4.90.4 Information Return Examinations and Penalties

Manual Transmittal

May 03, 2017


(1) This transmits a revision of IRM Part 4.90.4, Federal State and Local Governments (FSLG), Information Return Examinations and Penalties.

Material Changes

(1) The following IRM sections were renumbered, deleted, moved to other IRM sections or modified with revised or additional content.

Previous IRM Section/Subsection Explanation Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified. Became IRM and content modified.

(2) A table of source codes was added to IRM (5).

(3) Incorporated Interim Guidance Memorandum (IGM) TE/GE-04-0316-0004 into IRM (7) and IRM (5).

(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 section supersedes IRM 4.90.4, dated December 06, 2013.


Tax Exempt Government Entities
Government Entities/Shared Services
Federal, State and Local Governments

Effective Date


Paul Marmolejo
Director, Federal State and Local Governments
Government Entities/Shared Services
Tax Exempt Government Entities

Program Scope and Objectives

  1. Purpose. This IRM section provides detailed information on:

    • Penalties

    • Information Return Examinations

    • Backup Withholding

  2. Audience. This IRM audience includes:

    • FSLG Specialists (Specialists)

    • Field Managers (Managers)

    • Compliance and Program Management (CPM) Staff

  3. Policy Owner. Small Business/Self Employed (SB/SE): Operations Support, Servicewide Operations: Servicewide Penalties is responsible for overseeing and providing guidance.

  4. Program Owner. FSLG is responsible for overseeing this program for FSLG entities.

  5. Contact Information. To recommend changes or make any other suggestions to this IRM section, contact the CPM office.


  1. SB/SE is the program owner for employment tax issues and penalties. When Tax Exempt and Government Entities (TE/GE) formed in 2000, FSLG assumed responsibility for handling employment tax issues and penalties for government entities.


  1. IRM 20.1, Penalty Handbook, is the primary source of guidance for the administration of penalties by the IRS. IRS functions may develop additional guidance or reference material for their specific functional administrative needs. However, such reference material must receive approval from the Office of Servicewide Penalties (OSP) prior to distribution and must remain consistent with the policies and general procedural requirements set forth in IRM, Policy Statement 20-1 (Formerly P-1-18), and any other guidance relating to IRS penalties. See also IRM, Organization of IRM 20.1, Penalty Handbook.

  2. See IRM, Policy Statement 20-2 (formerly P-2-4), for federal agency penalty provisions.

  3. See IRM 4.23.8, Employment Tax, Determining Employment Tax Liability, for additional guidance.


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

    1. Form 941, Employer’s Quarterly Federal Tax Return, employment tax audits.

    2. Form 945, Annual Return of Withheld Federal Income Tax, back-up withholding tax audits.

    3. Information Return Examinations.

  2. IRC 6751 requires written managerial approval for all penalties except those imposed by IRC 6651, failure to file tax return or to pay tax, or other penalties automatically calculated.


  1. The following acronyms are used in this IRM:

    Acronym Explanation
    CPM Compliance and Program Management
    FICA Federal Insurance Contributions Act
    FUTA Federal Unemployment Tax Act
    IRP Information Reporting Program
    RCCMS Reporting Compliance Case Management System
    WebETS Web-Based Employee Technical Time System
    RICS Return Integrity and Compliance Services
    TIN Taxpayer Identification Number
    IRC Internal Revenue Code

Compliance and Program Management (CPM) Classification Process

  1. A significant part of FSLG's compliance program is ensuring that government entities comply with wage and information return reporting requirements. This subsection gives information about this compliance program.

Wage Reporting Compliance

  1. The correct and timely reporting of employment taxes is the key to our voluntary compliance system as well as the cornerstone of the Social Security system. Studies show that the issuance of Forms W-2 greatly increases the likelihood that the income will be reported. Employment taxes include:

    • Income Tax Withholding

    • Social Security and Medicare taxes under FICA

    • Unemployment taxes under FUTA

Information Return Reporting Compliance

  1. IRS studies show:

    1. Widespread non-compliance by governmental entities that are required to file information returns.

    2. Issuing Forms 1099 greatly increases the likelihood that the income will be reported.

  2. When Forms 1099 are issued, they are included in the IRP matching process that verifies income was reported and identifies taxpayers that fail to file Form 1040. Information returns are an integral part of ensuring voluntary compliance.

