This IRM outlines an examiner’s responsibilities regarding employment tax workpapers and will assist the examiner in meeting quality standards and ensuring appropriate and consistent audit procedures.

Employment tax provisions are found at Internal Revenue Code Subtitle C:

The Employment Tax Program is governed by Policy Statements and other internal guidance that apply to all Service personnel regardless of operating division. The Policy Statements found in IRM 1.2.1, Servicewide Policy Statements, apply to all employment tax issues and examinations. Examiners should review these Policy Statements to properly perform their examination duties.

A website, Search Servicewide Delegation Orders, located at http://irm.web.irs.gov/imd/del/search.aspx provides a searchable list of Servicewide Delegation Orders issued by the Commissioner of the Internal Revenue, or on their behalf by either of the deputy commissioners. Delegation Orders pertaining to each IRS business process can be found in IRM 1.2.2, Servicewide Delegations of Authority.

IRM 4.23 provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting, and payment of employment taxes. IRM 4.23 serves as the foundation for consistent administration of employment taxes by various IRS operating divisions. By providing one source of authority for all operating divisions, the Service greatly reduces philosophical and procedural inconsistencies.

Director, Specialty Examination Policy is responsible for the procedures and updates addressed in this IRM.

Director, Examination Specialty, is the executive responsible for examination operational compliance.

Program Goals: The processes and procedures provided in this IRM are consistent with the objectives or goals for Employment Tax - Examination that are addressed in IRM 1.1.16.5.3.3, Employment Tax Examination and for Employment Tax Policy, found in IRM 1.1.16.5.5.2.2 , Employment Tax Policy.

Program Effectiveness: Program goals are measured with Employment Tax Embedded Quality Performance Reports that monitor whether quality attributes are applied uniformly and consistently.

Annual Review: Employment Tax Policy - Program Manager, is responsible for reviewing the information in this IRM annually to ensure accuracy and promote consistent tax administration.

The following table lists commonly used acronyms and their definitions:

Other helpful information sources include:

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. For additional information about the TBOR see IRC 7803(a)(3). For additional information about TBOR, see https://www.irs.gov/taxpayer-bill-of-rights or https://irssource.web.irs.gov/SitePages/TaxpayerBillOfRights.aspx.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS, led by the National Taxpayer Advocate. Its job is to protect taxpayers’ rights by striving to ensure that every taxpayer is treated fairly and knows and understands their rights under the TBOR. TAS offers free help to taxpayers, including when taxpayers face financial difficulties due to an IRS problem, when they are unable to resolve tax problems they have not been able to resolve on their own, or when they need assistance to address an IRS system, process, or procedure that is not functioning as it should. TAS has at least one taxpayer advocate office located in every state, the District of Columbia, and Puerto Rico.

Employment tax examiners should consider the disclosure and privacy provisions when preparing agreed and unagreed case reports. For further information, see the Privacy, Government Liaison and Disclosure (PGLD) knowledge base at Disclosure and Privacy Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB003).

Overall responsibility for civil penalty programs is assigned to the Office of Servicewide Penalties (OSP). OSP is charged with coordinating policy and procedures concerning the civil penalty program administration, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching penalty effectiveness on compliance trends, and determining appropriate action necessary to promote voluntary compliance. For further understanding of the civil penalty program and penalty relief, refer to the Penalties Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB015).

Electronic Case File (also known as Paperless File) is selected, classified, delivered, assigned, developed, closed, processed, and archived electronically. The electronic case is the only record that is archived and a paper file is not prepared and shipped to Files. ET examiners use IMS to maintain and store case-related electronic documents.

Workpapers are key in the support of all IRS positions taken when making adjustments. Properly prepared workpapers:

Workpapers are required in every examination case. Workpapers should include all evidence gathered by the examiner to show the work performed, audit techniques followed, tax law relied on, and conclusions reached. Supporting workpapers must be prepared when necessary to fully document all issues and conclusions. These supporting workpapers must be included in the case file and indexed to the appropriate lead sheet.

