Purpose: This section outlines the procedures for delinquent and substitute returns for employment tax returns, including those filed for reporting the taxes due under the following:

Audience: This section contains instructions and guidelines for all Large Business & International (LB&I), Tax Exempt/Government Entities (TE/GE), and Small Business/Self-Employed (SB/SE) employees dealing with employment tax issues.

Policy Owner: Director, Specialty Examination Policy of the Small Business/ Self-Employed Division.

Program Owner: Program Manager - Employment Tax Policy. The mission of Employment Tax Policy is to establish effective policies and procedures, to support compliance with employment tax laws.

Primary Stakeholders:

Program Scope: The mission of Employment Tax Policy is to establish effective policies and procedures, and to support compliance with employment tax laws.

When an examiner discovers during any examination that a taxpayer may have failed to file required federal tax returns, he/she will, before soliciting any returns, determine the taxable periods and type of returns for which the taxpayer may be liable. The following information is available to assist in making this determination:

If a return or returns are determined to be required, the examiner will ascertain the reasons why the taxpayer failed to file the required returns and determine whether any indications of fraud exist.

When information is developed during an examination that indicates the taxpayer’s failure to file a required return or returns is willful, or if there is any other indication of fraud, discuss the case with the group manager. If the group manager concurs that the possibility of fraud exists, the Fraud Enforcement Advisor (FEA) will be contacted. In such cases, do not solicit delinquent returns, payment of tax, or any agreement from the taxpayer. If the possibility of fraud exists and the taxpayer furnishes delinquent returns to the examiner, see IRM 25.1.7.2 (3), Pre–screening Non–filers, for guidance. For additional information, see:

If no indications of fraud are present, advise the taxpayer that he/she is required to file all delinquent returns without regard to the number of years or taxable periods involved. In addition, all taxes, penalties, and interest are immediately due. The taxpayer will be asked to deliver the returns promptly to the examiner. Fully document the taxpayer's reasons for the non-filing of the returns in the case file. The examiner will request payment of the liabilities and explain the taxpayer’s options for collection alternatives (for example, installment agreement, offer-in-compromise). The examiner should also be prepared to discuss services available from the Taxpayer Advocate Service (TAS), if necessary.

The examiner will set a specific date for receiving the return(s). The date should be reasonable in light of the facts and circumstances in the case, the number of employees involved, and other factors which may extend the time necessary to prepare a proper and correct return. Inform the taxpayer that failure to tender the delinquent return(s) by the specified date will be considered a refusal to file.

When a taxpayer is advised to file all required delinquent returns but refuses to file, or states he/she is unable to file all of the returns, a determination will be made as to the extent the filing requirements should be enforced. This determination must be consistent with the criteria in Policy Statement 5–133, Delinquent returns - enforcement of filing requirements, found at IRM 1.2.1.6.18. Delinquency procedures are normally enforced for a six-year period of delinquency. Any deviation from the general six-year guideline requires managerial approval.

There are some delinquent employment tax returns filed on which no balance due was originally reflected, however, as a result of an examination, additional tax is proposed. Since the returns as originally filed reflected no taxes due, they were processed without considering the delinquency features or without securing a statement from the taxpayer as to the cause for delay in filing. The examiner will secure a statement from the taxpayer and determine if reasonable cause exists. The decision as to whether to assert delinquency penalties will be made based on this statement. Examiner comments as to the assertion or non-assertion of penalties will be incorporated into the report transmittal and workpapers.

Employment tax non-filer cases can be processed using either Delinquent Return or Substitute for Return (SFR) procedures.

Stamp all secured delinquent returns with an official date stamp.

If the secured delinquent returns are not within the examiner's responsibility (in other words no exam controls will be established), file the returns with the appropriate Campus address, as noted in the return instruction package for the secured return (for example Form 1040, Form 1120, and so on). Document the case activity record that the return(s) were secured and forwarded.

Referrals generated by SB/SE Employment Tax Examiners: If the secured delinquent returns need to be screened further by the another function, complete Form 5346, Examination Information Report.

Referrals generated by non-SB/SE examiners should follow their business-prescribed procedures.

In cases where no return has been filed (or a delinquent return is secured), determine whether to assert the failure to file and failure to pay penalties. See IRM 1.2.1.4.2, Policy Statement 3-2 (Formerly P-2–7), for guidance regarding acceptable reasonable causes for failure to file. Document the recommendation for assertion or non-assertion of the penalties in the case file.

Penalty recommendations for delinquent returns must be made whether or not the taxpayer agrees to the assertion of the penalties.

The failure to file and failure to pay penalties are automatic penalties and will be asserted unless case processing is notified otherwise.

It is the policy of the IRS not to assert a delinquency penalty if an unsigned tax return is timely filed by the taxpayer on the prescribed form and the form is accompanied by proper payment, provided that:

When it is necessary to rely upon a taxpayer’s failure to sign a return in defense of the statute of limitations, the delinquency penalty may be asserted to support the IRS’s position that the statutory period of limitations does not begin to run until a valid return has been filed.

When a taxpayer is advised to file all required delinquent returns but refuses to file, states inability to file, or neglects to file within the time-frame set, a determination will be made as to the extent the filing requirements should be enforced. The application of enforcement procedures will depend upon the facts of each case. This determination must be consistent with the criteria in IRM 1.2.1.6.18, Policy Statement 5–133, and the guidelines outlined in IRM 4.23.12.9.

The extent to which enforcement of delinquency procedures will be undertaken will depend upon the facts of each case. As a general rule, enforcement should not extend beyond six prior years. But enforcement for shorter or longer periods, or not at all, may be determined where such action appears to be in the best interest of the Government from the standpoint of reasonableness, salutary effect on compliance, and prudent deployment of resources. (See IRM 1.2.1.6.18, Policy Statement 5-133.)

Specific factors that should be taken into account include:

Delinquency procedures will generally be enforced if a taxpayer has failed to file a one-time return. In other cases when contact is made with a delinquent taxpayer, delinquency procedures should ordinarily be followed through for at least one period. However, the circumstances of each individual case must be taken into consideration. (Refusal-to-file cases referred to Examination or TE/GE after taxpayer contact has been made by examiners are required to be fully documented prior to such referral.)

If it is determined that enforcement should extend beyond a six-year period, the examiner will document the case file by outlining the facts of the case and the reasons why enforcement for the longer period is recommended. Such recommendations must receive managerial approval prior to enforcement.

If it is determined that delinquency procedures need not be enforced for the full period of the delinquency if less than six years, the case file must fully document justification for the shorter period. Such determination must receive managerial approval prior to enforcement except in cases where there would be no net tax due for the years for which delinquency procedures are not to be enforced.

Cases are referred to Criminal Investigation by using Form 2797, Referral Report of Potential Criminal Fraud Cases. If a case involving a collateral examination results in a fraud referral, the affected examination areas will coordinate the referral. The general guidelines for fraud procedures are outlined in IRM 4.23.9.6, Employment Tax Fraud - General.

Instructions for completing Form 2797 can be found in IRM 25.1.3.3, Preparation of Form 2797 - Referral Report of Potential Criminal Fraud Cases.

If a responsible officer of a TE/GE organization refuses to file a required return, the employee should prepare Form 5666, TE/GE Referral Information Report, or Form 5346. After managerial approval, the Form 5666 or Form 5346 should be forwarded to TE/GE for necessary action.