Information Return Examinations

  1. CPM may assign Information Return Examinations that are limited in scope to a government entity's compliance with information return reporting and filing (e.g. Form W-2 , Form 1099, etc.). These audits may be expanded to include Form 941 and other tax returns with Manager’s approval.


    Information Return Examinations may be used when auditing a federal or state agency that files Forms 1099 but whose employee wages and employment taxes are reported by a different federal or state agency.

  2. CPM establishes Information Return Examinations on RCCMS using activity code 520 and Type - "Information Return Examination" .

  3. Use activity code 520 on WebETS for time spent on Information Return Examinations.

  4. Normal audit opening procedures apply to Information Return Examinations. See IRM 4.90.9, Procedures, Workpapers and Report Writing.

  5. If the audit is expanded to include Form 941 or Form 945, the Specialist establishes the activity on RCCMS for the appropriate periods and notifies the taxpayer. Use source codes listed below depending on the source code of the original compliance activity. See Document 11308, Information Systems Codes, for more information about source codes.

    Primary Case Source Code CPM Assigned Prior/Subsequent Year (Multi-Year Audit) Related Return
    (e.g., F945)
    92 - RICS General 94 - RICS Multi-Year 95 - RICS Related Pick-Up
    90 - RICS New Project 94 - RICS Multi-Year 95 - RICS Related Pick-Up
    60 - Information Report 40 - Multi-Year Audit 05 - Related Pick-Up
    72 - Informant's Report 40 - Multi-Year Audit 05 - Related Pick-Up
    74 - Media Lead 40 - Multi-Year Audit 05 - Related Pick-Up
    77 - State Agency 40 - Multi-Year Audit 05 - Related Pick-Up
    25 - Substitute for Return 40 - Multi-Year Audit
    If not filed, use 25
    05 - Related Pick-Up
    If not filed, use 25
  6. If the taxpayer failed to file Forms 1099 and/or W-2, secure and process the delinquent returns per IRM 4.90.9 and IRM, Delinquent Forms W-2/W-2c.

  7. If the taxpayer didn’t file and/or furnish required information returns, the Specialist will:

    1. Prepare a spreadsheet that contains a list of payees (named" 34.2204.1.BUW.F1099-MISC Payees" ) in the case file. Include:

      • Payee names.

      • TINs.

      • Amounts paid to them that should have been, but were not, reported.

    2. Address penalties under IRC 6721 and IRC 6722. See IRM

  8. Close the Information Return Examination using disposal code:

    1. 303 if a discrepancy report is issued.

    2. 801 if no discrepancy report is issued.

  9. When a taxpayer did not file and/or furnish required payee statements, penalties under IRC 6721 and IRC 6722 for failure to file and furnish payee statements must be addressed. See IRM

Backup Withholding

  1. IRC 3406 requires a payer to withhold income tax from reportable payments to recipients for any of these situations:

    1. The payee fails to furnish a TIN to the payer in the manner required.

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

    3. There has been a notified payee underreporting described in IRC 3406(c).

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

  2. Payments that may be subject to backup withholding include:

    • Interest

    • Dividends

    • Rents

    • Royalties

    • Commissions

    • Non-employee compensation

    • Direct sales

    • Broker proceeds

    • Barter exchange transactions

    • Reportable gross proceeds paid to attorneys

    • Payment card transactions

    • Certain payments made by fishing boat operators

    • Taxable grants and agriculture payments

  3. Payers must pay any backup withholding required to be deducted and withheld under IRC 3406. If a payer withheld the tax from a payee but didn’t pay it, the Trust Fund Recovery Penalty may apply.

  4. Federal agencies and instrumentalities of the federal government are not exempt from backup withholding requirements.

  5. When it's determined that the taxpayer did not have payees' TINs at the time of making reportable payments, and that required information returns were not filed and/or furnished by the taxpayer, the Specialist must:

    1. Include a spreadsheet in the case file containing a list (named "34.2204.1.BUW.F1099-MISC Payees" ) of:

      • Payee names.

      • TINs.