As workpapers are used in the preparation of the audit report, examiners must ensure that the information contained in the workpapers is consistent with and fully supports the final conclusions reached. The workpapers will be relied upon to support the issues in appealed or litigated cases. The workpapers can be provided to a subsequent reviewer or the taxpayer when requested under the Freedom of Information Act (FOIA) process.

Use of the Employment Tax Lead Sheets (ETLS) will help the examiner meet all workpaper requirements. Use of stand-alone workpapers, while not prohibited, does not relieve the examiner from meeting workpaper requirements.

Properly prepared workpapers must provide adequate documentation to support conclusions. Without sufficient documentation, it is not possible for reviewers to verify that the scope of the examination is appropriate, or the basis of an adjustment is accurate. Examiners should always cite legal authority to support the conclusions (for example, Internal Revenue Code, applicable regulations, court cases, revenue rulings and/or revenue procedures).

Workpapers must be neat, legible, clear, and concise. The legibility of examination workpapers and reports is an important aspect of the overall quality of the examination. The easier it is to read workpapers and reports, the easier it is to understand them.

Workpapers must be clearly headed:

All workpapers that contribute to the development of the case and support the audit trail must be included in IMS and uploaded to the appropriate Standard Audit Index Number (SAIN). Issue specific workpapers must be uploaded to the specific technical issue SAIN to which they relate in IMS. Workpapers that are not specific to one issue, such as an examination report or statute extension, should be uploaded to the "ET 080-Administrative Procedures" SAIN. All uploaded documents must follow the naming convention described in IRM 4.23.4.5.5, File Naming Convention.

For examiners preparing a paper case file, workpapers must be indexed, numbered, and securely fastened together.

If an issue cannot be fully explained on the specific lead sheet, supporting workpapers must be prepared and indexed to the appropriate lead sheet. Supporting workpapers may be required to provide detailed explanations, analysis, schedules, and/or computations. For example, supporting workpapers would be used to schedule out wage adjustments applicable to each employee.

The volume of supporting workpapers prepared during examinations will vary depending on the size of the entity and the number and type of issues developed. While there is no fixed requirement to include specific schedules or analyses in the supporting workpapers, examiners must include enough information to support the conclusion documented on the lead sheet. Any notes taken during interviews conducted must be included in the case file as added support of the final case resolution.

Workpapers should reflect what was actually accomplished during the examination. The workpapers should not include superfluous documentation, copies of irrelevant data, or the examiner's personal opinions relating to the taxpayer or the business. For example, copies of CPA workpapers or reports should not be included in the workpapers where they do not contribute to the development of an issue. In addition, examiners should never make personal comments about a taxpayer. Remember, taxpayers always have the right to request any and all workpapers included in the case file under the Freedom of Information Act (FOIA).

The case file will include a well-documented, contemporaneous case history sheet. For SB/SE examiners using IMS, the Examining Office’s Activity Record in IMS should be used for this purpose. For non-IMS users, Form 9984, Examining Officer’s Activity Record, is used for this purpose and is numbered as Workpaper 100. The case history documents:

If the case was initiated by a referral, examiners must include a printed copy of the "Specialist Referral System (SRS) Referral Form" in the workpapers.

Examiners have different workpapers available depending on the type of examination being worked and the type of training received:

The LB&I Corporate and Business Issues (Non-Credits) Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB020) contains job aids and other resources that may be useful to an ET examiner.

Examiners should access the latest job aids and other miscellaneous workbooks via the Employment Tax Small Business Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB014) in the "Employment Tax Resources" library.

In order to access the most current Employment Tax letters and forms, examiners will need to go to the Forms Repository at http://publish.no.irs.gov/catlg.html. In Forms Repository, the examiner will:

All letter correspondence must be maintained in the "Correspondence Letters" section in IMS. The "Correspondence Letters" section will generate many of the Employment Tax letters. It will auto-populate the taxpayer's information and automatically store a copy in the IMS file. IMS letters may be used if they are the most current version.

ET has four distinct categories of cases. Each category has different documentation requirements within IMS.

ET General Cases: Corporations, Subchapter S Corporations, and Partnerships having less than $10 million of assets (for example, Activity Code 217 or less for Form 1120).

