for ITINs for certain nonresident and resident aliens, their spouses and dependents that don’t qualify for or can’t get a SSN. Form W-7 requires documentation substantiating foreign/alien status and true identity for each individual. Submit documentation and Form W-7 to: the ITIN Operation at the Austin Campus, IRS walk-in offices, or through an Acceptance Agent or a Certifying Acceptance Agent authorized by the IRS.

      Note:

      See IRM 3.21.264, International Returns Documents Analysis, IRS Individual Taxpayer Identification Number (ITIN) Acceptance Agent Program.

    6. ITINs are required of certain resident or nonresident aliens who wish to file a tax return to claim tax treaty benefits and/or claim a refund of withholding.

    7. No tax is imposed on, and no reporting is required for, gambling income of a nonresident alien playing the following games in the United States:

      • Traditional Blackjack

      • Baccarat

      • Craps

      • Roulette

      • Big-6 Wheel

  6. Forms 1099, Information Returns:

    1. Prizes and awards of $600 or more (aggregated for the entire year) are reported on Form 1099-MISC. Include the fair market value of non-cash prizes. If a wager is made, report the winnings on Form W-2G.

    2. There are different types of information returns for reporting non-employee payments and for reporting other types of miscellaneous payments. Tribal gaming establishments are required to file the appropriate information returns, just as any other trade or business is required to do.

    3. The tribal gaming operation may be required to file the Forms 1099 electronically. Generally, if you are required to prepare and file 250 or more information returns, you must file electronically. The 250 or more requirement applies separately to each type of form.

      Example:

      If you must file 500 Forms 1099-MISC and 10 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs. Insurance Contracts, etc., you must file Forms 1099-MISC electronically, but you are not required to file Forms 1099-R electronically.

    4. To receive a waiver from the required filing of information returns electronically, submit Form 8508, Request for Waiver from Filing Information Returns Electronically, at least 45 days before the due date of the returns.

Withholding Requirements
  1. A tribal gaming operation is responsible for its employees:

    1. Withholding and paying employment taxes

    2. Filing and furnishing the required employment tax forms and information returns

Failure to Pay Withholding Tax
  1. A tribal gaming operation is responsible for paying to the IRS, whether it collects it from the prize recipient any of the following that are due:

    • regular gambling withholding

    • backup withholding

    • foreign withholding

    Note:

    The best time to collect withholding, backup withholding or foreign withholding due is before you pay the recipient.

  2. Assess penalties for failure to deposit taxes withheld, failure to timely file a return, and failure to pay taxes on a return.

  3. If the casino pays the withholding rather than deducting it from the payment, then the payment is required to and deemed to include the amount of federal income tax the casino paid.

    Example:

    If the gambling withholding is required at 25% but the casino pays it, then the income tax due is 33.33% of the winnings. If backup withholding of 28% is required but the casino pays it, then the income tax due is 38.88% of the payment. Beginning in 2018, the rates for gambling withholding and backup withholding are both 24%. If the casino pays these taxes, the tax due is 31.58% of the payment.

  4. Form W-2G: show the amount of tax paid by the tribal casino in the federal income tax withheld box. Add it to the amount of the prize if the tax isn’t deducted from the prize. See Notice 93-7, 1993-1 C.B. 297 for additional information. See Exhibit 4.88.1-2, General Guidelines - When to Withhold and Report Gaming Wins.

Bank Secrecy Act (BSA) Title 31

  1. ITG/TEB is responsible for identifying, notifying, educating and issuing assistance on Title 31 including:

    • Recording outreach events with each gaming entity on Bank Secrecy Act (BSA) outreach activities for Title 31 and IRC 6050I.

    • Identifying entities subject to the BSA and IRC 6050I that are owned by Indian tribal governments.

    • Providing an annual risk assessment of tribal entities subject to BSA.

    • Providing notification (Letter 1052) and education activities with the BSA Program.

      Note:

      The Memorandum of Understanding (MOU) with SB/SE BSA addresses the shared responsibilities for BSA and IRC 6050I notification and education activities for entities that are owned by Indian tribal governments. Find the MOU between ITG and SB/SE BSA: www.irs.gov/Government-Entities/Indian-Tribal-Governments/ITG-Memorandum-of-Understanding.

  2. ITG/TEB employees are responsible for answering technical inquiries from tribal entities on Title 31 CFR Chapter X (Effective March 1, 2011), also see IRM 4.26, Bank Secrecy Act.

  3. ITG/TEB can’t make any oral or written statements on the quality or accuracy of a tribe's BSA program. This applies to any informal discussions, BSA outreach events, or BSA compliance checks. ITG/TEB's role is simply to provide BSA information to the tribal entity, and recommend possible improvements in their BSA program. ITG/TEB communications, including the closing letter for a BSA Compliance Check, can’t indicate that IRS found no problems with the tribe's BSA compliance program. Only the SB/SE BSA exam can make that finding.

  4. Find authority to conduct the BSA Program in IRM 4.26.1, Bank Secrecy Act. The MOU addresses operating procedures between both functions. When the specialist conducts a Title 31 Bank Secrecy Act visit, notify the BSA Coordinator.

  5. ITG/TEB and the SB/SE BSA field employees:

    1. Assume joint responsibility for all BSA and IRC 6050I notification and education activities relating to entities owned by Indian tribal governments.

    2. Should coordinate all education, identification, and BSA examination efforts with the local SB/SE Program Staff, local group manager, the ITG BSA Coordinator, and the SB/SE BSA Casino Technical Advisor.

    3. Share responsibilities for BSA and IRC 6050I notification and education activities for entities owned by Indian tribal government

  6. ITG/TEB notifies BSA Examination Case Selection (ECS) staff and BSA Policy staff of updates to tribal gaming entities, key contacts and other information.

  7. SB/SE BSA field examiners conducts BSA examinations at tribal gaming entities.

Authorities

  1. In 1970, Congress enacted the Bank Secrecy Act. As of August 1996, Indian tribal casinos were subject to the regulations of 31 CFR Chapter X (revision March 1, 2011).

  2. Due to the cash intensive nature of gaming activity and the huge volume of wagering throughout the United States, casinos deal with large numbers of individuals and massive amounts of currency. The information in this section intends to offer a basic understanding of the BSA and how to comply with its provisions.

  3. Casinos and card rooms are designated as financial institutions subject to the requirements of the BSA if the property:

    1. Is licensed as a casino by state, local, or tribal governments, and

    2. Has gross annual gaming revenues in excess of $1,000,000.

Reporting Requirements

  1. As of April 1, 2013, financial institutions must use new FinCEN reports, available only electronically through the BSA E-Filing System. FinCEN no longer accepts legacy reports. Use the Currency Transaction Report (CTR) to report cash transactions greater than $10,000. Financial institutions must file this form electronically by the fifteenth calendar day after the day of the transaction.

  2. File the CTR for a single or multiple transactions over $10,000.

    1. Single transaction - a transaction of more than $10,000 in currency at one time.

    2. Multiple transactions - a series of transactions each less than $10,000, which, when aggregated, exceed $10,000 during the gaming day.

  3. The casino must have knowledge that multiple transactions exceeded $10,000 in a gaming day and are by, or on behalf of, one individual.

    1. The casino is deemed to have knowledge if any employee, proprietor, officer, director or partner knows the transactions occurred.

    2. The casino doesn’t need to have personally observed the transactions; they can learn it from examining books, records, logs, computer files, etc.

  4. To properly file a CTR, the casino must secure the following identification information from the customer (including foreign nationals) BEFORE ending the transaction:

    1. Name and current address

    2. Date of Birth

    3. Account number (with the casino, if applicable)

    4. Social Security number, IF they have one.

  5. Identification requirements. All individuals (except employees conducting transactions on behalf of armored car services) who conduct a reportable transaction(s) for themselves or for another person must be identified by means of an official or otherwise reliable record.

    Acceptable forms of identification:
    Driver's license, military or military dependent identification card, passport, alien registration card, state issued identification card, foreign national identity card (cedular card), or a combination of other unexpired documents that have an individual's name and address and preferably a photograph and that financial institution normally accept for ID when cashing checks for non-customers
    For casino customers granted accounts for credit, deposit, or check cashing, or on whom a FinCEN CTR containing verified identity has been filed, use acceptable ID information obtained previously and maintained in the casino's internal records as long as the ID meets the following conditions. The casino:
    • Reverifies the customer's identity periodically.

    • Updates any out-of-date identifying information in the internal records.

    • Notes the date of each re-verification on the internal record.

    Example:

    If the casino examined documents verifying an individual's identity and recorded them on a signature card when he/she opened a deposit or credit account, the casino may rely on that information as long as they reverify it periodically.

    Note:

    This information must be documented on the FinCEN CTR.

Recordkeeping Requirements

  1. Financial institutions have extensive recordkeeping requirements. Casinos have additional ones. Find a complete list of requirements in 31 CFR Chapter X. See 31 CFR 1021.410(a)-(c) for recordkeeping requirements specifically for casinos.

  2. Important recordkeeping requirements include deposit(s) of funds, account(s) opened, or credit(s) extended. The casino must:

    1. Secure and maintain the name, permanent address, and SSN for each person having a financial interest in the account.

    2. Verify the information by examining a driver's license or any other form of ID that’s acceptable within the banking community for cashing checks of non-depositors.

    3. Verify using a passport, alien identification card, or other official document corroborating nationality or residency for aliens or U.S. non-residents.

  3. Other key records include:

    1. Credit transactions greater than $2,500.

    2. Records used to monitor customers gaming activity (i.e., player rating records).

    3. List of transactions involving monetary instruments of $3,000 and greater.

    4. Records of wire transfers involving funds of $3,000 or more.

    5. A copy of the casino's written compliance program.

    6. Computerized transaction records of casinos with automated recordkeeping systems.

Compliance Programs

  1. Casinos are required to develop and implement a reasonably designed, written program to monitor compliance with the BSA. At a minimum, the plan must include:

    1. A system of internal controls to assure ongoing compliance.

    2. Internal and/or external, independent testing of compliance.

    3. Training of casino personnel in BSA requirements.

    4. An individual or individuals to ensure day-to-day compliance.

    5. Procedures for using all available information to determine (when required) accurate customer identity, suspicious or unusual activity, and whether recordkeeping requirements are met.

  2. For casinos with automated systems, the casino must use the programs to help ensure compliance.

  3. Don’t make any oral or written statements on the quality or accuracy of a tribe's BSA program; see IRM 4.88.1.9 (3).

Suspicious Transactions

  1. Casinos have a certain vulnerability to potential money laundering schemes caused by the cash intensive nature of the games. The BSA was designed to create an audit trail to help minimize illicit financial transactions. Suspicious activities often involve structuring to avoid recordkeeping and reporting thresholds.

  2. Structuring occurs when a person, alone or with others, conducts or attempts to conduct one or more currency transactions in amounts of $10,000 or less in order to evade the reporting requirements of the BSA. Casinos should be aware that both customers and employees may be involved.

  3. Casinos must report all suspicious transactions that involve or aggregate to at least $5,000 in funds or other assets that it knows, suspects, or has reason to suspect is relevant to a possible violation. Possible violations that involve less than $5,000 may be reported on a voluntary basis. Casinos:

    1. Use FinCEN Suspicious Activity Report (SAR) to report suspicious transactions.

    2. File this report electronically through the BSA E-Filing System by the 30th calendar day after the date of the initial detection of the transaction.

      Note:

      FinCEN has issued guidance on suspicious activity reporting and preparation, including SAR narrative examples

    .

Other Requirements

  1. Currency transactions in a casino’s other operational aspects may be subject to other reporting requirements, such as:

    1. Independent check cashiers, money remitters, wire transfer companies, etc., operating inside or outside of the casino use a CTR. The casino must file this report electronically through the BSA E-Filing System by the fifteenth calendar day after the day of the transaction.

    2. Casino non-gaming activities such as hotels, retail outlets, and other establishments use Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Cash for Form 8300 reporting purposes include coin, currency and cashier’s checks, bank drafts, traveler’s checks, or money orders received during a 12-month period. The company can file this form electronically or submit it a paper file.

Tip Agreements

  1. IRS began The Tip Rate Determination and Education Program (TRD/EP) to improve and ensure employees/ employers’ compliance in industries where tipping is customary. If noncompliance exists, both employees and employers can be held liable for paying significant taxes, penalties, and interest. Under the TRD/EP the employer may enter into a tip agreement to promote tip compliance and reduce disputes under IRC 3121(q).

  2. Tribal government employers can voluntarily enter into one of three tip agreement arrangements with the IRS:

    • The Gaming Industry Tip Compliance Agreement (GITCA).

    • The Tip Rate Determination Agreement (TRDA) for the food and beverage industry.

    • The Tip Rate Determination Agreement (TRDA) for industries other than the food and beverage.

  3. The Gaming Industry Tip Compliance Agreement (GITCA) is described in Rev. Proc. 2007-32. Request samples of Tip Rate Determination Agreement (TRDA) for food and beverage, and for industries other than food and beverage from the ITG/TEB Tip Analyst (Tip Analyst).

  4. Tip agreements are voluntary. Although tip agreements provide many benefits to both the employees and the employer, some employers choose not to participate in the program.

  5. Section 3414 of the IRS Restructuring and Reform Act of 1998 prohibits the threat of an audit to coerce taxpayers into signing a TRDA or tip agreement. This prohibition extends to GITCA agreements.

  6. IRC 3121(q) explains employer liability for FICA taxes on tips. Effective January 1, 1988, employers pay their share of FICA taxes on tips reported by their employees (IRC 3121(q)). This remuneration is deemed to have been paid at the time the employee furnishes a written statement including these tips to the employer. If the employee doesn’t provide a statement (or gives an incomplete or inaccurate one), this remuneration is considered paid on the date on which the IRS makes a notice and demand for those taxes to the employer.

  7. IRM 4.23.7, Employment Tax on Tip Income, provides additional information on employment taxes and tip income including information on tip agreements.

Tip Agreement Benefits

  1. Tip agreements provide several benefits to the employer:

    1. Lessen the potential contingent employer liability under IRC 3121(q) for the employer's share of FICA tax on tips.

    2. Increase employee compliance with the tax laws.

    3. Reduce the burden on employers by establishing rates or methods to ensure that the employees are reporting appropriate tips.

    4. Provide that the IRS will not make an assessment against the employer under IRC 3121(q) while the employer is covered by a tip agreement.

      Exception:

      There are two exceptions: assessments on additional tips the employee reported on Form 4137, Social Security Tax on Tip Income Not Reported to the Employer, and attached to their Form 1040; and additional tips determined during an employee audit and reported on Form 885-T, Adjustment of Social Security Tax on Tip Income Not Reported to the Employer.

