Purpose- This IRM provides technical guidance regarding the examination of employee tax returns.

Audience- This guidance applies to all Service employees who are working on cases involving the examination of an employee tax return.

Policy Owner- The Director, Examination Field and Campus Policy, who reports to the Director, Examination Headquarters.

Program Owner- Field Examination General Processes (FEGP), which is under the Director, Examination Field and Campus Policy.

Contact Information- To recommend changes or make any other suggestions related to this IRM section, see IRM 1.11.6.5, Providing Feedback About an IRM Section - Outside of Clearance.

As the administrators of our nation's tax system, our dedication to the highest standards of ethical behavior and conduct promotes the public trust in our honesty, fairness, and efficiency. Therefore, IRS employees are expected to fully comply with all tax laws by accurately reporting and timely filing their federal, state, and local tax returns and fully paying their taxes when due. This includes paying the proper amount of tax (e.g., estimated tax payments and withholding) as income is earned during the tax year. RRA 98 sections 1203(b)(8) and (b)(9) provide for the removal of IRS employees who willfully fail to file any return of tax required under the Internal Revenue Code of 1986 on or before the date prescribed therefore, or who willfully understate federal tax liability respectively. To this end, the IRS has established a comprehensive employee tax compliance program. Employees' accounts will be subjected to examination, underreporter, and annual delinquency check procedures.

Each area has an employee audit coordinator. The employee audit coordinator is located in the area Planning and Special Programs (PSP) office. A list of coordinators may be found at Employee Audit Coordinators.

IRM 1.2.1.5.7, Policy Statement 4-9, Highest Integrity Expected, provides that standard IRS procedures relating to examinations, proposed changes, appeal rights, etc., will apply to IRS employees to the same extent they apply to all other taxpayers.

Examination of employee returns are generally in nine categories:

Current employees newly hired into auditable positions and new employees in auditable positions must undergo employee tax return reviews or examinations or both.

The employee audit coordinator establishes controls on employee examinations and builds the case file.

The package sent to the group should contain the following items:

Employee returns will be examined in the same manner as all individual income tax returns, which include conducting minimum income probes and required filing checks.

If the primary reason for the examination of a new employee’s return is consideration for employment and the individual is no longer employed by IRS or is no longer being considered for employment, the examiner must discuss the scope of this case with their group manager. See IRM 4.2.6.3.10.

The initial interview in an employee tax audit has increased significance, as the outcome of the examination may initiate a conduct investigation. The examiner’s interview questions should adequately probe the employee’s:

The examiner’s initial interview of an employee may be considered an investigatory interview, and a bargaining unit employee may elect to have union representation.

Employee Attendance at the Audit: IRC 7521(c) generally prohibits IRS from requiring a taxpayer to accompany the taxpayer's recognized representative to an audit in the absence of an administrative summons. However, IRC 7521(d) provides that IRC 7521(c) shall not apply to investigations relating to the integrity of any officer or employee of the IRS. Since an audit of an employee relates to the integrity of the employee and may result in a disciplinary or adverse action against the employee, the employee's recognized representative may not attend the audit in lieu of the employee, although the recognized representative may accompany the employee to the audit. If the employee declines to be interviewed, the examiner should consult with their group manager.

An employee will be granted administrative leave to attend a tax audit or a discussion of the employee’s own tax affairs.

An employee will not be granted administrative leave to prepare for an examination.

Survey procedures are applicable only to new employee examinations and regularly classified returns. Treasury mandates (TIGTA referrals) and executive selections cases cannot be surveyed.

Once an IRS employee's return has been selected for examination and assigned to a group, it can only be surveyed with written approval. This survey action must include a description of any documents and/or other information used to draw this conclusion. Surveys are subject to mandatory review. See IRM 1.2.2.5.31, Delegation Order 4-40 (formerly DO-244, Rev. 1), IRS Employees’ Returns Selected for Examination, for the appropriate approving official.

When an examiner believes that an examination of an employee's return would result in no material change in tax liability, they may apply survey after assignment procedures. The examiner will prepare Form 1900, Income Tax Survey, stating the reasons for the survey action. If the examiner's group manager concurs, they will approve the case and forward it to the territory manager for their consideration and final approval on Form 1900. Refer to IRM 1.2.2.5.31, Delegation Order 4-40 (formerly DO-244, Rev. 1), for the appropriate approving official. The group manager will forward the case file to Baltimore Technical Services (TS) after securing the territory manager's approval.

If the group manager decides an employee's return should be surveyed before assignment, the group manager will prepare Form 1900, Income Tax Survey, stating the reasons for the survey action and forward it to the territory manager for their consideration and final approval. The group manager will then forward the case file to Baltimore Technical Services (TS).

Check the "Employee Audit" box on Form 3198, Special Handling Notice for Examination Case Processing, in the "Forward to Technical Services" section, when closing the case.

All employee audits, including Treasury mandated (TIGTA referrals) audits of individuals no longer employed with the IRS, are subject to mandatory review and must be closed directly to the Employee Audit Reviewer in Baltimore Technical Services. The examiner must complete the following steps:

In the case of a joint return, identify the name and social security number (SSN) of the IRS employee on Form 3198 by checking the "Other" block in the "Forward to Technical Services" section and notate the name and SSN of the employee on the lines provided.

Baltimore Technical Services will close the case to the appropriate Centralized Case Processing (CCP) office.

Once the case is closed from Baltimore Technical Services, CCP will forward the required employee audit information in the case file (e.g., audit report and applicable workpapers) to the requesting official such as Labor Relations/Employee Relations, TIGTA, or IRS Personnel Security.

An employee may avail themselves of the audit reconsideration process. Refer to IRM 4.13, Audit Reconsiderations, for information concerning the audit reconsideration process and procedures.

Employee audit reconsideration cases that are selected will be sent to the appropriate area PSP office for assignment and control. The case should be returned to the group and examiner that originally worked the case. Employee audit reconsideration cases are high priority cases. They are given the same priority status as employee audit cases.

The purpose of the audit reconsideration is to examine information that was not previously considered. The examiner should review IRM 4.10.11.4, Audit Reconsiderations, for guidance and procedures for examining and closing an audit reconsideration case.