ET Large Cases: Corporations, Subchapter S Corporations, and Partnerships with assets equal to or greater than $10 million (for example, Activity Code 219 or higher for Form 1120). This includes work completed using LB&I team audit procedures (for example, Form 5701, Notice of Proposed Adjustment, and Form 4764-A, LB&I Examination Plan, Part III - Summary of Assignments) and stand-alone examinations.

IRC 3121(q) Assessment Cases (Tip Issue Only): Tip cases involving only an IRC 3121(q) assessment. Refer to IRM 4.23.7.7.3, Report Writing Procedures for Tip Exams.

ET Tip Agreement Program: A Tip Compliance Rate Review case is not a tip audit. Guidelines for regular tip examinations may not apply. Refer to IRM 4.23.7, Employment Tax on Tip Income. Tip Compliance Rate Reviews can be conducted on any type of tip agreement, including:

All case names must begin with "ET" for ease in identifying employment tax cases. To ensure consistency, all examiners will use the following naming convention when naming a case in IMS:
ET [Taxpayer Name] [Year]: (Example: ET ABC Inc 2012)

To ensure consistency, all examiners will prepare and complete Information Document Requests (IDRs) within IMS, including annotating the Form 4564, Information Document Request, as appropriate (for example, Date IDR Issued, Date Information due by).

ET examiners must update the IDR status and date fields via the "View/Modify Form Status" icon on the IDR tool bar in IMS. The IDR status choices will vary depending on the current status of the IDR (for example, Issued, Received, Revoked, Closed, etc.).

For examiners working ET Large Cases who issue draft IDRs following team audit procedures, the draft IDR should be preserved in IMS by adding it as an attachment to the final IDR.

For all employment tax cases, original taxpayer responses to IDRs must be uploaded to the "IDR Responses" section in IMS. Original responses from the taxpayer must not be modified. A copy of the taxpayer’s response can be modified and uploaded as a workpaper in IMS to support the audit trail. Naming conventions will apply to IDR responses and will follow the form"IDR (number), Item (number) (if needed) – Description."

For each return under exam, all SB/SE ET Examiners must set up an "ET 080-Administrative Procedures" issue and charge at least half an hour (0.5) to each return.

All other ET issues will be entered in IMS on the key return (generally, the 4th quarter return) for each tax year that the issue is examined. The time spent on the case will be charged to the examined ET issue(s) reflected on the key return(s), as appropriate. Examples of how to set up a case, its issues, and how to charge time are provided in supplemental training materials.

The first instance an examiner’s time is applied to the return, the status will automatically change from Status code 10 to Status Code 12.

Each return must have time charged except when the return is closed using a non-examined disposal code such as Disposal Code "32" , Survey After Assignment, or "36" , No Return Filed.

See IRM 4.9.1.7.2, Time Input on ERCS and IMS, through IRM 4.9.1.7.2.2, Inputting Time Into IMS, addressing charging time. Note that employees in Employment Tax who are required to input technical time will use IMS for time input. The Examination Returns Control System (ERCS) Group Handbook also addresses ERCS time entry and fractional hours.

The Time Sheet in IMS allows the IMS user to enter all categories of daily time applied, including case time and below the line time. TCOs and TEs input daily time as well as purge actions.

The Form 9984 in IMS is used to document each action taken on the Entity/Return issues. Documentation must include the date, location, time charged, and an explanation of each activity or contact. The activity record must provide a complete and concise case history. Recordation of events must be made by examiners or other employees responsible for activity on the case as warranted (such as group managers, engineers, clerical staff, team members, actions taken by group secretaries, etc.)

IRM 4.4.12.5.38, Item. 28: Examiner’s Time, addresses the requirement to enter time on the Form 5344, Examination Closing Record. Time may be charged in 15 minute increments.

