Purpose: The Internal Revenue Code Subtitle C, Employment Taxes and Collection of Income Tax, is the primary source for employees determining employment tax liability issues. This IRM section provides procedural guidance for Appeals Technical Employees (ATE), as defined in Exhibit 8.1.1-1, working these cases. Specifically, IRM 8.7.16 provides guidance on the following:

Audience: The primary users of this IRM section are Appeals Officers, Appeals Team Case Leaders, and Appeals Tax Computation Specialists.

Policy Owner: Director, Case and Operations Support

Program Owner: Director, Policy, Planning, Quality and Analysis

Contact Information: Appeals employees should follow established procedures on How to Contact an Analyst. Other employees should contact the Product Content Owner shown on the Product Catalog Information page for this IRM section.

Use of the Issue Management System (IMS) is mandatory for providing Compliance with feedback on Appeals’ employment tax liability case decisions by uploading the settlement determination documents (e.g. Form 5402, Appeals Case Memorandum, computations, agreements, etc.) on the IMS system. Appeals employees who work these cases will have "read" and "print" access through the IMS Team Website for cases in Appeals’ inventory. If the case is not in IMS, Appeals will follow the current Feedback Loop process. ACDS remains the Appeals system of record for case management and recording time spent on cases. Online 5081 is required to gain access to IMS.

Account and Processing Support Employee

Appeals Team Manager

Appeals Team Leader

Appeals Team Member

Visit Appeals’ Business Systems Planning (BSP) “Issue Management System Website” for additional information, including training modules on the IMS roles for the Appeals employees identified in paragraphs (2) through (5).

Follow the procedures detailed in IRM 8.2.1.4, Receipt of New Assignment by an Appeals Technical Employee (ATE), requiring statute verification within 45 days, initial contact procedures that identify the appropriate initial letter and enclosures, guidance on returning a case to Examination, and closing actions for a premature referral. Appeals will not accept a pre-assessed liability case if the number of days remaining on the ASED for a new receipt is less than 365 days. See IRM 8.21.3, Appeals Technical Employees Statute Responsibility, and IRM 8.7.16.3.1, Verifying the Statutory Period of Limitations. See IRM 8.6.1, Conference and Issue Resolution, that includes Appeals’ policies on new issues, new information, and new arguments raised by taxpayers.

Verify the case is carded-in on ACDS following the same procedures used when a regular income tax case is received except the ACDS TYPE = EMPL. See IRM 8.20.5, Account and Processing Support (APS), Carding New Receipts.

In addition to the examiner’s workpapers, tax returns, 30-day letter (i.e. Letter 950 series), taxpayer’s protest, examiner’s rebuttal (if applicable), look for the following:

Tax returns may be original, copies, or Substitutes for Returns (SFRs). Confirm that all IDRS account modules have been established (with Transaction Code 150 posted) for the liability periods under Appeals’ jurisdiction, including modules for alternative positions [e.g. Backup withholding Tax (MFT 16) as an alternative to "worker reclassification" ]. See IRM 4.23.10.16.3 , Alternative and Whipsaw Positions in Unagreed Cases, and IRM 4.23.12.4.3 , IRC 6020(b) Procedures for SFR Employment Tax Cases. For cases with return copies, review transcripts and verify the copies are accurate.

Confirm managerial approval of penalties, as required by IRC 6751(b), Approval of Assessment. See IRM 8.11.1.2.1, Supervisory Approval of Penalties Before Appeals Consideration.

Where there is a failure to comply with significant requirements of the IRM, see IRM 8.2.1.5, Returning a Case to Examination - ATE.

IRC 7436, Proceedings for Determination of Employment Status, allows the taxpayer to petition the United States Tax Court if in connection with an audit of the taxpayer there is an actual controversy involving the Service’s determination that as part of the examination

As reflected in IRM 4.23.5, Technical Guidelines for Employment Tax Issues, "IRC 7436 Issues" is an umbrella term that includes:

"Employment tax" under the statutory language includes the additions to tax, additional amounts, and penalties imposed under subchapter 68A of the Code (IRC 6651 through IRC 6665). The Tax Court has jurisdiction to determine the proper amount of the additions to tax, additional amounts, and penalties that relate to the employment tax imposed by subtitle C with respect to determinations of worker classification and section 530 treatment.