      • Amounts paid to them that should have been, but were not, reported.

      • Amounts for each payee that are eligible for IRC 3402(d) relief.

    2. Scan Form 4669, Statement of Payments Received, and Form 4670, Request for Relief of Certain Withholding Taxes, into RCCMS (named 34.2204.2.F4670-F4669) when secured from a taxpayer for IRC 3402(d).

  6. For additional guidance, see:

    • IRM, IRC 3406 - Backup Withholding

    • IRM, IRC 3402(d) - Relief for Employer When Employees Have Paid Income Tax on Wages.

Penalty Overview

  1. Abating or not asserting civil penalties based on reasonable cause or other relief provisions must:

    1. Be made in a consistent manner.

    2. Conform with the IRC, Treasury Regulations, and IRM 20.1, Penalty Handbook.

  2. Policy Statement 20-1 provides that the IRS administers a penalty system that is designed to:

    1. Enhance voluntary compliance.

    2. Promote consistency in the application of penalties compared to similar cases.

    3. Promote unbiased analysis of the facts in each case.

    4. Promote the proper application of the law to the facts of the case.

    5. Approve a reduction of otherwise applicable penalties or penalty waiver for a group or class of taxpayers as part of a Service-wide resolution strategy to encourage efficient and prompt resolution of cases of noncompliant taxpayers.

    6. Ensure that penalties are used for their proper purpose and not as bargaining points in developing or processing cases.

  3. Generally, relief from penalties falls into four separate categories:

    • Reasonable Cause

    • Statutory Exceptions

    • Administrative Waivers

    • Correction of Service error


    See IRM, Criteria for Relief From Penalties, for guidance.

  4. Policy Statement 20-2, located in IRM, provides that penalties and interest will not be assessed against Federal agencies or instrumentalities of the United States. If errors are found during these audits, the Specialist should:

    1. Focus on helping correct the errors.

    2. Promote future compliance.

    3. Consider asserting backup withholding tax when issues arise related to failure to file or furnish Forms 1099.

Assessment of Penalties

  1. FSLG will assert penalties only during audits. If delinquent returns are secured during other types of compliance activities, such as Customer Assistance or Compliance Checks, the Specialist may assist the taxpayer by explaining reasonable cause criteria.

  2. Reasonable cause must be considered when issues arise during the audit concerning the assertion of penalties. Reasonable cause is discussed in IRM, Reasonable Cause.

  3. The Specialist:

    1. Must document his or her position and should not proceed with asserting the penalty if taxpayer provides a valid reasonable cause argument.

    2. Should assert all applicable penalties if he or she determines reasonable cause does not exist.

    3. Should Focus on educating the taxpayer about the errors and to foster future compliance.

Information Return Penalties

  1. The Small Business Jobs Act of 2010 increased the amount of information return penalties for returns and statements required to be filed on or after January 1, 2011.

  2. The Tax Increase Prevention Act of 2014 provides for inflationary adjustments to the penalty rates and maximums for returns and statements required to be filed after December 31, 2014.

  3. For guidance:

    Refer To Provide For:
    IRC 6721 Penalties for failure to file correct information returns.
    IRC 6722 Penalties for failure to furnish correct payee statements.
    IRC 6723 A penalty of $50 for each failure, not to exceed $100,000, to comply with other specified information reporting requirements.
    IRC 6724 Waiver/definitions and special rules. This section provides that penalties will not be assessed if the taxpayer has reasonable cause for failure to comply.
    IRM, Penalties for Failure to File Certain Information Returns or Furnish Certain Statements Information on return penalties.
    IRM, Information Penalty Rates Information return penalty rates
    IRM, Penalties under IRC Sections 6721 and 6722 Information on extending statutes for information return penalties.
    IRM 20.1.7, Information Return Penalties Information on policies and procedures.
    IRM , Civil Penalties Statute of Limitations Information on extending statutes for information return penalties.
  4. Beginning with tax year 2016, if payees report amounts in box 7 of Form 1099-Misc then the statute for those returns will correspond to the due date of January 31 of the year following payments. For other Forms 1099-Misc, the statute remains February 28.