  2. Tip agreements also provide many benefits to employees:

    1. Ensure that the IRS will not examine a participating employee's tip income if the employee is reporting tips at or above the tip rate established for their occupational category.

    2. Increase employees' compliance with the tax law.

    3. Increase reported tip income.

  3. When employees increase their reported tip income, they also increase any benefits that are based on reported income, such as:

    1. Proof of income when applying for mortgages, auto loans, etc.

    2. Increased worker compensation unemployment benefits.

    3. Increased Social Security and Medicare benefits.

    4. Increased pension, annuity or participation in a 401(k).

  4. Tip agreements provide benefits to the IRS, such as:

    1. Result in higher voluntary compliance with tip reporting.

    2. Reduce disputes with employers under IRC 3121(q).

    3. Require less IRS enforcement measurement and resources.

    4. Lead to better relationships between the IRS and taxpayers.

Gaming Industry Tip Compliance Agreement Program (GITCA)

  1. The Gaming Industry Tip Compliance Agreement (GITCA) is designed specifically to:

    1. Address the gaming industry’s concerns on tip income.

    2. Reduce disputes under IRC 3121(q).

  2. Some of the basic provisions of the GITCA are listed below. For more details review the model GITCA in Rev. Proc. 2007-32.

  3. To participate in a GITCA the employer agrees to comply with certain requirements. Pub 4936, Your Guide to Maintaining and Complying with the GITCA, provides information on:

    • Maintaining the GITCA

    • Securing a new GITCA

    • The streamlined rate review process

    • Annual reporting

  4. The GITCA details the employer’s and the IRS’s commitments upon entering the agreement. The GITCA also includes definitions, tip rate methods, and miscellaneous provisions.

  5. The authority to sign the GITCA is in IRM 4.88.1.10.15, Authority to Sign Tip Agreements.

  6. Pub 4932, Gaming Industry Tip Compliance Agreement (GITCA), provides an overview of the GITCA program including employer and employee benefits of participation, eligibility requirements, and the responsibilities of non-participating employees.

  7. Pub 4985, Gaming Industry Tip Compliance Agreement – for Tipped Employees, summarizes the eligibility requirements and benefits for tipped employees participating in a GITCA agreement.

GITCA Employee Participation

  1. A "participating employee" in a GITCA is a tipped employee who:

    1. Signs a Model Gaming Employee Tip Reporting Agreement as provided in Appendix C of the GITCA.

    2. Before signing the Model Gaming Employee Tip Reporting Agreement, filed federal tax returns for the three years before the GITCA effective date. The employee must have paid the tax or made arrangements to pay the tax no later than 60 days after signing the agreement.

    3. Reports tips at or above the agreed rate on timely filed tax returns.

  2. If an employee revokes the Model Gaming Employee Tip Reporting Agreement at any time during the taxable year, he/she is treated as a nonparticipating employee for the entire year and may not enter into a new Model Gaming Employee Tip Reporting Agreement until January 1 of the following taxable year.

  3. If employee participation is below 75% of the eligible employees, ITG/TEB and the employer will meet to discuss the decline in participation and take appropriate measures to increase the participation rate.

  4. Housekeeping employees may not be included in a GITCA and are not considered eligible employees for the agreement.

GITCA Employer Requirements

  1. The employer agrees to encourage all eligible employees to participate in the program and to sign the Model Gaming Employee Tip Reporting Agreement. See Rev. Proc. 2007-32. The employer:

    1. Withholds and pays tax on reported tips and includes all reported tips on Forms W-2 as required by law.

    2. Acknowledges that the IRS has the authority to secure the information necessary for it to develop the tip rates of nonparticipating employees.

    3. Maintains certain gaming employees, food and beverage, and tip rate records, and provides them to the IRS upon request.

GITCA Required Employer Annual Reports

  1. The employer furnishes an annual report to the Tip Analyst with specific information on each nonparticipating employee on or before March 31 of the year after the calendar year, or any portion thereof, during which the GITCA was in effect.

  2. If the employer doesn’t use a certified Employer-Computed Tip Reporting Process (ECTRP), Appendix E of the GITCA, the employer must also furnish an annual report to the Tip Analyst with specific information on each participating employee on or before March 31 of the year after the calendar year, or any portion thereof, during which the GITCA was in effect. See IRM 4.88.1.10.6, GITCA Employer-Computed Tip Reporting Process, for information on ECTRP.

  3. If the establishment qualifies as a large food and beverage establishment under IRC 6053, the employer is required to provide certain information annually to the Tip Analyst on or before the Form 8027, which is the last day of February, unless the form is filed electronically. If filed electronically, the Form 8027 is due on March 31.

  4. If the employer meets the requirements in paragraph G of the GITCA, the employer is deemed to satisfy the requirement to file Forms 8027 for all of their employees.

  5. If the employer has a certified ECTRP, the employer provides:

    1. A time-and-attendance system or a payroll processing system report that evidences the tip rates used in the implementation of the agreement and for the preparation of Forms W-2.

    2. The number of tipped employees as of the last day of the calendar year.

    3. The report to the Tip Analyst on or before March 31 of the year after the calendar year, or any portion thereof, during which the GITCA was in effect. See IRM 4.88.1.10.6, GITCA Employer-Computed Tip Reporting Process, for information on ECTRP.

  6. If the employer has a certified ECTRP and all tipped occupations are on actual or actual/pool and split rates, the casino isn’t required to provide a time and attendance system or payroll processing system report. The employer is required to provide notification in writing of mandatory or 100% participation in the tip agreement on or before March 31 of the year after the calendar year, or any portion thereof, during which the GITCA was in effect. Notification should be made in writing.

GITCA Employer-Computed Tip Reporting Process (ECTRP)

  1. The Employer-Computed Tip Reporting Process (ECTRP) is a process the employer establishes, maintains, and controls using time-and-attendance and payroll processing systems to compute, without employee input, the tips reportable by the employee per the GITCA rates for that employee's occupation and shift.

  2. The tips determined under the ECTRP system are treated as tips the participating employee reported to the employer for reporting, withholding, and paying the applicable taxes.

  3. The employer's process qualifies as an ECTRP upon its certification and IRS concurrence that the process satisfies the requirements for the ECTRP listed in the GITCA. The certification form is Appendix E of the GITCA.

  4. If Appendix A of the GITCA agreement shows actual or actual/pool and split as the rate method for all tipped employees, then the casino automatically qualifies for certification on Appendix E. The employer’s internal controls were strong enough to grant all actual rates for tipped occupations, therefore Appendix E should be executed.

GITCA Tip Examinations of Employees

  1. The IRS doesn’t examine a participating employee's tip income for any taxable year that begins after the effective date of the agreement if each of the following conditions are met:

    1. The employee is a participating employee for the entire year.

    2. The employee reports tips earned during the taxable year at or above the tip rates in the agreement or works for an employer who uses an ECTRP system.

    3. The participating employee timely files a federal income tax return that reports earned tips and wages on Form W-2.

  2. The IRS doesn’t examine a participating employee's tip income for any taxable year that ends on or before the effective date of the agreement if during the prior period the employee met certain conditions clarified in the GITCA.

  3. The Tip Analyst reviews any employer’s Non-Participant Reports and makes examination referrals of non-participant employees based on National Tip Reporting Compliance, (NTRC) criteria. NTRC has arrangements with various IRS Campuses to conduct these examinations. NTRC has a dedicated employee, who makes the related 3121(q), mirror assessment adjustments from these examinations.

GITCA Tip Examinations of Employer

  1. During any taxable year during which the GITCA is in effect, the IRS may not assert liability against the employer per IRC 3121(q), except liability based on:

    1. The final audit results of a nonparticipating employee.

    2. Additional tip income reported by an employee.

Establishing GITCA Tip Rates

  1. GITCA applicable tip rates include the following:

    1. Employees Who Pool Tips. For employees who pool tips, the employees or their group representative present to the employer a list of the actual share of pooled tips each employee received. If chips are used, the list must reconcile with the tips presented at the employer's cage for cashing.

    2. Other Tipped Employees - Specified Occupational Categories emphasis. By agreement between the employer and the IRS, tip rates are set for the occupational tip categories listed on Appendix A of the GITCA. These rates specify tips received by the hour, by shift, by drink, by percentage of sales, or other mutually agreed and verifiable bases of measurement.

  2. Mutual Agreement Process. The employer or the IRS may propose revisions to the tip rates or occupational categories during the term of the agreement. The non-proposing party notifies the proposing party in writing of approval or disapproval within 60 days of receipt of the proposed revision.

  3. Request for Tip Rate Modification. Upon specific significant events such as a significant change in the business, a 20% decrease in the employer's monthly gross income, or a drop below 50% in the participation rate of any occupational category, the employer may request an appropriate amount and duration change in the relevant rate.

Term of the GITCA

  1. The GITCA starts on a date agreeable to both parties and the GITCA terminates no later than three years after the initial agreement date.

  2. The IRS and employer agree to start discussions on appropriate revisions to the agreement no later than six months before the termination date.

  3. The IRS and employer by mutual agreement may extend the GITCA termination date by completing the GITCA Appendix D Extension Agreement to allow time to finalize and execute a renewal agreement.

Termination of GITCA Agreement

  1. The IRS may terminate the agreement by written notice if participation falls below 50% of the eligible employees.

  2. The employer and IRS may terminate the agreement upon the joint agreement without any participating employee’s consent.

  3. If either party doesn’t comply with any material provision of the agreement, the non-defaulting party may terminate the agreement by giving written notice of termination to the other party.

  4. If the agreement is terminated per the GITCA's terms, the parties’ mutual obligations remain in effect through the effective date of termination.

Tip Rate Determination Agreements (TRDA) Requirements

  1. To participate in a Tip Rate Determination Agreement (TRDA) the employer agrees to comply with certain requirements.

  2. The TRDA details the commitments the employer and IRS made when they entered the agreements. Each TRDA also includes definitions, tip rate methods, and miscellaneous provisions.

  3. The various TRDAs have minor variances (food and beverage, and for industries other than food and beverage). Some of these variances are discussed below. Refer to the specific TRDA for details.

  4. The authority to sign the TRDA is in IRM 4.88.1.10.15, Authority to Sign Tip Agreements.

  5. The TRDA is effective on the first day of the first calendar quarter following the date the authorized ITG/TEB Representative signs the agreement.

TRDA Required Employer Recordkeeping
  1. The employer agrees to maintain specific employee records, detailed in the TRDA, including all records of data used to determine tip rates.

  2. The employer must retain these records for at least four years after April 15 following the calendar year to which they relate.

  3. The employer must furnish any of these records plus required annual reports to the Tip Analyst upon request.

  4. The Tip Analyst may evaluate the employer and its participating employees for compliance with the tip agreement’s provisions.

TRDA Annual Reporting and Tax Compliance Requirements
  1. The employer furnishes the Tip Analyst an annual report on each nonparticipating employee listing the employee's name, social security number, occupational category, shift and hours, wages, reported tips, and sales (if tip rate is computed on a percentage of sales). The report is due on March 31 following each calendar year and may include information on participating employees too, if the employer chooses.

  2. If the employer is required to file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, they furnish copies of the filed forms to the Tip Analyst on or before March 31 for the preceding calendar year.

  3. The employer complies with all the requirements for filing all required federal tax returns and paying and depositing all federal taxes.

  4. If the employer has mandatory or 100% participation in the tip agreement, they notify the Tip Analyst, in writing, on or before March 31 for the preceding calendar year. This is not addressed in the TRDA, but is an NTRC requirement. It is an employer’s decision to make participation in the tip agreement a condition of employment. The employer has the ability to reverse this decision at anytime during the agreement. Therefore, it is important that the employer confirms there was 100% participation in the tip agreement for each calendar year the agreement is in effect.

TRDA Internal Revenue Service Commitments
  1. Participating Employee: If the employee reports tips to the employer at or above the agreed rate of the employee's occupational category on a timely filed return, the IRS doesn’t examine a participating employee's tip income for any period for which a Tipped Employee Participation Agreement (TEPA) is in effect.

  2. Employer: Any IRC 3121(q) notice and demand issued to the employer by the Service Representative will be based solely on one or more of the following forms:

    1. Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed by an employee on his or her Form 1040.

    2. Form 885-T, Adjustment of Social Security Tax and Income Not Reported to the Employer, prepared at the end of an employee tip examination.

  3. If a tip agreement terminates, the rule listed in (2) above applies to all tips received from the effective date of the agreement to the effective date of the termination.

TRDA Tip Rates

  1. Depending on the occupational categories and the employer's business practices, tips rates are reported on the agreement using the following types of measurements:

    1. Actual Tips: Actual tips generally refers to an occupational category where pooling of tips is common. Employees in categories where tips are pooled must report the actual tips they received and may not use a tip rate. Actual tips may also include occupational categories where the employer has strict internal controls that tracks the tip from the moment the employee receives it from the customer until it’s reported in payroll.

    2. Tip Rates: Tip rates apply to occupational categories where there are no actual tips that may be determined by tip pooling methods or by strong employer internal tracking systems. The rates may be determined as a percentage of sales, a dollar amount per hour, a dollar amount per drink, or another measurable basis.

  2. If the employer uses the tip rate measurement, they determine the rates based on available information from their own records, or provided by the specialist, and generally accepted accounting principles. The specialist may provide acceptable formulas used to determine tip rates in specific areas, such as McQuatters Formula used in the food and beverage industry. See McQuatters v. Commissioner, T.C. Memo, 1973-240.

  3. The employer reviews every calendar year, the tip rates and occupational categories. The employer may also review its occupational categories to add new categories and delete eliminated categories. If the employer believes that a revision of rates or categories is appropriate, they must submit the proposed revisions to the specialist by September 30. For more details on this review process, refer to the TRDA.

Termination of TRDA Agreement

  1. The employer can terminate the agreement at any time with written notice. The termination will be effective the first day of the calendar quarter following the date of the notice.

  2. The IRS may terminate the agreement with written notice effective on the first day of the calendar quarter following the date of the notice if any of the following conditions exist:

    1. At the end of the calendar year less than 75% of the employees in tipped occupational categories are participating.

    2. The employer fails to maintain required records.

    3. The employer fails to submit the required annual employee report or the Form(s) 8027.

    4. The employer fails to make required records available to ITG/TEB, upon request.

    5. The employer fails to file all required federal tax returns and/or fails to make related payments and required tax deposits.

  3. If any of the conditions listed in (2) above exist, the specialist e-mails the facts to the Tip Analyst to determine whether termination is warranted.