Appeals has the primary responsibility for resolving disputes without litigation to the maximum extent possible. For guidance on settlement options, see IRM 1.2.1.9.6, Policy Statement 8-47, and IRM 8.6.4, Reaching Settlement and Securing an Appeals Agreement Form. For guidance on preparing an ACM that adequately explains and supports the basis for settlement, see IRM 8.6.2, Appeals Case Memo Procedures.

IRM 4.23.5, Technical Guidelines for Employment Tax Issues, contains detailed information on employment tax liability issues, including the following:

This section provides information on documents needed for closing employment tax liability cases. An Appeals Case Memo (ACM) and Form 5402 are required for each work unit. Locate Form 5402 instructions by accessing the ACDS "Utilities" , selecting "Customized 5402 Instructions" ; and then select "Customized Form 5402-EMPL" for employment tax liability cases. For key and related cases, prepare consolidated ACMs to avoid duplication of information. The ACM must adequately explain and support the basis of the settlement. See IRM 8.6.2, Appeals Case Memo Procedures. If the correct employment status of a worker is an issue, it is essential to have a detailed and complete description of the work relationship. Per IRM 8.6.2.3.3, Using Form 5402 as an Alert, use Form 5402 to alert the ATM and/or APS employee of significant items in the case to be addressed. Alerts could include information on the following:

The required closing documents are shown below for agreed, unagreed, docketed, and non-docketed closures:

Follow the closing procedures in IRM 8.2.1.11, Preparing the Case to Close to APS. Provide APS with Form 5403 Instructions for AIMS controlled cases or Form 3870, Request for Adjustments, for non-AIMS cases to process IDRS account adjustments.

Form 944, Employer’s ANNUAL Federal Tax Return, is designed so the smallest employers can file and pay their employment tax liabilities only once a year, instead of quarterly. If IRS notified an employer to file Form 944, the employer must file this form. If the employer did not receive written IRS notification to file Form 944, an employer could qualify for the program if one of the following applies:

Any adjustments to items reported on Form 944 are made to the 4th quarter on Form 4668, Employment Tax Examination Changes Report.

Form 945, Annual Return of Withheld Federal Income Tax, must be filed to report backup withholding (BUWH) and income tax withheld from non-payroll items, such as:

Form 945 is an annual return - due January 31 following the close of the calendar year.

Adjustments to non-payroll items reported on Form 945 are made using Form 4668–B, Report of Examination of Withheld Federal Income Tax.

For an agreed case, the Appeals Technical Employee will mail to the taxpayer and authorized representative (if applicable) the following to secure written agreement:

The Form 2504 type agreements are identified below:

Form 906, Closing Agreement on Final Determination Covering Specific Matters, is also available for entering into non-worker classification/Section 530 employment tax disputes, with the appropriate Form 2504 type agreement. See IRM 8.13.1, Processing Closing Agreements in Appeals. A power of attorney is required when a taxpayer wishes to authorize a representative to execute a closing agreement on behalf of the taxpayer. See IRM 8.13.1.3.5.2, Power of Attorney Holder.

The Decision/Stipulation Document is the agreement form for docketed cases used for a no-change settlement, additional tax due from the taxpayer, or a refund due the taxpayer. Contact TEGEDC Area Counsel for assistance in preparing the Decision/Stipulation document. See IRM 8.4.1.11.2, Stipulation/Decision Preparation. The Decision Document is prepared according to U.S. Tax Court requirements and is signed by the taxpayer or his authorized representative and the appropriate Counsel official as a representative of the Chief Counsel. Follow the guidance in IRM 8.4.1, Procedures for Processing and Settling Docketed Cases.

Use Letter 1220, Docketed Case Decision Document Transmittal - Deficiency, or Letter 1220-A, Docketed Case Decision Document Transmittal - No Amount Due, to send settlement documents to the taxpayer and authorized representative (if applicable). See IRM 8.4.1.16, Letters Used on Docketed Cases.

Letter 971, Letter Advising No Settlement - Docketed Case, is available to notify a petitioner that no settlement has been reached and that the case has been referred to Counsel for trial preparation.