Trust Fund Recovery Penalty

  1. The purpose of IRC 6672 is to:

    1. Encourage the prompt payment of withheld and other collected taxes.

    2. Provide the Service with a secondary source of collection in the event that these taxes are not paid.


      The withheld taxes are commonly referred to as "trust fund taxes"


    3. When the trust fund taxes are not paid by the payee, the Trust Fund Recovery Penalty may be asserted against the responsible persons for willful failure to collect and pay over the taxes.

    4. The penalty is comprised of employee FICA and income taxes withheld by the payee but not deposited or remitted to the Treasury.

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

Preparer Penalties

  1. The Small Business and Work Opportunity Tax Act of 2007 amended IRC 6694 and IRC 6695 to include any tax return preparer.

  2. Preparer penalties became applicable to employment tax returns filed on or after May 25, 2007.

  3. For guidance, see:

    • IRM 4.23.17, Preparer Penalty Procedures for SB/SE Employment Tax

    • IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties

Promoter Penalties

  1. Promoter penalty sections include:

    • IRC 6700 Promoting Abusive Tax Shelters, Etc.

    • IRC 6701 Penalties for Aiding and Abetting Understatement of Tax Liability

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

Information Return Penalty Case (Civil Penalty Case)

  1. This subsection:

    1. Discusses information return penalties.

    2. Discusses the preparation of an information return penalty case, sometimes referred to as a civil penalty case.

    3. Applies when a Specialist determines that information return penalties are applicable.

Computation of Information Return Penalties

  1. To compute the information return penalties for IRC 6721, IRC 6722 or IRC 6723, multiply the number of violations for each code section by the applicable dollar amount.

Information Return Penalty Case Processing Procedures

  1. If it is determined that information return penalties should be assessed during an employment tax audit, the Specialist will:

    1. Obtain Manager’s approval to propose information return penalties.

    2. Once approved, establish a separate Information Return Penalty case file on RCCMS using:


      If the audit is an Information Return Examination, don’t create a separate penalty case but assert penalties in the existing case on RCCMS.

      • Activity code 520.

      • Type - “Information Return Penalties”

      • Source code based on the source code of the original compliance activity. See table IRM

    3. Close 100% electronically.

    4. Not control case on AIMS.

    5. Use activity code 520 on WebETS.

  2. The time spent on:

    1. Reviewing books and records to determine if the taxpayers are complying with information return reporting and filing requirements will be charged to the original compliance activity (employment tax or information return examination).

    2. Preparing the penalty case will be charged to the penalty case.

  3. An information return penalty case should include the following:

    • Form 3198-A, TE/GE Special Handling Notice

    • Form 3645, Computation of Information Return Penalty

    • Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties

    • Form 9984, Examining Officer’s Activity Record

    • Form 3244-A, Payment Posting Voucher - Examination, if payment received

    • Form 4318, Examination Workpapers Index

    • Form 886-A, Explanation of Items

    • Spreadsheet with a complete list of payees, TINs and amounts that went unreported for each period in question. See IRM (7) for specific information to be included in the spreadsheet.

    • Any other workpapers

  4. Case procedures:

    • Use the RCCMS Naming Convention for all case documents. See IRM Exhibit 4.90.12-3.

    • Do not provide Forms 3645 or 8278 to the taxpayer.

    • Do provide the penalty calculations on Form 886-A and the spreadsheet that contains a complete list of payees, TINs, and amounts that went unreported for each period in question.


    See IRM for guidance in the use of Forms 8278, 3645 and 886-A.

  5. The information return penalty case should be included in and closed concurrently with the employment tax or information return examination case. On RCCMS, the penalty case is closed using disposal code 802.

  6. Payments of information return penalties secured by the Specialist will be processed in the same way as other advanced payments. The original Form 3244-A with the payment should be forwarded via a separate Form 3210 for processing. A copy of Form 3244-A should be included in the RCCMS case file. Taxpayers have the option to pay penalties using EFTPS (Electronic Federal Tax Payment System). See IRM 4.90.9.

  7. The statute of limitations for information returns and information return penalties is three years from the date the returns were due or filed, whichever is later. There is no statute for penalties on information returns that were never filed. See IRM 4.23.14, Statute Control and Extension, and IRM, Civil Penalties Statute of Limitations, for statutes on information return penalties.