  4. The ITG/TEB Field Operations manager, has sole authority to terminate any Indian Tribal Government tip agreement on behalf of the IRS. If termination is warranted, the Tip Analyst prepares the termination letter for the Director, ITG/TEB’s signature.

Authority to Sign Tip Agreements

  1. The tip agreement must be signed by the tribal representative who has been delegated this authority by the tribal government.

  2. The ITG/TEB Field Operations manager:

    1. Has the authority to sign tip agreements on behalf of the IRS per Delegation Order 4-34 (Rev. 3), Gaming Tip Compliance Agreements. See IRM 1.2.43.31.

    2. Must review and approve the tip agreement before it is presented to the tribal representative for signature. The specialist sends two original unsigned agreements to the tribe. The tribal representative signs and dates both agreements in blue ink and returns them to the specialist.

    3. Countersigns and dates both agreements in blue ink. The specialist sends one original to the tribal representative and keeps the other original in the closed paper tip case file.

  3. The specialist sends the paper tip case file (containing the original signed agreement) to the Tip Analyst for review and processing for storage.

Tip Rate Reviews for Tip Agreements

  1. The specialist must do a validation review for Initial tip rates and requests to review existing tip rates. The specialist reviews:

    1. How the rates were determined.

    2. Related internal and accounting controls.

  2. The tribal tipped establishment may use different methods to determine tip rates based on available data, formulas, and generally accepted accounting principles. The specialist can offer suggested formulas, methods, and internal controls for determining reasonable tip rates. Generally, the establishment should use the McQuatters Formula for all food and beverage venues that have employees who receive charge tips.

  3. It’s recommended that the tribal establishment and the specialist agree on the method for each tipped category before the initial field appointment.

  4. Tip rates should be determined using financial and payroll data available, preferably 12 months. Tip rates may be based on:

    • A dollar amount per hour with possible shift differentials

    • A percentage of sales

    • Actual tips received

      Note:

      Actual tip rates require enforced strong internal controls that clearly track the tip from the moment the employee receives it to when payroll reports it. The internal controls should eliminate any opportunity for the tip to be diverted from the internal control procedures and thereby fail to be reported in payroll.

  5. The TRDA and GITCA require the employer to keep all records of data used to determine the tip rates for each occupational category. The specialist should request and review these records.

  6. Specialist-initiated tip rate reviews should use statistically valid sampling techniques (preferably for a 12-month period). In some cases, you may need to use a statistically qualified Computer Audit Specialist (CAS).

  7. The internal and accounting controls ensure that the tip income under any tip rate method is accurately and correctly reported. Secure and review a copy of the written internal and accounting controls. Sometimes, you may need to sample and test check existing controls.

  8. Tip rates that are based on an actual or a pooling method require enforced strong internal controls to ensure that all tips an employee receives are reported in payroll. Some examples of internal control procedures are:

    1. When an employee receives the tip, they make an overt sign such as tapping the chip on the dealer's table then immediately and clearly deposit the chip in the locked toke box.

    2. The locked toke box can't leave the gaming floor. If the employee leaves the gaming floor during his/her shift, he deposits the locked toke box in a designated area under surveillance.

    3. The keys for the toke boxes are maintained in a secure area and never accessible to the tipped employee.

  9. Consider these factors when reviewing tip rates:

    1. Type and location of tipped establishment

    2. Customer base and regional economic conditions

    3. Possible shift differentials or seasonal factors

    4. Occupational categories and tip outs

    5. Statistical relationships such as the number of poker hands dealt bears a direct relationship to the number of tips paid. The number of buffet meals served bears a direct relationship to the number of potential buffet tips.

  10. See Rev. Rul. 2012-18 for guidance on Tips vs. Service Charges. Make sure that any distributed service charges are properly characterized as social security (SS) wages and not SS tips. When calculating a tip rate or unreported tips, don’t include service charges. Notate the following statement in Appendix A, GITCA or Attachment A, TRDA: Service Charges/Automatic Gratuities which were previously included in the tip rate calculations are no longer included. Establishments have been advised that all Service Charges/Automatic Gratuities must be treated as non-tip wages. If needed, Rev. Rul. 2012-18 was provided to the Establishment which details the proper treatment of Service Charges/Automatic Gratuities.

  11. During a rate review, clearly document in your workpapers, by occupational category, the method and data the establishment used to determine the tip rate for that occupational category. Submit your workpapers to your group manager for review.

  12. The workpapers must stay with the case file until the documentation is no longer relevant for determining the appropriate tip rate for an occupational category or as a basis for a nonparticipating employee tip audit.

Tip Case File Closing Procedures for ITG/TEB Specialists

  1. When the final agreement is presented to the tribe for signature, specify a reasonable amount of time for tribal review and signature and communicate it to the tribe.

    • If you don’t receive the signed agreement by the time specified and the case is a Tip Solicitation, refer to the Desk Guide on Disposition of Tip Cases to determine what letter(s) to issue before you close the assignment.

    • If the case is a Tip Rate Review, the casino or non-gaming entity can’t decline it.

    • Consideration closing the case as is and allowing the current GITCA to expire without renewing or terminating the current TRDA. Contact the Tip Analyst for their determination on terminating the TRDA. If termination is warranted, the Tip Analyst gets the termination approved, prepares the termination letter, secures the proper official’s signature, mails the letter and sends a copy of the final letter to the specialist, allowing the Tip Rate Review to be closed.

  2. Specialist: When you get both the taxpayer and the ITG/TEB Field Operations manager’s signatures on the agreement:

    1. Verify workpaper documentation supports the conclusion(s) and are properly indexed to the Form 4318, Examination Workpaper Index.

    2. Upload workpapers into RCCMS Office Documents folder. Upload the signed electronic tip agreement (one document including the signature page with both signatures (taxpayer and group manager). Document this activity on your Form 9984, Examining Officer’s Activity Record.

    3. E-mail or EEFax the signed electronic agreement (one document including the signature page with both signatures (taxpayer and ITG/TEB Field Operations manager) along with any additional workpapers to the Tip Analyst.

      Note:

      The ITG/TEB Field Operations manager may choose to do this step instead of the specialist.

    4. Ship the paper tip case file with Form 3210, Document Transmittal to your group manager, or to ITG/TEB Technical Group II if your group manager approves directly shipping the case to ITG/TEB Technical Group II.

    Note:

    The specialist gets the group manager’s signature on the tip agreement after securing the taxpayer’s signature. When both signatures have been secured, the specialist must close the case to the group manager within 10 business days.

  3. Specialist: when you complete the above steps, make sure you’ve documented the above actions in Form 9984, Examining Officer’s Activity Record, including the case is ready to close, and send the case on RCCMS to your group manager for approval and closure.

Closing Procedures for Managers
  1. Manager: when you receive a closed case, make sure the conclusion reached is technically correct and processed accurately, including, but is not limited to:

    1. Review, approve, and timely close the case in RCCMS. (10 calendar days for manager to initial, date the case activity record and close after receiving from the specialist).

    2. Verify the specialist documented actions on Form 9984, Examining Officer’s Activity Record.

    3. E-mail or EEFax the signed electronic agreement (one document including the signature page with both signatures (taxpayer and Field Operations manager) along with any additional workpapers to the Tip Analyst.

      Note:

      The group manager may choose to do this step instead of the specialist.

    4. Immediately mail any paper case files included with RCCMS file to Technical Group II using Form 3210, Document Transmittal, to:

      Internal Revenue Service
      SE:T:GE:ITG/TEB Technical Group II
      55 North Robinson Avenue, Mail Stop 4900
      Oklahoma City, OK 73102-9229

Role of ITG/TEB Tip Analyst

  1. The Tip Analyst:

    1. Oversees the Tip Program and works directly with the tribes on issues that arise after both parties have entered into a tip compliance agreement.

    2. Coordinates with other IRS operating divisions and campuses on tip related issues to ensure consistency and to clarify areas where the approach may be different due to the variance in the customer base.

  2. A primary goal of the Tip Analyst is to ensure that all parties (the tribes, their employees, and the IRS) stick to the agreements. This generally involves monitoring annual reports required by the tip agreements, helping field employees, and referring nonparticipating tipped employees for audit.

  3. The Tip Analyst:

    1. Reviews internal data and selects tip case work for the field.

    2. Update the ITG/TEB Tip Database and notifies management on the ITG/TEB Tip Program’s trends or issues.

  4. If the Tip Analyst receives a question for which the specialist can better handle, the Tip Analyst will send the question to the group manager so the specialist can respond directly.

  5. SB/SE has agreed to track the data from Form 4137, Social Security and Medicare Tax on Unreported Tip Income, for Indian tribal government entities. Based on this data, SB/SE issues notice and demand to the tribal entities for the employer’s share of FICA on the unreported tips.

Introduction of the ITG/TEB Tip Analyst to the Tribes

  1. Tip Analyst:

    1. When you receive an initial tip agreement, send a letter of introduction to the tipped establishment offering assistance on federal tip issues and advising the entity of the tip agreement’s annual reporting requirements.

    2. Set up a tip file for the entity that includes contact information along with any other relevant information on the entity. The file includes a copy of the tip agreement plus copies of any correspondence between the entity and the Tip Analyst.

    3. Keep an activity spreadsheet in the file for contacts between the Tip Analyst and the tribal entity along with related specialist contacts.

ITG/TEB Tip Analyst Monitoring of Tip Agreements

  1. Tip Analyst: send letters to the tribal entities with tip agreements each January reminding them of the required annual reports and their due dates.

  2. The taxpayer sends to the Tip Analyst electronically or by mail every year:

    • The required annual reports.

    • A copy of the filed Forms 8027, or specific food and beverage data for entities with a GITCA.

  3. The Tip Analyst reviews the reports for completeness and for indications of tip reporting problems.

  4. Specialists should inform the Tip Analyst of any changes in the tribe's business operations that would affect the tribe's tip agreement for possible revisions.

  5. Tip Analyst:

    1. Enter the data on nonparticipating employees into prescribed spreadsheets for referral to the IRS Campus handling employee tip examinations.

    2. E-mail the spreadsheets to the SB/SE Senior Program Analyst who reviews the spreadsheets and forwards them to the Campus contact.

  6. When they complete the nonparticipating employee audits, the IRS Campus sends the nonparticipating employee exam results to the SB/SE Senior Program Analyst. The SB/SE Senior Program Analyst records and forwards the exam results monthly to the Tip Analyst to use to prepare the monthly briefing report.

  7. The SB/SE Senior Program Analyst uses the nonparticipating employee exam results as a basis for issuance of notice and demand letters under IRC 3121(q) to the tipped entities. The Tip Analyst monitors the entity accounts, as needed, to ensure that the additional tax is reported.

  8. Not following the requirements of the tip agreements may result in substantial unreported tip income and lost revenue to the federal government. Although the revocation of a tip agreement should be the last resort, it may be needed in egregious situations.

  9. The ITG/TEB Field Operations manager has the authority to terminate an agreement on the IRS’s behalf.

Excise Taxes

  1. ITG/TEB wagers tax issues on Indian tribal governments and serves as the IRS “single point of contact” to authorize or make contacts with Indian tribal governments.

    1. Specialty Examination Excise Tax has jurisdiction over all other excise tax issues but notifies the applicable ITG/TEB group manager before they begin any examination or outreach activity with an Indian tribal government.

    2. See IRM 4.88.1.11.1, Responsibilities and Procedures, for guidance for employees in both functions relating to the federal excise tax responsibilities of Indian tribal governments per the Memorandum of Understanding (MOU) between Indian Tribal Governments (ITG) and Specialty Examination Excise Tax.

  2. Indian tribes are generally subject to federal excise tax. Absent a specific statutory exemption, Indian tribal governments must pay tax on their sale or use of taxable articles or services. Rev. Rul. 94-81, 1994-2 C.B. 412, discusses the extent to which various excise taxes apply to Indian tribal governments. IRM 4.24, Excise Tax, provides Service-wide instructions for all operating divisions with employees involved with the correct filing, reporting and payment of excise taxes.

  3. Find Frequently Asked Questions (FAQs) and other aids related to excise tax issues as they relate to Indian tribal governments at Excise Tax That Apply to Tribes.

  4. The ITG/TEB office may at times be involved in the Coordinated Industry Case Program (CIC). See IRM 4.24.5.2, CIC Program - General Procedures for the procedures for this type of examination. The CIC procedures and guidelines promote uniformity and consistency in managing coordinated examination cases. Examination activities in tribal governments may raise concerns which require fragmenting the examination for a multi-agent approach and assigning specific examination work to each team member.

Responsibilities and Procedures

  1. The intent of the MOU between ITG and Specialty Examination Excise Tax Program (formerly known as the Office of Excise Taxes or OET) is to clarify the responsibility for administering federal excise tax issues involving Indian Tribal Governments, and to enhance a “single point of contact” relationship between Indian tribal governments and the IRS.

    MOU with SB/SE: MOU states:
    Specialty Examination Excise Tax Program (formerly known as the Office of Excise Taxes or OET) ITG/TEB, formerly known as ITG:
    • Is responsible for all wagering tax issues related to Indian tribal governments, including any subdivision, subsidiary, or wholly owned business of the Indian tribal government.

    • Is the "single point of contact" to authorize or to make contacts with Indian tribal governments.

    • Will refer any issues they identify concerning non-wagering excise taxes to an excise tax specialist using the Specialist Referral System (SRS).

    • Will coordinate education and outreach sessions with the applicable Excise tax group and Indian tribal governments where potential non-wagering excise tax responsibilities may exist.

    • Will contact appropriate Excise Issue Specialists (EIS) for help to answer specific excise tax questions that don’t involve wagering.

    Specialty Examination Excise Tax Program:
    • Has jurisdiction over all other excise tax issues relating to Indian tribal governments.

    • Will coordinate with ITG/TEB before they initiate any examination or outreach activity with an Indian tribal government, including any subdivision, subsidiary, or wholly owned business of the Indian tribal government.

Tax on Wagering

  1. Tribes which conduct gaming activities may be subject to excise tax on wagering on conducting certain games, such as bingo games, pull-tabs, raffles and tip boards. The facts and circumstances of the types of wagering conducted, as well as the benefits derived, may have a bearing on whether the wagers are subject to tax.

  2. There are two types of wagering tax:

    • wagering tax imposed on the gross amount of a wager

    • occupational tax imposed on people receiving wagers

  3. In general, the tax on wagering applies to:

    • wagers placed on a sports event or contest

    • wagers placed in a wagering pool on a sports event or contest

    • wagers placed in a lottery conducted for profit

      Note:

      Pull-tabs, raffles, and tip jar games are taxable lotteries. Bingo (not instant bingo) is specifically excluded from wagering tax. Keno may or may not be excluded. Generally, Keno games over 20 on a single bet and player may leave and collect winnings at a later date.