Prepare one of the closing letters below, depending on the circumstances:

APS will date and mail the closing letter(s) when processing the case for closure or interim action, such as mailing Letter 3523-A. If unagreed IRC 7436 and non IRC 7436 issues are involved, APS will mail Letter 4451 for the non 7436 issues and process those closing adjustments as an interim action. APS will send Letter 3523-A by certified or registered mail (if sent outside the United States) and suspense the case, following the same procedures for issuing a Statutory Notice of Deficiency. See IRM 8.20.6, Account and Processing Support (APS), Interim Actions. The mailing of the Notice of Employment Tax Determination Under IRC 7436 does not suspend the ASED for the non IRC 7436 issues.

An employment tax case received in Appeals could contain Form 4669, Statement of Payment Received, with a Form 4670, Request for Relief of Payment of Certain Withholding Taxes, filed with the examiner. IRM 4.23.8.4.2, Forms 4669/4670, and IRM 4.23.8.4.3, Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination, provide examiners with guidance on processing Forms 4669 and 4670, described below:

After the case is closed from the examination group, the taxpayer (payor) can send the completed Forms 4669 and 4670 to the IRS Campus address identified on Form 4670 under "Where to File." to be processed as described in IRM 21.7.2.5.8.1, Processing Procedures for Form 4669/4670.

IRC 6205, Special Rules Applicable to Certain Employment Taxes, provides that an employer who makes, or has made an under collection or underpayment of FICA/RRTA tax or income tax withholding, may make interest-free payments of the tax due when certain conditions are met in accordance with 26 CFR 31.6205-1 effective for adjustments on or after January 1, 2009.

IRC 6205 allows employers to report and pay additional liability for FICA/RRTA tax and withheld income taxes as an interest-free adjustment, if certain requirements are met. The regulations under IRC 6205 provide that to be interest-free, the adjustment must be made by the due date of the return for the return period in which the error is ascertained and the amount of the underpayment must be paid by the time the adjusted return (e.g., Form 941-X ) is filed or interest will accrue from that date. An interest-free adjustment cannot be made for any Income Tax or Additional Medicare Tax withheld in a prior calendar year - unless it is to correct an administrative error, IRC 3509 applies, or the adjustment is reported on a Form 2504 type agreement or other prescribed form.

The discovery date is when the employer has sufficient knowledge of the error to be able to correct it. Such knowledge may be obtained, for example, in the course of an examination. In an agreed case, this is when the employer signs a Form 2504 type agreement. For a protested case, it is at the conclusion of an Appeals conference. See Rev. Rul. 2009–39, 2009–52, I.R.B 951.

If an agreement is reached in Appeals, the taxpayer (if eligible) receives complete interest-free treatment for the FICA and federal income tax withholding liability when full paid by the time Appeals receives the signed Form 2504 type agreement. If Appeals receives a signed Form 2504-type agreement and the taxpayer doesn't pay, interest starts the day after the date the agreement is received.

If the case is unagreed in Appeals, the availability of an interest-free adjustment ends when the taxpayer has exhausted appeal rights. This occurs when the Service issues the "Notice of Employment Tax Determination Under IRC 7436" to the taxpayer on cases involving IRC 7436 issues. Once a taxpayer has received a "Notice of Employment Tax Determination Under IRC 7436" , an interest-free adjustment is no longer permitted. Thus, if the Service prevails in Tax Court, interest accrues from the due date of the return on which the tax was required to be reported and paid. For non IRC 7436 adjustments, an interest-free adjustment is no longer available once the taxpayer receives a "notice and demand" for payment based upon the assessment.

Interest-free adjustments are not allowed if the taxpayer knowingly underreports the employment tax liability or if the amounts underreported relate to an issue that was raised in an examination of a prior period. See 26 CFR 31.6205-1, effective for errors discovered on or after January 1, 2009 and Rev. Rul. 2009–39, 2009–52 I.R.B. 951 or rules relating to interest-free adjustments.

If the taxpayer is a debtor in bankruptcy, the "automatic stay" provision (i.e. 11 USC. 362(a)(8)), precludes "the commencement or continuation of a proceeding before the United States Tax Court" , unless certain conditions are met (when the debtor is an individual taxpayer) as described in IRM 8.7.6.1.2, The Automatic Stay.