  4. The gross amount of the wager upon which tax is imposed is the amount risked by the bettor, including any charge or fee incident to placing the wager. The taxable amount, for purposes of the excise tax, does not depend on the amount that a patron may win in the wager.

  5. The law specifically exempts certain wagers from the wagering tax. Exemptions relevant to Indian tribal government gaming include wagers placed:

    1. with a pari-mutuel wagering enterprise, including horse racing, dog racing, and jai alai, licensed under state law;

    2. in a coin-operated device, such as slot machines, pinball machines or video games (including electronic pull-tab machines); and

    3. through drawings conducted by an organization exempt from tax under sections 501 and 521, if the proceeds of the drawing do not benefit a private shareholder or individual.

Wagering Excise Tax
  1. The wagering excise tax is imposed on gross wagers received before any payout of winnings or other expenses. The tax rate depends upon whether the wager is authorized under the law of the state in which it is accepted:

    • If the wager is authorized under the law of the state in which it is accepted, the rate of tax is 0.25 percent of the amount of the wager.

    • If a wager is not authorized under the law of the state in which it is accepted, the rate of tax is two (2) percent of the wager.

      Example:

      Unauthorized wagers are those made to bookies, illegal sales of pull-tabs, and unauthorized lottery games.

  2. Form 730, Monthly Tax on Wagering, is a monthly form those in the business of accepting wagers use to report and pay the federal excise tax imposed on taxable wagers. Wagers are the total of those wagers that are authorized and those wagers that are not authorized by the State in which they are accepted. The return is due by the last day of the month following the month in which taxable wagers were accepted.

  3. A tribe may be subject to a penalty for failure to file the form and failure to pay the tax.

  4. The statute of limitations (SOL), the last day that we can assess additional tax, is three years from the date filed or the date due, which is later. Each return has its own statute.

  5. The taxpayer can extend the SOL by signing Form 872-B before the expiration of the normal statute of limitation.

  6. If a Form 730 is assigned to be examined, it must be established on AIMS and RCCMS.

  7. Form 730 has an IDRS Master File Transaction Code (MFT) code of 64 and Activity Code 198.

Occupational Tax
  1. The occupational tax is imposed on those who receive wagers that are subject to tax. The tax applies to persons receiving taxable wagers, whether they receive compensation or are volunteers.

  2. The applicable rates and amounts of tax for the tax on wagers and the occupational tax depend on whether the wager is authorized under the law of the state in which it is accepted:

    • If the wager is authorized under the law of the state in which is accepted, the occupational tax is $50 per year per person receiving wagers and $50 per year for the entity.

    • If a wager is not authorized under the law of the state in which it is accepted, the occupational tax is $500 per year per person receiving wagers and $500 per year for the entity.

    • The tax is prorated for each month filed after July 1, XX, which is $4.17 per month for authorized wagers and $41.67 for unauthorized wagers.

  3. Persons required to pay tax must register certain information with the IRS. This includes both principals (persons in the business of accepting taxable wages on their own behalf) and agents (persons who accept taxable wagers on behalf of a principal).

    1. Both principals and agent must file Form 11-C, Occupational Tax and Registration Return for Wagering, to register and to pay the occupational tax before wagers are accepted and annually thereafter.

    2. Principals and agents must file the first return before accepting any wagers.

    3. An EIN must be used on Form 11-C, not a SSN.

    4. A renewal return is due by July 1st of each year and covers from July 1 of that year until June 30th of the following year.

    5. An initial return can be filed any month, but Forms 11-C have a fiscal year month of 07, regardless of whichever month the taxpayer first starts accepting wagers.

    Note:

    This is unusual, a return that is due at the beginning of the period that it relates to. Most returns are due after the tax period ends.

  4. A tribe may be subject to a penalty for not filing on time, for accepting wagers before paying the tax, and for willfully failing to file the return.

  5. The SOL, the last day that we can assess additional tax, is three years from the date filed or the date due, which is later.

  6. The taxpayer can extend the SOL by signing Form 872-B before the expiration of the normal statute of limitation.

  7. If a Form 11-C is assigned to be examined, it must be established on AIMS and RCCMS.

  8. Form 11-C has an IDRS Master File Transaction Code (MFT) code of 63 and Activity Code 197.

Limited Exemption for Certain Excise Taxes Applicable to Tribal Governments

  1. Tribal governments are, for certain excise taxes, treated as states, and a political subdivision of a tribal government is, for certain excise taxes, treated as a political subdivision of a state under IRC 7871(a) and (d) respectively.

    1. This treatment is for purposes of any refund or credit, or any exemption from or payment of certain federal excise taxes if, and only if, the article is for the exclusive use of the tribe and the transaction involves the exercise of an essential governmental function of the Indian tribal government

  2. The exemptions apply to excise taxes imposed by:

    • Chapter 31 (tax on special fuels)

    • Chapter 32 (manufacturers excise tax)

    • Subchapter B of Chapter 33 (communications excise tax)

    • Subchapter D of Chapter 36 (tax on use of certain highway vehicles).

  3. Functions that qualify as essential governmental functions (i.e., tribal administration, housing authorities, health clinics, fire and police protection, etc.) generally include those that State and local governments with general taxing powers customarily perform.

    Note:

    They do not apply to casinos or other business entities not normally associated with a state or local government.

    Rev. Rul. 94-81 gives some examples of what is and what is not an essential government function.

  4. To qualify for these exemptions, the tribe must be a federally recognized Indian tribe.

IRC 7871 Letter Request Procedures

  1. Specialist: when you receive a request for an IRC 7871 letter, contact your group manager for approval and establish the compliance activity on RCCMS with the information:

    • Indian Tribal Government Name

    • Address

    • Taxpayer Identification Number

      Note:

      An ICN is not required.

    • Status 12

    • Type: Taxpayer Assistance - Post Filing

    • Activity Code: 108 (Taxpayer Assistance - Post Filing)

    • Project Code: 4190

    • Work Unit: 7871

    • Tax Period: use the year of the request

      Example:

      If the request is received in 2018, enter 201812 as the Tax Period.

    • Uncheck the AIMS box since the case will not be on AIMS.

      Note:

      For general information on establishing non-AIMS activities and cases in RCCMS, see the section titled Establishing Non-AIMS Compliance Activities in RCCMS, in the ITG Case Work Procedures Desk Guide at https://organization.ds.irsnet.gov/sites/tege-ge/itg/itg/forms/1-caseproc2-guidesandprocs.aspx. The activity will not require an ICN and the tax period will be the year of the request, i.e. 201812. In WebETS, use activity code 108 and project code 4190.

  2. Use the following WebETS codes to report time spent on the activity as follows:

    • Establish the case as an "Other Operational" activity

    • Activity Code: 108 (Post Filing Assistance)

    • Project Code: 4190

  3. The IRC 7871 letter can only be issued to the tribal government, attention of the tribal leader or authorized official. If the letter is issued to an authorized official, then you must issue the tribal leader a copy of the letter. Contact your group manager if you have a question about the protocol for issuing the IRC 7871 letter.

  4. Once the RCCMS case file is established, download from the RCCMS repository, the Form 9984, Examining Officer’s Activity Record and IRC 7871 Letter (5.601.IRC 7871 status). Use Form 9984 to document:

    • The date of each action on the case.

    • A description of each action on the case.

    • The time spent on the case, which must tie to what’s reported on WebETS.

    • The source of the request and reason for the request.

    • Name, title and contact information of persons involved in the IRC 7871 letter request.

    • History of the request, how it was resolved.

  5. If the tribal leader or an authorized official is the person who requested the letter:

    • Complete the IRC 7871 letter and address it to the tribal government, to the attention of the tribal leader or authorized official. If the letter is issued to an authorized official of the tribe, then you must also issue the tribal leader a copy of the letter.

  6. If the tribal leader or authorized official is not the person who requested the letter, then:

    • Inform the requestor that the IRC 7871 letter must be sent to the tribal government. The requester will need to contact the tribal government for a copy of the letter.

    • As a courtesy, consider contacting the tribal leader or authorized tribal official, to give advance notice that you’re sending the letter. Advise the tribe that ITG/TEB is authorized to issue the IRC 7871 letter only to the tribe. Upon the tribe’s receipt of the letter, the tribe can disseminate the letter to the requestor, as they deem necessary.

  7. Specialist: sign and mail the letter. Then, upload it into the RCCMS case file. Close the case on RCCMS:

    • Disposal Code: 107 (No Change)

    • Examination Technique: 4

    • Time spent on the case

    • Principal Issue Code: 01A (Filing Requirement - No Change)

    • Send case to group manager for closure to Status 90

      Note:

      The case is not forwarded to Technical upon closure.

Abuse Detection and Prevention Team (ADAPT)

  1. The Abuse Detection and Prevention Team (ADAPT), part of ITG/TEB, works on issues/cases in which tax schemes or abuses impact multiple field group areas, or involve extensive interactions with enforcement functions/agencies inside or outside the IRS.

    1. Although some of the work involves tax fraud, the team’s role is much more expansive than that single issue, as it also encompasses tax shelter activities, BSA abuses, and the use of tribal entities to avoid proper reporting and oversight of transactions.

    2. Because of this role, the team not only undertakes compliance actions to fix identified noncompliance but also acts to prevent and mitigate any growth in schemes.

    3. The objective is to stem the growth in these types of activities and do so through a coordinated national strategy that combines partnerships with customers and other regulatory agencies.

  2. Cases are assigned or reassigned to ADAPT based on the potential to be referred to the Criminal Investigation (CI) Division, or where the abusive issue(s) may affect other Indian tribes. Field groups work cases that have little or no criminal potential or that will impact only one tribe. ADAPT specialists are experienced and trained in detecting fraud and abuse. ADAPT is responsible for detecting and preventing abusive shelters and other abusive schemes promoted in Indian Country by examining Indian tribes’ tax returns and books and records.

  3. ADAPT specialists provide grand jury and non-grand jury cooperating agent assistance to the CI Division.

  4. The ADAPT manager participates on the Indian Gaming Working Group and serves as the primary contact point to coordinate with other federal agencies and CI at the national level where appropriate, and within the guidelines of disclosure rules and policies under IRC 6103 and IRM 4.2.5, General Examination Procedures, Disclosure of Official Information.

  5. ADAPT specialists participate on local Indian Gaming Working Groups where appropriate, and within the guidelines of disclosure rules and policies under IRC 6103 and IRM 4.2.5, General Examination Procedures, Disclosure of Official Information.

  6. Find contact information for the TE/GE Fraud, Promoter & ATAT Program Manager, TE/GE Fraud Specialist, and ITG Fraud Subject Matter Expert on TE/GE Connect at http://tege.web.irs.gov/article-job-v2.asp?category=job&title=atat-fraud&path=/my-job.

Types of Cases That ADAPT Works

  1. Types of cases assigned to ADAPT specialists include, but are not limited to:

    Issues involving Description
    A scheme designed to shelter transactions from normal oversight. This includes tax sheltering activities such as:
    • equipment leasing shelters

    • overstated basis transactions

    • property transfers where the tribe holds title to an asset for a brief period in a scheme to avoid taxation of a gain.

    Example:

    Using a tribal entity to avoid federal taxation, such as disguising a transaction to give the appearance that the tribe earned the income when the beneficial party to the transaction was not the tribe.

    A potential criminal referral, where the books and records of the tribe require extensive review. Most tribal books and records do not tie to federal income tax returns, and the specialist’s investigation is usually on employment tax and information return requirements.
    The use of the special tax status of a tribe or tribal entity to give the appearance that a transaction should receive a certain tax treatment that appears to be inconsistent with the intent of the law. Example: The creation of an entity that purportedly belongs to a tribe, when in fact the tribe has little to no control and the purpose of the entity is to avoid federal tax liability.

    Note:

    Find additional examples of schemes and abuses identified that may be assigned to ADAPT specialists at http://www.irs.gov/Government-Entities/Indian-Tribal-Governments/Fraud-and-Abusive-Schemes-Information-for-Indian-Tribal-Governments

    Note:

    These schemes typically involve substance versus form arguments.

    An investigation by external entities and ITG/TEB involvement is appropriate and the issue may be occurring or likely to occur in other tribes. Examples of external entities:
    • the Federal Bureau of Investigation (FBI)

    • Department of Interior (DOI) Inspector General

    • National Indian Gaming Commission (NIGC)

    • Large Business and International (LB&I)

    • Small Business/Self Employed (SB/SE)

    • Criminal Investigation (CI)

  2. In all of these situations, ADAPT assumes responsibility for developing and disposing the issue, and works closely with field groups to ensure that field employees are aware of the issues and the case disposition, where necessary.

Referrals on Potentially Abusive Tax Shelters, Emerging Issues and Practitioners

  1. Find procedures to help you identify and investigate abusive transactions and promotions in IRM 4.32, Abusive Transactions. These procedures identify how and where IRS employees submit referrals involving potentially abusive tax shelters, emerging issues and practitioners. Procedures in IRM 4.32.1, Abusive Transactions, Process Guide for Combating Abusive Tax Avoidance Transactions, IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process, and IRM 4.32.3, Abusive Transactions, Coordination and Roles of Cross-Functional Units, apply to ITG/TEB except as outlined in this section.

  2. IRM 4.70.3, TE/GE Examinations, Promoter Investigations, provides guidance to TE/GE employees pursuing investigations of promoters.

  3. IRS employees who receive information or uncover an abusive scheme suspected within Indian country should email a completed Form 5666, TE/GE Referral Information Report, to tege:itg:schemes@irs.gov, or if preferred, send regular mail to:

    Internal Revenue Service
    ITG ADAPT Classifier
    55 North Robinson Avenue
    Mail Stop 4900 ITG/TEB Technical Group I
    Oklahoma City, OK 73102-9229

  4. External stakeholders can submit information on abusive schemes that surface within Indian country. See Reporting Abusive Schemes at http://www.irs.gov/Government-Entities/Indian-Tribal-Governments/Reporting-Abusive-Schemes-and-Their-Promoters/.

  5. All referrals receive thorough analysis and review. The ITG ADAPT Classifier tracks all referrals and coordinates them with Compliance Planning & Classification (CP&C).

  6. Managers and specialists should not begin a compliance action on a promoter/preparer until the Lead Development Center (LDC) has authorized a promoter investigation and the ADAPT group provides the lead promoter investigator. The TE/GE Fraud Specialist coordinates promoter investigations and the examination of promoter client exams.

  7. Referrals to ADAPT may come from various sources:

    • ITG/TEB employees

    • Information from tribal members

    • Information from practitioners

    • Other inside and outside sources

  8. Send any other information including, but not limited to, scheme or promoter promotional material to the ITG ADAPT Classifier for review.