Thus, the taxpayer may not file a petition contesting the Service’s "Notice of Employment Tax Determination Under IRC 7436" without first obtaining relief from the "automatic stay" in bankruptcy court. For rules on how a bankruptcy proceeding affects the Tax Court, see Publication 3953, Questions and Answers About Tax Court and the Notice of Employment Tax Determination Under IRC §7436.

However, the Service is permitted to issue a "Notice of Employment Tax Determination Under IRC 7436" while the "automatic stay" is in effect and should do so to prevent expiration of the statute of limitations on assessment, which continues to run during the bankruptcy proceeding.

An employee's share of the FICA taxes might be adjusted as discussed below:

If an employee’s share of FICA is adjusted, then:

Since the adjustment for employee FICA tax is not an income tax adjustment, a Form 2504 type agreement form must be used to solicit agreement to the adjustment for employee’s share of FICA.

Should it be necessary to issue a statutory notice of deficiency, instruct APS to assess the additional FICA tax because FICA tax is not subject to the deficiency procedures and to issue the Notice of Deficiency for the income tax portion of the individual liability. See IRM 8.17.4.3, Adjustments Requested by AO Prior to Issuing Notice of Deficiency.

For information on FICA tax rates, see Document 6209, IRS Processing Codes and Information, Section 3.14, Social Security Tax Rate Table (Formerly FICA).

Appeals considers protested issues involving FICA or SECA, except as provided below:

The Social Security Administration (SSA) does not give an opinion on an employment tax issue raised by the Service. SSA uses Form SSA-7000, Notice of Determination of Self-Employment Income, and Form SSA-7010, Notice of Determination of FICA Wages, to advise the Service of its findings resulting from claims for correction of the earnings posted to their social security record submitted by a self-employed person or employees.

If the Compliance Area Director does not agree with those findings, IRM 4.23.15.5, Coordination of Employment Tax Rulings with Social Security Administration, provides for coordination between the Area Compliance function and the field office of the SSA to resolve the differences. If preliminary review of the file in an employment tax case discloses unresolved divergent views, promptly return the case for compliance with IRM 4.23.15.5.

If Appeals disagrees with a coordinated determination made by Compliance and the SSA in an employment tax case, the Appeals Area Director or the Appeals Team Manager notifies the Chief, Appeals. To provide prompt identification for the SSA, the memorandum will supply the taxpayer's social security number or date of birth when the number is not available.

This procedure is also applicable in a case where, prior to final action, the decision reached by Appeals is in conflict with the views of the SSA, whether or not the case was previously made the subject of coordination procedure.

The Office of Division Counsel (CC:TEGEDC) has responsibility for all coordination procedures between National Office and the General Counsel of the Social Security Administration (SSA).

If Appeals reaches a conclusion different from the SSA with respect to the same factual situation in an employment tax case, Appeals will notify the Office of Division Counsel (CC:TEGEDC). The TEGE Division Counsel office will contact the General Counsel of the Social Security Administration (SSA) and present the views of Appeals for reconciliation. Any disclosure of taxpayer information must be through authorized persons in the IRS.

Employees who receive cash tips of $20 or more in a month must report the total amount of tips to their employer. Cash tips include tips received directly from customers, tips from other employees under a tip-sharing arrangement, and charged tips distributed to the employee. These tips are wages subject to FICA tax. Although tips are treated in the same way for employee RRTA tax as FICA tax, IRC 3231(e)(3) excludes tips from "compensation" for employer RRTA tax.

IRC 6053(a) requires that the employee provide a written statement of tip income to the employer by the 10th day of the month following the employee's receipt of tips. No particular form is required to be used in reporting tip income. 26 CFR 31.6053–1 requires that the employee sign the form and disclose:

The employer withholds the employee portion of the FICA or RRTA, to the extent the employee has wages or other funds available to cover the amount of tax. At times, the employee may not have sufficient funds to cover their share of the FICA or RRTA tax on tips. In this instance, adjustments to the portion uncollected from the employee must be reported on Form 941, line 5b (Taxable social security tips) and line 5c (Taxable Medicare wages & tips) or Form 944, line 4b (Taxable social security tips) and line 4c (Taxable Medicare wages & tips). The employer is still liable for the employer portion of FICA on the tips reported. The employer is not required to have supporting documentation for this reduction in tax.