  9. ADAPT sends:

    • Promoter material to the LDC with the referral on the potential promoter via Form 14242, Reporting Abusive Tax Promotions and/or Promoters, for consideration and assignment

    • A copy of the Form 14242 to the TE/GE Fraud Specialist.

Practitioner Referrals

  1. Thoroughly review and document referrals involving practitioners on the performance of their actions.

  2. These referrals:

    1. Are very sensitive

    2. May arise because of a complaint from another practitioner, employer, employee or participant that the practitioner is not following the appropriate laws, regulations or rules.

  3. Make all practitioner referrals through the website at http://www.irs.gov/Government-Entities/Indian-Tribal-Governments/Reporting-Abusive-Schemes-and-Their-Promoters, or send to:

    Internal Revenue Service
    ITG ADAPT Classifier
    55 North Robinson Avenue
    Mail Stop 4900 ITG/TEB Technical Group I
    Oklahoma City, OK 73102-9229

  4. Send practitioner referrals involving a promoter scheme to the LDC for review and assignment to ADAPT.

ITG/TEB Coordination of Listed Transactions and Emerging Issues

  1. If you identify a "listed transaction" or emerging issues during an exam, compliance check, or any contact with a tribe, tribal member or other source, email the information to the ITG ADAPT Classifier at tege:itg:schemes@irs.gov or if preferred, send regular mail to:

    Internal Revenue Service
    ITG ADAPT Classifier
    55 North Robinson Avenue
    Mail Stop 4900 ITG/TEB Technical Group I
    Oklahoma City, OK 73102-9229

  2. Listed transactions involve potentially abusive tax avoidance transactions that must be disclosed per 26 CFR 1.6011-4, Requirement of statement disclosing participation in certain transaction by taxpayers. Other rules apply to organizers and promoters of these transactions.

  3. Emerging issues usually involve a promoter or practitioner’s aggressive position on current tax law or published IRS guidance (such as PLR).

Approved IRC 6700 Penalty Case

  1. After the LDC assigns a case that involves Indian tribal government issues, the ADAPT group manager coordinates with the TE/GE Fraud Specialist, other appropriate IRS operating divisions and Counsel offices. A specialist from the ADAPT group is assigned when warranted.

  2. The ADAPT specialist assigned to the case will work closely with Counsel and other operating divisions to help:

    1. Determine if an IRC 6700 penalty applies.

    2. Obtain all necessary documentation.

    3. Determine if IRS should seek an IRC 7408 injunction.

  3. Counsel provides legal assistance to the ADAPT specialist throughout the case.

Investigations

  1. Except as outlined above, ITG/TEB follows the investigative procedures in IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process.

  2. The Examiner Injunction Referral (EIR) is like the format of a Special Agent’s Report, is very detailed and should contain the following information:

    1. Investigation Summary

    2. Facts and findings

    3. Exhibits

    4. Investigative agent data

    5. Witness list

Penalty Assertion

  1. Penalties continue to be an important IRS tool to encourage voluntary compliance.

  2. Refer to IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process, and IRM 20.1.6, Penalty Handbook, Preparer, Promoter, Material Advisor Penalties, for an overview on asserting penalties.

Post Injunction Actions

  1. IRS actions are required throughout the promoter investigation to ensure IRS is fully coordinating its effort to stop abusive tax promotions. Refer to IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process.

Participant Cases

  1. Coordinate and work cases involving the clients of the promotion with SB/SE.

Fraud

  1. Specialists have specialized training in the administration of tax law and protocols unique to Indian tribes, (including tribes, its members and officials, and third parties dealing with tribes).

  2. To ensure proper detection and prevention of fraud in Indian tribal government entities, and to ensure consistency within the IRS, ITG/TEB coordinates resources with the National Fraud Coordinator, in SB/SE through the TE/GE Fraud Specialist.

  3. Refer to IRM 25.1, Fraud Handbook, for additional procedures.

  4. Refer to IRM 25.1.9, Fraud Handbook, Tax Exempt/Government Entities, and IRM 25.1.9.6, Fraud in Indian Tribal Governments (ITG), for additional procedures.

  5. Refer to IRM 25.1.2, Recognizing and Developing Fraud, for guidance on recognizing signs of fraud and the development process we use to prove fraud.

  6. The Program Manager and TE/GE Fraud Specialist in CP&C coordinate the TE/GE Fraud, Promoter, and ATAT programs. They are trained specifically in fraud and help to develop cases and communicate between operating functions.

  7. The TE/GE Fraud Specialist and the SB/SE Fraud Technical Advisors (FTA), guide group managers and specialists in developing fraud cases.

Fraud Development

  1. As soon as you discover indicators of fraud, discuss the issue with your group manager. Refer to IRM 25.1.2.3, Indicators of Fraud, and IRM 25.1.2.4, Investigative Techniques.

  2. If your manager agrees that the indicators of fraud are present, contact the TE/GE Fraud Specialist to discuss the indications of fraud.

  3. The ADAPT group manager determines if the case should be referred to ADAPT or if the specialist continues to work it.

  4. The TE/GE Fraud Specialist contacts the SB/SE FTA in the appropriate location. If the SB/SE FTA agrees, the TE/GE Fraud Specialist sets up a conference call or meeting with the specialist, group manager and SB/SE FTA to discuss the case. If all parties agree that we should develop the case for fraud, the specialist completes Form 11661, Fraud Development Recommendation -- Examination, and sends it to the TE/GE Fraud Specialist for review.

  5. The TE/GE Fraud Specialist sends the Form 11661 to the SB/SE FTA for their signature. The SB/SE FTA and the specialist jointly prepare a plan of action.

    Note:

    UNDER NO CIRCUMSTANCES SHOULD THE SPECIALIST OR THE GROUP MANAGER CONTACT CRIMINAL INVESTIGATION (CI) AT THIS STAGE.

  6. Specialist: when you receive a signed Form 11661, update the case to Status 17 (fraud development) through RCCMS on AIMS (check the update AIMS box), and proceed with the plan of action. Email a copy of the signed Form 11661 to the TE/GE Fraud Specialist to keep and update the TE/GE fraud inventory records.

  7. Specialist: Ask the TE/GE Fraud Specialist for a "WebETS naming convention code" to track WebETS time.

  8. Specialist: During the fraud development phase of the exam, work closely with the and SB/SE FTA as you develop additional information/facts with the TE/GE Fraud Specialist’s help, as needed. The specialist, and the SB/SE FTA jointly determine:

    1. When/if enough information has been developed to make a criminal referral to CI.

    2. If and/or when additional facts developed do not warrant a criminal referral.

  9. Specialist: notify the TE/GE Fraud Specialist of your decision to either submit a CI referral or return the case to Status 12. Update the Form 11661 and get the SB/SE FTA’s signature before you update the case back to Status 12. If you don’t make a CI referral, update the case through RCCMS on AIMS (check update AIMS box) to Status 12 when you receive the signed Form 11661. E-mail a copy of the signed Form 11661 to the TE/GE Fraud Specialist so he/she can have the form and update the TE/GE fraud inventory records.

Civil Fraud

  1. Always refer to IRM 25.1, Fraud Handbook, for additional procedures.

  2. Keep the SB/SE FTA advised as new facts develop. Update the TE/GE Fraud Specialist monthly of the case’s status including any significant developments, time frames, barriers, etc.

  3. Specialist: complete the case development, including your recommendation of assertion of the civil fraud penalty. The TE/GE Fraud Specialist, and/or the SB/SE FTA will help you with the case write-up. Keep the case in Status 17 on AIMS during this process.

  4. Specialist: send the case to TE/GE Division Counsel for review of the civil fraud penalty before a statutory notice of deficiency is issued or penalty is assessed in an assessable case.

Criminal Fraud

  1. Always refer to IRM 25.1, Fraud Handbook, for additional procedures.

  2. Keep the SB/SE FTA advised as new facts develop. Update the TE/GE Fraud Specialist monthly of the case’s current status including any significant developments, time frames, barriers, etc.

  3. Specialist: if you and the SB/SE FTA agree that affirmative acts (actions taken by the taxpayer that establish criminal intent) have been established, and criminal criteria (criteria used by CI for selecting a case for criminal investigation) are present, suspend all examination activity and refer the case to CI. Advise the TE/GE Fraud Specialist of your decision to refer the case to CI before you submit the referral. Make the referral via Form 2797, Referral Report of Potential Criminal Fraud Cases. The TE/GE Fraud Specialist, and/or SB/SE FTA will help you prepare Form 2797.

  4. Specialist: route the completed Form 2797 through your manager and the TE/GE Fraud Specialist for concurrence. The TE/GE Fraud Specialist routes the Form 2797 to the SB/SE FTA, who sends the approved Form 2797 to the appropriate CI field office for consideration.

  5. The CI Special Agent assigned to evaluate the criminal fraud referral arranges an initial meeting to discuss the case merits within 10 working days of receipt of the referral and invites the specialist, group manager, TE/GE Fraud Specialist, SB/SE FTA, and the Supervisory Special Agent to attend.

  6. CI conducts a disposition conference within 30 working days of receipt of the criminal fraud referral to discuss acceptance or denial of the referral. CI can request (and be granted) an extension of time. If the criminal fraud referral is accepted, CI may request a cooperating agent. If the referring agent is assigned as the cooperating agent, this is documented on either Form 2797 or Form 6544, Request for Cooperating Agent. Send a copy of the Form 2797 or Form 6544 to the TE/GE Fraud Specialist who coordinates the assignment of the cooperating agent and issuance of the appropriate naming convention code, if necessary.

  7. Specialist: keep a copy of the executed Form 11661 and Form 2797 returned to you in the case file. Send the TE/GE Fraud Specialist copies of both forms.

Administrative Joint Investigation Cases

  1. CI has jurisdiction over administrative investigations. These are criminal investigations for which a grand jury has not been approved. An administrative investigation that involves cooperating agents from any Compliance function, such as ADAPT, is an administrative joint investigation.

  2. See IRM 25.1.4, Fraud Handbook – Administrative Joint Investigations, for a detailed discussion on administrative joint investigation procedures.

  3. If CI hasn’t requested or received grand jury approval from the Department of Justice (DOJ), then the criminal investigation is an administrative investigation. When CI initiates an administrative criminal investigation, they send Form 14584, IRS - Criminal Investigation - Check for and Suspend Civil Activity Notification, to notify TE/GE that they have opened the investigation. If a specialist identifies a related, open examination that is not already part of the criminal investigation, then the group manager notifies the TE/GE Fraud Specialist so all involved can meet with CI to discuss the case.

  4. The conference should include the specialist, his/her group manager, the CI special agent (SA) and the CI supervisory special agent (SSA). The TE/GE Fraud Specialist and FTA may also attend when necessary.

  5. During this conference, a decision, based on the facts and circumstances, must be reached based on whether the specialist will:

    • Participate in the criminal investigation as a joint investigation.

    • Conduct a parallel investigation.

    • Suspend all civil activity and not participate in the criminal investigation.

    Note:

    Do not take any further civil actions until the meeting occurs and a decision is made.

  6. Regardless of the decision reached, place the examination case in AIMS status code 18 and keep it in the group.

  7. ITG/TEB Examination retains jurisdiction over the examinations in its inventory during an administrative investigation. The specialist who has worked any examinations related to the criminal investigation keeps the exam case files in the examination group but can’t contact the taxpayer or representative. Cases impacted by the CI investigation may be directly or peripherally related to the criminal investigation and can be identified by a -Z freeze (TC 914) on the module.

  8. If CI needs a cooperating agent to help with the administrative criminal investigation, they may request it on the Form 2797 (if the investigation arose from an examination) or on a Form 6544 (see IRM 4.88.1.14.3 (6) above). The administrative cooperating agent helps CI with the administrative investigation and receives a WebETS naming convention code to track time spent assisting CI in that role.

    Note:

    If a grand jury is approved, then CI must request a grand jury cooperating agent, who may or may not be the administrative cooperating agent. CI must complete a new or revised Form 6544 to request the grand jury cooperating agent and the TE/GE Fraud Specialist must issue a new WebETS naming convention code for the grand jury cooperating agent to use. Once a grand jury is approved, the procedures in IRM 4.88.1.14.5, Grand Jury Cases, apply.

  9. CI notifies TE/GE that its case has been forwarded for prosecution. This information is shared between the TE/GE Fraud Specialist, specialist and group manager, and the FTA.

  10. Once CI forwards its administrative case to the Department of Justice for its approval of prosecution, ITG/TEB Examination loses jurisdiction over the examination. The group must forward the examination cases previously held within the group to the TE/GE Fraud Suspense Unit to be placed into administrative fraud suspense. The specialist must suspend all civil actions and expeditiously close the exam case to the TE/GE Fraud Suspense Unit.

  11. Refer to IRM 25.1.4.3.11 (2), Fraud Handbook, Administrative Joint Investigation, for detailed instructions of what to include in the case file when you close it. The TE/GE Fraud Suspense Coordinator has prepared check sheets you can use to ensure you’ve considered and included all required elements.

  12. Specialist: statute protection is your responsibility before you close the case to suspense. Ensure a minimum of one year remains on the statute of limitations before you close cases to suspense.

  13. TE/GE Fraud Suspense Coordinator: review the case and determine its readiness for fraud suspense. When you review the case and accept it into TE/GE Fraud Suspense, update the case on AIMS through RCCMS to Status Code 32, Suspense-General Fraud, and update the organization code on AIMS.

  14. TE/GE Fraud Suspense Coordinator: review the case for compliance with IRM 25.1.4, Administrative Joint Investigation, or IRM 25.1.5, Grand Jury Suspense, and readiness for fraud suspense.

  15. Specialist: ensure that four-way quarterly conferences are held with CI before closing the case to suspense.

  16. TE/GE Fraud Suspense Coordinator: ensure that four-way quarterly conferences are held with CI while the case is in suspense. See IRM 25.1.4.3.3 (2) IRM for more information about four-way conferences.

  17. TE/GE Fraud Suspense Coordinator: monitor the statute while it’s in suspense. This includes:

    1. Preparing Form 10498-A, Joint Investigations Intent to Commence Civil Actions, or Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute, as necessary.

    2. Securing the Director, ITG/TEB, and CI’s consent to rely on applicable alpha statutes (i.e., NN, OO, CC).

    3. Preparing and processing any required Forms 3999, Statute Expiration Report.

    4. Keeping the TE/GE Fraud Specialist apprised of changes to the case while it is in fraud suspense.

  18. Once CI has concluded its investigation (prosecution, plea or discontinuance), it issues Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only). TE/GE Fraud Suspense Coordinator: when you receive Form 13308 (and not before), prepare the case to return to a group for civil settlement and closure.

  19. TE/GE Fraud Suspense Coordinator: determine what statutes exist when you receive Form 13308 and address any statute concerns before you return the case to the field or Appeals.

  20. Group: upon receipt, the group assigned the civil settlement of the case is also be responsible for the civil statutes. TE/GE Fraud Suspense Coordinator: update the case out of status code 32 and update the organization code.

Grand Jury Cases

  1. CI has complete jurisdiction over grand jury cases.

  2. See IRM 25.1.5, Fraud Handbook - Grand Jury Investigations, for a detailed discussion on grand jury procedures, and see IRM 25.1.9.6, Fraud in Indian Tribal Governments.

  3. When CI initiates a grand jury investigation which has not been referred by a civil compliance function or when the grand jury was initiated by the DOJ, the SA:

    1. Must determine if any civil action is being taken or planned.

    2. Forwards Form 14584, IRS - Criminal Investigation - Check for and Suspend Civil Activity Notification, to TE/GE to notify it of the grand jury investigation.

  4. Group: upon receipt of notification, immediately cease taxpayer contact for tax years currently under examination unless a parallel investigation is authorized.

    1. The information about the grand jury approval is shared between the TE/GE Fraud Specialist, specialist and group manager, and FTA.

    2. ITG/TEB Examination loses jurisdiction of the exam once the grand jury is approved.

    3. Upon receipt of this notification, the group expeditiously closes the pertinent examination cases to the TE/GE Fraud Suspense Unit to be place into grand jury suspense.

  5. If CI needs a cooperating agent to assist with the grand jury criminal investigation, the request may be made on the Form 2797 (if the investigation arose from an examination and the investigation is an ongoing grand jury investigation or on a Form 6544 (See IRM 4.88.1.14.4 (8) above.) The grand jury cooperating agent assists CI with the grand jury investigation and receives a WebETS naming convention code to track time spent assisting CI in that role.

    Note:

    If an existing administrative investigation has been assigned administrative cooperating agent, see IRM 4.88.1.14.4 (8) above.

  6. When an existing administrative criminal investigation, either with or without an assigned cooperating agent, becomes an approved grand jury investigation, CI sends a Notice of Department of Justice Referral memorandum to TE/GE to initiate suspense action.

    1. The information about the grand jury approval will be shared between the TE/GE Fraud Specialist, specialist and group manager, and FTA.

    2. ITG/TEB Examination loses jurisdiction of the exam once the grand jury is approved.

    3. Upon receipt of such notification, the group will expeditiously close the pertinent examination cases to the TE/GE Fraud Suspense Unit to be place into grand jury suspense.

  7. Refer to IRM 25.1.5, Fraud Handbook, Grand Jury Investigations, for detailed instructions of what to include in the case when you close it. The TE/GE Fraud Suspense Coordinator has prepared check sheets that you may use to ensure you’ve considered and included all required elements.

  8. Specialist: Statute protection is your responsibility before the case is closed. Ensure a minimum of one year remains on the statute of limitations before you close cases to suspense.

  9. TE/GE Fraud Suspense Coordinator: review the case and determine its readiness for fraud suspense. Once you’ve reviewed the case and accepted it into TE/GE Fraud Suspense, update the case on AIMS through RCCMS to Status Code 36, Suspense-Grand Jury, and update the organization code on AIMS.

  10. TE/GE Fraud Suspense Coordinator: review the case for compliance with IRM 25.1.4, Administrative Joint Investigation, or IRM 25.1.5, Grand Jury Investigations and readiness for fraud suspense.

  11. Specialist: ensure that four-way quarterly conferences are held with CI before you close the case to suspense. TE/GE Fraud Suspense Coordinator: ensure that four-way quarterly conferences are held with CI while the case is in fraud suspense. See IRM 25.1.5.3 for more information about four-way conferences.

  12. TE/GE Fraud Suspense Coordinator: monitor the statute while it is in suspense. This includes:

    1. Preparing Form 10498-A, Joint Investigations Intent to Commence Civil Actions, or Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute, as necessary.

    2. Securing the Director, ITG/TEB, and CI’s consent to rely on applicable alpha statutes (i.e., NN, OO, CC

    3. Preparing and processing any required Forms 3999, Statute Expiration Report.

    4. Keeping the TE/GE Fraud Specialist apprised of changes to the case while it is in fraud suspense.

  13. Once CI has concluded its investigation (prosecution, plea or discontinuance) it issues Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only). TE/GE Fraud Suspense Coordinator: when you receive Form 13308 (and not before), prepare the case to return to a group for civil settlement and closure.

    Note:

    For civil settlement, the case must be returned to a group whose employees were not on any Rule 6(e) list.

  14. Fraud Suspense Coordinator: determine what statutes exist when you receive Form 13308, Criminal Investigation Closing Report (Tax and Tax Related Only) and address any statute concerns before you return the case to the field or Appeals.

  15. Group: upon receipt, the group assigned the civil settlement of the case is also be responsible for the civil statutes. TE/GE Fraud Suspense Coordinator: update the case out of Status Code 36 and update the organization code.

Collection Issues

  1. ITG/TEB's role in the collection process involves education, outreach, assistance, facilitation and coordination. ITG/TEB employees help tribes:

    1. Understand pertinent collection policies and procedures.

    2. Streamline resolution of collection matters by coordinating with other IRS employees and serving as a liaison with the tribe.

  2. Make every effort to prevent collection problems through education and outreach. When collection problems occur, make an effort to resolve the issue at the earliest possible stage.

  3. ITG/TEB interacts with revenue officers (ROs) in the Collection Division. The ITG/TEB office is the primary IRS point of contact for all interactions with federally recognized Indian tribes. Indian tribal governments are treated as states for certain purposes, so a unique relationship exists between Indian tribal governments and the United States. Collection assignments on tribal entities can be complex and sensitive in nature because of tribal protocols and sovereign nation considerations. For these reasons, ROs are required to contact an ITG/TEB specialist:

    • Before making initial contact on any Indian tribal government/enterprise account(s)

    • Before making a field visit

    • With technical questions while working the case

    • Before issuing a summons, including trust fund recovery penalty (TFRP) summons

    • Before taking enforcement action

  4. E-mail the ITG/TEB group manager who will assign a specialist to help the RO. Find a list of group managers and specialists at: How to Contact ITG.

    1. The specialist has historical knowledge of tribal dynamics and is familiar with tax compliance issues common to tribal governments and related business entities.

    2. Tribal officers may not be familiar with the IRS notice process or collection procedures and may ignore correspondence with specific due dates.

    3. The specialist is familiar with the tribal protocols, leadership structure, sensitive issues and specific filing requirements to facilitate the collection process.

  5. Specialists:

    • Provide educational outreach services to tribal governments and business affiliations.

    • Develop tip agreements to encourage voluntary compliance by employers and employees relating to tip income.

    • Help the tribe with account issues, IRS notices, penalty issues and filing requirements.

    • Serve as a liaison between IRS Collection and the Tribal leaders and have established relationships with the Tribes.

    • Exchange tribal and collection account information with IRS Collection.

  6. Specialists do not work the collection case. However, they:

    • Share information with the RO, such as tribal contacts and issues that may aid case resolution.

    • Help with communication between the revenue office and the tribe.

    • In most cases, contact the tribe and explain the outstanding issues.

  7. Examples of collection issues and procedures in which ITG/TEB employees can provide information and assistance are:

    • Federal Tax Return Filing

    • Federal Tax Deposits

    • Information Reporting

    • Interest and Penalties

    • Abatements and Adjustments

    • Offers in Compromise Doubt as to Liability (DATL)

    • Trust Fund Recovery Penalties (TFRP)

    • Installment Agreements

    • Notice of Levy

    • Notice of Federal Tax Lien (NFTL)

    • Other Collection Procedures

Penalty Abatement

  1. IRM 20.1, Penalty Handbook, provides detailed criteria, guidelines and procedures for both assessing and abating penalties.

Relief from Penalties
  1. IRM 20.1.1.3, Criteria for Relief from Penalties, discusses four general categories of penalty relief:

    • Reasonable cause

    • Statutory exceptions

    • Administrative waivers, and

    • Correction of IRS errors

  2. Other criteria for relief from penalties are also discussed, such as undue hardship, advice from a tax advisor, fire, casualty, and natural disaster.

  3. Reasonable cause is generally granted when the taxpayer exercises ordinary business care and prudence in determining his or her tax obligations.

  4. Reasonable cause, as well as other relief provisions, must be administered in a consistent manner.

  5. Specialists should consider the definitions of "ordinary" and "prudence" for the specific tribal taxpayer. Judge each case individually based on its facts and circumstances.

  6. See IRM 20.1.1.3, Criteria for Relief from Penalties for a further discussion of reasonable cause and reviewing information to determine if the taxpayer exercised ordinary business care and prudence.

Requesting Penalty Relief and Processing
  1. You might receive a request for penalty relief in these ways:

    • An outreach visit

    • A compliance review

    • During or after an examination

    • With the filing of a return

    • By telephone inquiry from an Indian tribal entity

    • By e-mail

  2. When you receive a phone inquiry, advise the taxpayer that they may receive a written relief request, subject to a determination by the appropriate IRS employee.

  3. Evaluate each request on its own merit. The method to review the request and examples of when relief may and may not be appropriate are discussed in IRM 20.1.1.3.5, Requesting Penalty Relief.

  4. See IRM 5.1.15.16, Penalty and Interest Abatements, for Form 3870, Request for Adjustment, for processing penalty abatements. The group manager must approve penalty abatements/adjustments.

  5. Refer to the ITG Specialist Adjustment Desk Guide Form 3870 at Form 3870 Adjustments Guide ITG Specialists.

  6. See IRM 20.1.1.4, Methods of Appealing Penalties, for ways to appeal penalties.

Interest Abatement and Adjustments

  1. Find procedures for abatement of interest in IRM 20.2.7, Abatement and Suspension of Debit Interest. Reasonable cause is not a basis for abating interest. Interest-free adjustments are discussed under Employment Taxes in this manual. See IRM 4.88.1.7.1, Employment Tax Reporting, Deposit Requirements and Related Issues, IRM 4.23.8.3, Interest-Free Adjustments - In General.

Criteria for Relief
  1. IRC 6404(a) allows abatement of interest that is:

    • Excessive in amount

    • Assessed after the statutory period of limitations has expired, or

    • Erroneously or illegally assessed

  2. IRC 7508A provides for interest abatement in Presidentially declared disaster areas.

  3. IRC 6404(e)(2) provides for interest abatement on any erroneous refund under IRC 6602, with certain qualifications.

Delegation and Interest Calculation
  1. Delegation authority varies depending on code section and dollar amount of the request. See IRM 20.2.7.4.2, IRC 6404(e)(1) Delegation of Authority. It addresses actions to take, referencing when the interest abatement issue is raised by the taxpayer and under what function (for example compliance, appeals, criminal investigation, etc.).

  2. Interest computation, transaction codes, blocking series, and periods to include in calculations are discussed in IRM 20.2.7.122.1, IRC 6404(e)(1) Interest Calculation.

Advising Taxpayer and Processing
  1. Provisions for advising the taxpayer of the abatement determination are included in IRM 20.2.7.1, Abatement and Suspension of Debit Interest Overview.

  2. Procedures for processing requests are discussed in IRM 20.2.7.12, Request for Interest Abatement, IRM 20.2.7.12.1, Closing Other Interest Abatement Requests, and IRM 20.2.7.12.2, Closing IRC 6404(e)(1) Interest Abatement Requests.

  3. Form 3870, Request for Abatement and other forms for processing abatements are explained in IRM 5.1.15.3, Types of Reconsiderations-Audit, Automated Underreporter (IMF/BMF-AUR), Substitute for Return (SFR) and Automated Substitute for Return (ASFR), and IRM 4.23.13, Employment Tax, Adjusted Returns, Abatement and Claims.

Appeal Rights and Dispute Process
  1. Appeals rights are discussed in IRM 20.2.7.13, Appeal Rights.

  2. Disputes on the amount of interest, based on interpretation of law or as to the method used to compute, must be resolved at the immediate supervisory level. See IRM 20.2.7.14, Disputes as to Interest Amount.

Processing Adjustments
  1. The group manager must approve Form 3870, Request for Abatement, adjustments.

  2. The group manager sends approved adjustment documents to post the adjustments to IDRS.

  3. Specialist: Keep a copy of the Form 3870 and all supporting documentation to monitor the final and complete posting of the transaction. When you verify the transaction is completed (final not pending), shred the copies.

Offers-in-Compromise

  1. Sometimes IRS can’t collect an account receivable in full or there’s a dispute on what is owed. The authority to compromise tax is found in IRC 7122 and Regulation section 301.7122-1.

  2. Offers-in-Compromise (Offers) can be based on:

    • Doubt as to collectibility

    • Doubt as to liability

    • Effective tax administration (additional Basis for Compromise)

    • Hardship considerations

      Note:

      See IRM 5.8.11, Effective Tax Administration.

    Note:

    IRM 5.8, Offer in Compromise, has procedures for IRS employees to follow when working Offers. IRM 5.8 also covers the objectives of the Offers program, considerations in compromising Substitute for Return assessments, and the offer submission process.

  3. Policy Statement P-5-100 presents the IRS’s position on using offers. In short, the IRS accepts an offer when it’s unlikely we’ll collect the liability in full and the amount offered reasonably reflects collection potential. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government. See IRM 5.8.1.1.3, Responsibilities.

Coordination with SB/SE
  1. SB/SE Collection is responsible for:

    • Offers based on doubt as to collectibility

    • Offers to compromise Trust Fund Recovery Penalty

    • Offers on personal liability for excise tax, and

    • Offers based on effective tax administration unless the original assessment determination was made by Appeals.

  2. SB/SE Collection is first assigned offers based on both doubt as to liability and doubt as to collectibility for a collectibility determination.

  3. SB/SE Examination is responsible for offers based solely on doubt as to liability, except the liabilities described above. See IRM 5.8.1, Offer in Compromise - Overview.

  4. Examples of doubt as to liability offers that may be assigned to specialists include:

    • FICA

    • FUTA

    • Federal Income Tax Withholding (FITW)

    • Excise Tax pertaining to Gaming

    • Civil Penalties

Trust Fund Recovery Penalty

  1. The trust fund recovery penalty (TFRP) is a penalty per IRC 6672 against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities, or willfully attempts to evade or defeat any such tax or its payment. The TFRP is used to:

    • Facilitate the collection of tax and enhance voluntary compliance.