On Form W-2, box 8, an employer must report, if applicable, the

Employers that operate a large food or beverage establishment are required to calculate and report allocated tips on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Employers withhold federal income tax, FICA or RRTA tax only on tips reported by employees, not on allocated tips. Allocated tips are not reported on Form 941, but are included in Box 8 of Form W-2 and must be reported as additional wages on the employee's tax return (unless the employee can prove a smaller amount with adequate records).

If an employee subject to FICA tax does not report all of the tip income to the employer, the employee is required to file Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Unreported tip income (including allocated tips), reported on Form 4137, is carried over to Form 8959, Additional Medicare Tax, only if the Additional Medicare Tax is applicable. The Form 4137 and Form 8959 are filed with the Form 1040. A railroad employee who does not report all tips received to his or her employer is required to contact the Railroad Retirement Board. The Railroad Retirement Board computes the amount of railroad retirement tax to be reported on Form 1040.

Returns with income tax under Subtitle A of the Internal Revenue Code (IRC) and employment tax on unreported tips under Subtitle C of the IRC are processed, assessed, and billed as if both taxes were under Subtitle A of the IRC.

For cases involving unreported tip income, two settlement computations are prepared:

Form 885-T is used to show the taxpayer how the FICA tax on tips is computed. All adjustments to tip income are electronically provided through the use of reference codes on the "Form 5403 Instructions to APS" , (also referred to as the "Form 5403 Worksheet" ) that APS will include on Form 5403, Appeals Closing Record. See IRM 8.17.5.2.7, Tip Income Adjustments (FICA), for the required reference codes. Also see Document 6209, IRS Processing Codes and Information, Section 8C, Item Adjustment Codes & Credit Reference Numbers.

Should it be necessary to issue a statutory notice of deficiency, the ATE must direct APS to assess the additional FICA or RRTA with applicable IRC 6652 penalty before issuing the notice, as though it were an income tax mathematical error. See IRM 8.17.4.3, Adjustments Requested by AO Prior to Issuing Notice of Deficiency, and IRM 8.17.4.26, Tip Income Cases and FICA Tax Informational Notice.

IRC 6103(l)(1)(C) authorizes disclosure of returns and return information concerning Railroad Retirement Tax (IRC - Chapter 22) to the Railroad Retirement Board (RRB) for administering the Railroad Retirement Act (RRTA). Only RRTA information is permitted to be disclosed to the RRB. For example, FICA changes, FIT changes, FUTA changes, and 1099 penalty results are not permitted to be disclosed. If assistance is required, contact the "Disclosure Office." See IRM 11.3.29.4, Administration of the Railroad Retirement Act - Railroad Retirement Board.

For all closed cases involving adjustments to the RRTA, the ATE must prepare a memorandum to the RRB. The memorandum will include the employee’s name, Social Security number, name of the railroad employer, and the amount of the adjustment subject to railroad retirement tax.

On Form 5402, include instructions for APS to mail the package to:

For self-employment adjustments, include on the "Form 5403 Instructions to APS" the appropriate reference numbers and amounts. APS will enter this information on Form 5403 and on IDRS to identify any changes to the primary and/or secondary taxpayer’s self-employment income, Medicare income, and self-employment tax adjustments. For reference codes related to self-employment adjustments, see the following:

Reference Number 889 is required when "reference numbers" 878 or 879 are entered. If "reference number" 878 or 879 is entered but adjustments made to income did not change the self-employment tax, "reference number" 889 must be entered with a "zero" amount.

See also IRM 8.17.5.2.8, Self Employment Tax Adjustments, and all subsections.

An individual who employs domestic workers generally reports employment tax payments annually on Schedule H, Household Employment Taxes, which is attached to Form 1040, Form 1040-NR, Form 1040-SS, or Form 1041.

However, instead of filing a Schedule H, an individual who employs both household employees and non-household employees may choose to report employment taxes for all employees (household and other employees) on Form 941, Employer’s QUARTERLY Federal Tax Return, or Form 943, Employer’s Annual Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return, and report FUTA taxes annually for all employees on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

If an individual is not required to file an income tax return (i.e. the individual’s income doesn’t exceed the filing threshold for the filing status), Schedule H must be filed by itself.

The employer's use of Schedule H to report these taxes does not change the character of the taxes that are withheld and paid by household employers from "employment taxes" to "income taxes" .