    • Serve as another way IRS can collect unpaid trust fund taxes when taxes aren’t fully collectible from the tribe/business entities that failed to pay the taxes.

  2. The penalty equals the total amount of tax evaded, not collected, or not accounted for and paid.

    Note:

    This penalty is separate and distinct from the employer’s liability to pay the taxes.

  3. IRC 6672, TFRP applies to individuals or entities (representatives of a business with authority and responsibility) that did not pay any of these taxes to the government:

    • Withheld income taxes

    • Withheld Social security and Medicare

    • Railroad retirement taxes

    • Collected excise taxes

  4. The TFRP may be assessed against anyone who is both:

    • Responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes.

    • Willfully fails or neglects to collect or pay them.

  5. The responsible person may be one or more of, but not limited to, the following:

    • Officer or an employee of a corporation

    • Tribal leader or an employee of a tribal business

    • Tribal council member

    • Partner or employee of a partnership

    • Corporate director or shareholder

    • Payroll Service Provider (PSP) or responsible parties within a PSP

    • Member of a board of trustees of a nonprofit organization

    • Other person(s) with authority and control over funds to direct their disbursement, or

    • Another corporation

  6. Though TFRP may be assessed against several individuals, the total liability is collected (ultimately retained) only once from any of these:

    • The business

    • One or more responsible individuals

    • The business and one or more responsible individuals.

  7. TFRP assessments may be based on liabilities for the following tax forms with related Master file tax (MFT) codes:

    • Form 941, Employer's QUARTERLY Federal Tax Return (MFT 01, 17*)

    • Form 720, Quarterly Federal Excise Tax Return (see IRM 5.7.3.1.2, TFRP For Collected Excise Taxes) (MFT 03, 45*)

    • Form CT-1, Employer's Annual Railroad Retirement and Unemployment Return (MFT 09, 71*)

    • Form 943, Employer's Annual Federal Tax Return for Agricultural Employees (MFT 11, 19*)

    • Form 944, Employer's ANNUAL Federal Tax Return (MFT 14, 39*)

    • Form 945, Annual Return of Withheld Federal Income Tax (MFT 16)

    • Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (MFT 12)

    • Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests (MFT 17)

    • Form 8804, Annual Return for Partnership Withholding Tax (Section 1446) (MFT 08)

      Note:

      * Indicates Non-Masterfile (NMF)

      Note:

      The TFRP is limited to that portion of the liability from these returns that is "collected" and held in trust for the benefit of the U.S. Government.

  8. The IRS’s policy on assertion of the trust fund recovery penalty is in Policy Statement 5-14 (formerly P-5-60), Trust Fund Recovery Penalty Assessments. See IRM 1.2.14.1.3, Policy Statements for the Collecting Process Activities, Policy Statement 5-14 (Formerly P-5-60).

  9. The statutory period for assessment of a Trust Fund Recovery Penalty, for any taxable period within a calendar year, is three years from the succeeding April 15 or from the date the return was filed, whichever is later. The statutory period for assessment for any unpaid trust fund tax arising from an adjustment made to a taxpayer filed return remains the original statute date based on the filed return.

  10. IRC 6672 doesn’t prohibit the assertion of the Trust Fund Recovery Penalty against responsible persons where the addition to the tax for fraud is asserted against the employer.

    1. Section 6672 only bars the assertion of the fraud and accuracy-related penalties against a responsible person liable for the Trust Fund Recovery Penalty.

    2. The fraud and accuracy-related penalties apply to any underpayment of tax and can be asserted against the employer based on the acts of its officers (including fraud, negligence or disregard of rules or regulations).

  11. IRM 5.7, Trust Fund Compliance, contains several sections on the Trust Fund Recovery Penalty (TFRP). The TFRP is based on IRC 6672.

  12. Employment tax examinations in which full rates are used will necessitate a TFRP determination, with consideration to the dollar criterion. See IRM 5.7.3.4, Consideration for Employment Tax Examination (ETE) Assessment.

  13. Also, a tribal entity may submit a claim for consideration of an abatement of a TFRP assessment. "Responsibility" and "willfulness" (defined below) are the key elements that need to be established in order to assess and sustain the TFRP.

  14. As discussed below, the extent of SB/SE involvement in the TFRP process is determined on a case-by-case basis.

Responsibility and Willfulness
  1. For factors to consider in determining who is a responsible person and definitions of willful and willfulness, see IRM 5.7.3, Trust Fund Compliance Establishing Responsibility and Willfulness for the Trust Fund Recovery Penalty (TFRP).

    1. IRM 5.7.4, Investigation and Recommendation of the TFRP, discusses the investigations of all potential responsible persons and includes securing Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.

    2. Computing the statutory assessment period and extending the statutory assessment date are covered in IRM 5.7.3.5, Statutory Assessment Period, and IRM 5.7.3.6, Extension of Statutory Assessment Period.

  2. Consider factors in determining whether a person is "responsible."

    1. These factors involve whether a person has the status, duty and authority to ensure that the trust fund taxes are paid.

    2. Responsibility is a matter of status, duty and authority.

    3. A determination of responsibility depends on each case’s facts and circumstances.

    4. A responsible person has the duty to perform and the power to direct the act of collecting trust funds, and accountability and authority to pay trust funds.

  3. The definitions of "willful" and "willfulness" are:

    1. Willful -- Intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. No evil intent or bad motive is required.

    2. Willfulness -- To show willfulness, the government generally must demonstrate that a responsible person was aware or should’ve been aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. Determine willfulness for each issue raised in the examination.

      Example:

      Willfulness exists where a responsible person makes a deliberate choice to use trust fund taxes to pay other creditors instead of the United States.

Trust Fund Recovery Penalty Procedures
  1. For all cases in which there’s an indication that the trust fund recovery penalty applies:

    1. Make the referral for the TFRP assessment.

    2. Protect the statute for the penalty assessment.

    3. Send requests for determinations for assertion or non-assertion of the TFRP to the Collection Advisory group in the geographic area in which taxpayer is located.

    4. See Pub 4235, Collection Advisory Group Addresses, for location of Collection Advisory groups. The group will have a RO investigate to make the determination per IRM 5.7.3.4.1, Referral from Examination.

    Note:

    Employment tax examinations in which full rates are used will necessitate a TFRP determination. See IRM 5.7.3.4, Consideration for Employment Tax Examination (ETE) Assessments.

  2. ITG/TEB helps the RO to make a determination (use appropriate initial information and facts to help make a decision). See IRM 5.7.6, Trust Fund Penalty Assessment Action, and IRM 5.7.4.3, Calculating the TFRP.

  3. Complete Form 6238, Referral Report for Potential 100 Percent Penalty Cases, according to the instructions in IRM 4.23.9.14.2, Instructions for Completing Form 6238, Referral Report for Potential Trust Fund Recovery Penalty Cases. Send the original Form 6238 and one copy to Collection Advisory through your group manager. See IRM 20.1.10.7, IRC 6672 Failure to Collect and Pay Over Tax or Attempt to Evade or Defeat Tax.

  4. Include appropriate remarks in your workpapers and a copy of the completed Form 6238 in the case file for all cases that have an indication that the trust fund recovery penalty applies.

  5. If possible, secure Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty, from every responsible party for all tax periods when the TFRP assessment statute will expire within two years for unagreed cases; one year for agreed cases. See IRM 4.23.14.7, Form 2750, Waiver Extending Statutory Period for Assessment of the Trust Fund Recovery Penalty, for procedures for Form 2750. See IRM 25.6.22.6.10.3, Trust Fund Recovery Penalty (formerly referred to as 100 percent Penalty) for information about extending the period of limitations to assess.

  6. If you don’t prepare Form 6238, comment in the workpapers that you considered a referral to Collection Advisory but didn’t make one and include the reason(s) you didn't make one.

Considering Installment Agreements, Collectibility and Alternatives
  1. The specialist, with a RO, can secure an installment agreement on an in-business trust fund case. See these IRMs for considering and processing installment agreements:

    • IRM 5.7.7, Payment Application and Refund Claims

    • IRM 5.14.7.4, In-Business Trust Fund Installment Agreements Requiring Financial Analysis and Determining Ability to Pay

    • IRM 5.14.7.5, Payments on Trust Fund Accounts During Approved In-Business Trust Fund Installment Agreements

  2. Complete a collectibility determination for each potentially responsible person determined to be both responsible and willful. Collectibility determinations are an assertion factor, particularly for members of impoverished tribes. See IRM 5.7.5, Collectibility Determination.

  3. Alternatives to the TFRP, such as transferee assessments, suits, and payments on behalf of the corporation are discussed in IRM 5.7.4.2.2, Additional Actions to Consider.

Coordination with SB/SE Collection
  1. If you determine, with your manager, that a TFRP may apply, refer the issue to a revenue officer (RO) for resolution.

  2. ITG/TEB helps the RO to make a determination (appropriate initial information and facts to help make a decision). See IRM 5.7.6, Trust Fund Penalty Assessment Action, and IRM 5.7.4.3, Calculating the TFRP.

Other Compliance Procedures
  1. Collection should contact ITG/TEB when considering certain procedures (for example NFTL, notice of levy, summons, seizures and sale, etc.), and discuss the circumstances with a specialist and/or manager. The manager determines when to involve the Director, ITG/TEB.

  2. Tribes may contact ITG/TEB employees about using the procedures referenced above. ITG/TEB employees may discuss the situation with the tribe, SB/SE Collection and/or Submission Processing Campus.

  3. In certain unusual and/or exigent circumstances, see IRM 5.10, 5.11, Property Offered for Sale by More Than One Method, and IRM 5.12, Federal Tax Liens. You may need to use the above referenced procedures. If so, consult with your group manager and ask an RO to help.

Account Resolution

  1. Tribes, tribal enterprises, or tribal members may ask for help to resolve SB/SE Collection, Submission Processing Campus or other matters. ITG/TEB employees may contact Collection, Submission Processing Campus and other IRS employees to determine the status of a situation as appropriate and serve as a liaison in the resolution process. See IRM 4.88.1.15.2, Interest Abatement and Adjustments, for criteria and procedures relating to penalties and interest. See IRM 4.88.1.7.6, Abatement Procedures, for a discussion of processing IRC 3402(d) adjustments.

Submission Processing Campus

  1. Sometimes, you may need to coordinate with the Submission Processing Campus. For example:

    • Penalty and interest abatements

    • Adjustments

    • Enforced collection

    • Payment and credit transfers

  2. Entity Issues:

    1. Changes - IRM 4.4.11 covers entity changes that can be done using the Form 2363, Master File Entity Change. These include, but are not limited to: name, address, and marital status changes. See IRM Exhibit 4.4.11-1 to complete Form 2363.

    2. Unpostables - Chapter 8 of ADP and IDRS Information, Document 6209 explains unpostable codes. If a Submission Processing Campus employee controls the account on IDRS, ask them to help you.

    3. Establishment - When ITG/TEB employees have a customer who needs to establish an entity with the IRS by securing an Employer Identification Number (EIN), the customer uses Form SS-4, Application for Employer Identification Number. You can call the Submission Processing Campus to initially secure the EIN, then follow up by mailing or faxing the SS-4. The SS-4 instructions provide specific information on the application process and include direct contact information for the applicable Entity Control Unit.

Payment Tracers and Credit Transfers

  1. IRM 5.4.10.3, Payment Tracers, is the process we use to locate a missing or misapplied payment that a taxpayer made. This IRM Section gives procedures to locate missing payments and decide who works payment tracer cases that need various levels of research.

  2. While ITG/TEB employees may research misapplied payments and/or prepare/process Form 4159, Payment Tracer Request, if the case is assigned to a RO, then you must coordinate with them. If not assigned to an RO, you may need SB/SE Collection’s help to research IDRS and prepare Form 4159.

  3. You may need to coordinate with and call the Submission Processing Campus (SPC) if the SPC controls the account on IDRS. Contact the SPC before you process Form 4159. Doing so will allow you to determine the assigned SPC employee, who with you can directly communicate.

  4. IRM 21.5.8 has procedures for transferring credits once payment tracer research has located any missing payments/credits.

  5. The mailing address for the SPC location that processes ITG/TEB account adjustments, payment tracers and credit transfers is:

    Internal Revenue Service
    1973 N. Rulon White Blvd.
    Mail Stop 6552
    Ogden, UT 84404-7843

Taxpayer Advocate Service and Form 911

  1. The IRS Taxpayer Advocate program is designed to alleviate taxpayer hardships that arise from systemic problems or the application of the Internal Revenue Code. Additional resources for Taxpayer Advocate Service:

    1. IRM 13.1, Taxpayer Advocate Case Procedures.

    2. Pub 1546, Taxpayer Advocate Service—We are Here to Help.

  2. If during a customer contact, you can’t resolve the issue and one of the situations below applies, prepare or help the taxpayer prepare Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order):

    • A hardship situation per IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria.

    • The customer insists on being referred to the Taxpayer Advocate Service (TAS).

    • The contact meets TAS criteria in IRM 13.1.7.

  3. Confirm the Local Taxpayer Advocate's office receives the Form 911 timely and monitor the status with TAS until the issue is resolved.

  4. Refer to the Service Level Agreement between the National Taxpayer Advocate and the Commissioner, Tax Exempt and Government Entities for procedures.

Gaming Withholding and Reporting Thresholds — Forms Needed

GAME FORM 1099 Required FORM W-2G Proceeds Not Reduced by Wager FORM W-2G Proceeds Reduced by Wager FORM W-2G Withholding Required
See Note 1
FORM 1042-S Foreign Payouts Verifiable Payments
See Note 2
Slot win
(slot tournaments with entry fee)
  $ 1,200     Yes
Bingo win
(Bingo tournaments with entry fee)
  $ 1,200     Yes
Keno win
(IRC 4421(2)(A) applicable)
See Note (3) and (5).
    $ 1,500   Yes
Keno win
(IRC 4421(2)(A) not applicable)
See Note (4) and (5).
    $ 1,500   Yes
Sweepstakes, lotteries, wagering pools
Proceeds > 300 times amount wagered.
    $ 600   Yes
Sweepstakes, lotteries, wagering pools.
Withholding required regardless of payout ratio.
     
$5,000
Yes

Wagering transactions with proceeds > 300 times the amount wagered.
    $ 600
$5,000
Yes
Tournament
no entry fee
$ 600       Yes
Tournament
with entry fee
See Note (6) and (7).
         
Pari-mutuel, including horse racing, dog racing and Jai Alai
With proceeds > 300 times amount wagered.
    $ 600
$5,000
Yes
Prizes received with no wager (Drawings, Promotions, Bad Beat Poker win, etc.) $ 600       Yes
Sports event or contest
(Only reportable if proceeds exceed 300 times the wager.)
    $ 600
$5,000
Yes
Pull-tabs     $ 600
$5,000
Yes
Note:
1. Winnings proceeds must exceed $5,000 after reduction of the amount wagered.
2. Payments made to non-resident aliens are subject to withholding and reporting on Form 1042-S (Proceeds from traditional blackjack, craps, roulette, baccarat, or big wheel 6 are exempt from withholding and reporting.)
3. Wagers placed, winners determined, and disbursement of prizes made in the presence of all participants.
4. Odds greater than 300 to 1 and either advance wagers or winner not required to be present results in excise tax.
5. Multi-race and Multi-way Keno games must be aggregated and reported as a single transaction as indicated above.
6. See Rev. Proc. 2007-57 for poker tournament filing and withholding requirements.
7. For tournaments other than poker tournaments, entry fees must be analyzed to see if the entry fee is a wager, and if the proceeds exceed the wager by 300 times or more, or if the tournament is a wagering pool.


Treas. Reg. 1.6041-10 26 CFR 1.6041-10 provides that Form W-2G must be issued for slot machine and bingo wins of $1,200 or greater, and for keno wins of $1,500 or greater. For keno, the winnings from one game must be reduced by the amount wagered in one game.

General Guidelines - When to Withhold and Report Gaming Wins

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General Welfare Exception Summary of Authority

Caution:

The following rulings and memoranda, except for Notice 2015-34 below, were issued prior to the enactment of the Tribal General Welfare Exclusion Act of 2014. These ruling and memoranda should be interpreted in light of that Act and caution should be applied. If uncertain, consult with your manager. Any general welfare-related questions received from tribes should be forwarded to your manager.

Citation Guidance
Rev. Rul. 57-1, 1957-1 C.B. 15 Strike benefits paid by union to needy striking employees not excludable from income.
Rev. Rul. 57-102, 1957-1 C.B. 26 General welfare exception applies to state's payments to blind persons.
Rev. Rul. 63-136, 1963-2 C.B. 19 Benefits paid to persons undergoing training excluded under general welfare exception where no services required.
Rev. Rul. 65-139, 1965-1 C.B. 31, clarified by Rev. Rul. 66-240, 1966-2 C.B. 19 Where state hires unemployed persons to perform socially beneficial work and pays reasonable compensation for work performed, employment relationship arises, and payments are not general welfare payments.
Rev. Rul. 66-240, 1966-2 C.B. 19 Basis for conclusion in Rev. Rul. 65-139 is that enrollees receive wages for services performed, even though services may embody some training.
Rev. Rul. 66-285, 1966-2 C.B. 455 Amounts paid to students under college work- study program are wages for services performed, not excludable under general welfare exception.
Rev. Rul. 67-144, 1967-1 C.B. 12, modified by Rev. Rul. 71-425, 1971-2 C.B. 76 Bifurcating amounts paid to needy persons into noncompensatory general welfare payments -- amounts in excess of that directly attributable to services performed -- and compensation for services performed. See Rev. Rul. 71-425 for modification.
Rev. Rul. 68-38, 1968-1 C.B. 446 Payments to participants in tribal program to train enrollees in construction skills to enhance employability are excludable under general welfare doctrine; main purpose is training.
Rev. Rul. 68-133, 1968-1 C.B. 136 Payments to "job service corpsmen" to aid in their efforts to acquire new job skills are general welfare payments; training.
Rev. Rul. 70-217, 1970-1 C.B. 13, superseding I.T. 3447, 1941-1 C.B. 191 Social security benefits excludable under general welfare exception.
Rev. Rul. 71-425, 1971-2 C.B. 76, modifying Rev. Rul. 67-144 Holding that on facts, payments to needy persons to participate in work experience programs to help them develop work habits to enhance employability are all excluded under general welfare exception. Note: concludes exclusion appropriate when payments are made in lieu of and not in excess of subsistence payments; if in excess of that amount, all payments are taxable except to extent the amount received exceeds the fair market value of the services performed under the program.
Rev. Rul. 72-340, 1972-2 C.B. 31 Stipend paid to encourage probationers to participate in job counseling/training/work experience program are general welfare payments; training.
Rev. Rul. 73-87, 1973-1 C.B. 39 Payments to needy families are excludable as general welfare payments where no services were required to be performed; university experiment encouraging work.
Rev. Rul. 74-74, 1974-1 C.B. 18 Payments by state to crime victims based on need are not income under general welfare exception.
Rev. Rul. 74-153, 1974-1 C.B. 20 State payments to needy adoptive parents to assist in raising adopted children are excludable under general welfare exception.
Rev. Rul. 74-205, 1974-2 C.B. 20 Payments to needy families whose homes have been taken by government action are excludable as general welfare payments where payments are designed to assist needy families in acquiring a decent home and suitable living conditions.
Rev. Rul. 74-413, 1974-2 C.B. 333 Wages paid by state to short-term employees hired to assist in disaster clean-up are not excludible under general welfare exception despite needy status of hires.
Rev. Rul. 75-32, 1975-1 C.B. 14 Amounts paid by USDOT for retraining discharged air traffic controllers is compensation to controllers because paid by USDOT in its capacity as employer with respect to past services.
Rev. Rul. 75-246, 1975-1 C.B. 24 Scenarios distinguish between amounts paid in connection with training -- excludable under general welfare exception -- and amounts paid in connection with services -- compensation.
Rev. Rul. 75-271, 1975-2 C.B. 23 Interest subsidies paid by HUD on behalf of needy families not income under general welfare exception.
Rev. Rul. 76-75, 1976-1 C.B. 14 Interest subsidy payments made by HUD on behalf of owners of low-income housing projects are income to project owners.
Rev. Rul. 76-131, 1976-1 C.B. 16 Bonuses paid by state to long-time residents not excludable as general welfare because not need based.
Rev. Rul. 76-144, 1976-1 C.B. 17 Disaster grants by states to needy individuals to pay for essential needs not income under general welfare doctrine.
Rev. Rul. 76-230, 1976-1 C.B. 19 Amounts paid by IRS under IRS Scholarship program not excludable under general welfare exception because relates to performance of services.
Rev. Rul. 76-373, 1976-2 C.B. 16 Relocation costs paid to families displaced by urban renewal project excluded under general welfare exception.
Rev. Rul. 76-395, 1976-2 C.B. 16 Home rehabilitation grants to needy families to correct substandard conditions are excludable as general welfare payments.
Rev. Rul. 77-77, 1977-1 C.B. 11 Payments to Indians to expand profit-making enterprises on or near reservations excludable under general welfare exception.
Rev. Rul. 78-46, 1978-1 C.B. 22 Forgiving repayment of interim survivor's benefit, paid by a governmental unit later found to be improperly paid not income under general welfare doctrine if forgiveness of the repayment is due to a showing of economic hardship.
Rev. Rul. 78-170, 1978-1 C.B. 24 Utility subsidy grants paid by state on behalf of needy residents not income under general welfare exception.
Rev. Rul. 82-106, 1982-1 C.B. 16 Relocation assistance payments made by landlord to evicted tenants, in accordance with local ordinance requiring flat payment, not excludable under general welfare exception.
Rev. Rul. 85-39, 1985-1 C.B. 21 Payments made by state of Alaska to residents regardless of need are not excluded from income under general welfare exception.
Rev. Rul. 98-19, 1998-1 C.B. 840 Payments made by city to residents moving from a flood-damaged residence to another residence are excluded from income under general welfare exception.
Rev. Rul. 99-44, 1999-2 C.B. 549 Interest earned by an Individual Development Account (IDA) project participant on funds deposited in a participant's personal account is includible in the participant's gross income; however, a participant may exclude parallel funds paid by a charity for a qualified expense as a gift under 102.
Notice 99-3, 1999-1 C.B. 271 Federal Temporary Assistance for Needy Families (TANF) payments will be excluded from income under general welfare exception if:
(1) the only payments received by individuals with respect to a work activity are received directly from the state or local welfare agency;
(2) individual eligibility is based on need, and the only payments relating to a work activity are funded entirely under a TANF program; and
(3) the size of payments is determined by the applicable welfare law, and the number of hours allowed for work activity is limited by the size of the individual's payment divided by the higher of the federal or state minimum wage.
Notice 2002-76, 2002-2 C.B. 917 Payments by governmental unit to help individuals pay for reasonable and necessary personal, living, and family expenses they incur because of the continuing effects of a Presidentially declared disaster under IRC 1033 are excluded from income under the general welfare exclusion and IRC 139. Payments in excess of such amounts and made regardless of any other needs-based criterion must be included in income.
Rev. Rul. 2003-12, 2003-1 C.B. 285, modifying Rev. Rul 131, 1953-2 C.B. 112. Payments received by individuals to help pay for unreimbursed reasonable and necessary medical, temporary housing, and transportation expenses they incur because of a Presidentially declared disaster under IRC 1033 are excluded from income under (i) the general welfare exclusion and IRC 139 if received from a governmental unit, (ii) IRC 102 as a gift if received from a charity, or (iii) IRC 139 if received from an employer.
Notice 2003-18, 2003-1 C.B. 699 Payments by governmental unit to aid businesses affected by a disaster do not qualify under the general welfare exclusion because the exclusion generally is limited to individuals who receive governmental payments to help them with their individual needs (e.g., housing, education, and basic sustenance expenses). In addition, the payments do not qualify for exclusion from income under IRC 139.
Rev. Rul. 2005-46, 2005-2 C.B. 120 Payments by a governmental unit to reimburse real and other tangible property losses incurred by businesses because of a disaster are not excluded from gross income under general welfare or IRC 139.
Rev. Proc. 2014-35, 2014-26 IRB 1110 This revenue procedure describes principles of the general welfare exclusion and provides safe harbors under which the IRS will conclusively presume that the individual need requirement of the general welfare exclusion is met for benefits provided under Indian tribal governmental programs described in the revenue procedure, and programs described in section 5.02 of this revenue procedure. Also, the IRS will not assert that benefits provided under programs described in section 5.03 of this revenue procedure represent compensation for services.
Notice 2015-34 The enactment of the Tribal General Welfare Exclusion Act of 2014, Pub. L. No. 113-168, 128 Stat. 1883 (2014) and its codification of IRC 139E, has no effect on Rev. Proc. 2014-35, 2014-26 I.R.B. 1110. Therefore, taxpayers may continue to rely on Rev. Proc. 2014-35.
United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975) In non-tax case, Court states, "The low rent derives from the financial subsidies provided by the State of New York. This benefit cannot be liquidated into cash; nor does it result from the managerial efforts of others. In a real sense, it no more embodies the attributes of income or profits than do welfare benefits, food stamps, or other governmental subsidies."
Bannon v. Commissioner, 99 T.C. 59 (1992) State payments to incompetent's mother in her capacity as care-giver are taxable as income and may not be excluded under general welfare exception; compensation for services performed.
Bailey v. Commissioner, 88 T.C. 1293 (1987) Facade grant paid to building owner as part of urban renewal initiative was not need based and may not be excluded under general welfare exception.
Graff v. Commissioner, 74 T.C. 743 (1980), aff'd 673 F.2d 784 (5th Cir. 1982) HUD's payment of interest payments on behalf of low-income housing project owner are includible in owner's income; not excludable under general welfare exception.

Tax Audit Guidelines for Internal Revenue Examiners - Indian Fishing Rights -- IRC 7873

TAX AUDIT GUIDELINES FOR INTERNAL REVENUE EXAMINERS

Indian Fishing Rights-- IRC Section 7873

Section 3041 of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) added Internal Revenue Code section 7873, Income Derived by Indians from Exercise of Fishing Rights. This section exempts from federal taxation (i.e., income, employment, and self-employment) any income derived by a member of an Indian tribe or a qualified Indian entity from a fishing rights-related activity of that member's or entity's tribe. The fishing rights must be guaranteed to a tribe by a treaty, statute, or executive order secured as of March 17, 1988.

When a taxpayer reports the receipt of income as excludable from gross income under IRC Section 7873, the examiner should verify the following:

IF THEN
a) Excluding wages earned as an employee
  1. Proof of tribal membership verified by the tribe. This can be verified with a statement from the tribe and with the tribal membership enrollment card. This card includes the enrollment number, the signature of the authorizing official, as well as the official seal.

  2. A statement from the employer verifying that it is either an arm of the tribe or that it meets each of the requirements for qualified Indian entities per IRC 7873. These requirements are:

    1. It is engaged in treaty fishing rights-related activities of the employee's tribe.

    2. It is 100% owned by one or more qualified Indian tribes or members of such tribes (or their spouses). An Indian tribe is a qualified Indian tribe with respect to an entity if such entity is engaged in a fishing rights-related activity of such tribe.

    3. Substantially all of the management functions are performed by members of qualified Indian tribes.

    4. If its business is the processing or transporting of fish, at least 90% of its annual gross receipts is derived from the fishing rights-related activities of one or more qualified Indian tribes, each of which owns at least 10% of the entity. This document should also state that the employer maintains records to support these requirements.

    Note:

    The exclusion does not apply to any amounts received as an employee of a government agency such as the Department of Interior or Bureau of Indian Affairs.

  3. Verification of time allocated to fishing versus non-fishing activity. For example, consider a game warden who is responsible for protecting other wildlife and has other duties, as well as patrolling the treaty waters of his tribe. His employer should verify the percentage of time he engages in fishing rights-related activities of his tribe. The employer should also indicate that the employer is maintaining records to support the allocation.

  4. When a taxpayer meets the established criteria (i.e., proof of tribal membership, verification of employer qualified status, and verification of the allocation) and is entitled to the exclusion, the source of the employer's funding is not relevant.

b) Excluding income from self-employment
  1. Proof of tribal membership, verified by the tribe. For fisherman, a tribal fishing license is also necessary.

  2. Evidence that income is from treaty fishing rights-related activities of that individual's tribe. For fishermen, this could be copies of fishing logs or fish tickets or other documentation indicating that the activity was conducted in that tribe's protected waters. For transporters, copies of cargo logs/tickets would be acceptable, so long as such records clearly indicate that the transported fish were harvested in the exercise of a recognized fishing right of the tribe. For sellers, copies of purchase logs and receipts are needed, so long as such records clearly indicate that the sold fish were harvested to a substantial extent, by members of the seller's tribe.

  3. A corrected Schedule C, which includes the income and expenses attributable to non-treaty activities; in other words, activities related to fish harvested outside the treaty waters of that member's tribe. (Per IRC IRC 265, you cannot deduct expenses related to income you are excluding.)

Gaming Industry Tip Compliance Agreement (GITCA)

This Agreement is part of Rev. Proc. 2007-32. See it at Rev. Proc. 2007-32.