All required forms and documents that would otherwise be required in a paper case file per IRM 4.23.4, Employment Tax - General Procedures and Workpapers, and IRM 4.10.9, Examination of Returns, Workpaper System and Case File Assembly, must be uploaded to IMS. Examiners must ensure that all information critical to the case or that supports the audit trail is included in IMS, including lead sheets, supporting workpapers, and any other pertinent documents, and is uploaded to the correct SAIN. Required attributes or documents must be maintained contemporaneously within IMS. Additional information on workpapers is contained throughout IRM 4.23.4.

Each document will be named with a three-digit reference number – two-digit document number – document description. When applicable, the file name may also contain a two-digit document extension after the document number (see (c) below). This naming convention ensures that the workpapers will show up in the desired order within each issue SAIN.

Tax and Penalty Data Fields: The examiner will:

Wage Adjustment Data Fields: The examiner will:

Depending on the MFT on the Entity/Return, different types of closing forms (for example, Form 5344, Form 5351, Examination Non-Examined Closings, or Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties) may be required to be completed in IMS before a case file can be closed in IMS. Refer to supplemental ET IMS training material for more information.

ET examiners will close their cases in IMS to correspond with closure of the case to their manager.

ET managers must then perform their reviews and indicate concurrence with the closure of the case from the group by signing the IMS Closing Check Sheet and updating the "Manager Concurrence" on the Team Web Site (TWS) to "yes" . These timely steps allow other stakeholders (for example, Appeals, Technical Services, and Counsel) to access cases electronically in IMS/TWS. IMS case closing procedures and processes are described in more detail in ET IMS course books, job aids, and check sheets. See IRM 4.23.10.9, Technical Review of Reports, paragraph (3) and IRM 4.23.10.19, Assembly of Employment Tax Case File, and subsequent sections for further information.

Additional information:

For ET examiners working ET Large Cases as a stand-alone employment tax audit, an audit plan is optional.

For ET examiners working ET Large Cases following a team approach, an audit plan is required. The due date of the plan will be agreed upon by the LB&I team coordinator and ET examiner. The plan is prepared by the team coordinator using Form 4764, LB&I Examination Plan. The ET examiner will create an audit plan for the employment tax issues which consists of:

The audit plan (examination plan) provides the following information:

The taxpayer will be given a copy of the audit plan and such action must be documented in the "Examining Officer’s Activity Record" .

During the pre-examination analysis phase, the employment tax specialist must analyze available information, including:

ET examiners working LB&I exams using a team approach should follow the guidance in IRM 4.23.3.6.4.1, Scheduling the Initial Appointment LB&I Team Audits, for issuing an employment tax exam notification letter. For stand-alone ET audits, ET examiners should follow the guidance in IRM 4.23.3.6.4, Scheduling the Initial Appointment, for letters to use when scheduling a field appointment.

An officer of a corporation must sign either the communications agreement contained in the LB&I Audit Plan or any other type of written authorization that designates the persons with whom the examination team can communicate. A copy of the written authorization must be included and documented in the ET case file.

Risk-based decision-making is critical to the effective allocation of limited examination resources. A risk assessment must be conducted for all ET Large Cases:

The first risk analysis described in (1) above is prepared during the initial planning phase of the examination. Depending on materiality and/or compliance considerations, the risk analysis can be done on an issue-by-issue or a case basis.

A mid-cycle risk analysis is required on all large case ET examinations with an Estimated Closing Date (ECD) exceeding 12 months and must be approved by the ET group manager. A mid-cycle risk analysis is optional on large case ET examinations with an ECD of less than 12 months. Should the ECD of a large case be extended to exceed 12 months, an updated risk assessment is required. Refer to (2) and (3) of IRM 4.46.3.3.6, Documenting the Risk Analysis.

The mid-cycle risk analysis includes time applied and indicates if additional time is needed. The examiner should also state the potential tax liability by issue and by year, and provide a brief assessment of the audit.

After the agent completes the mid-cycle risk analysis, it may be apparent that additional time is needed to complete the examination. If the examiner needs more time than was originally planned, provide an explanation of why additional time is warranted and how much additional time is needed to complete the examination.

The SB/SE ET group manager must approve a request for additional time.

Form 4564 will be used to request information from the taxpayer. All requests for information should be specific, clear, and concise.

Prior to issuing an IDR, the examiner will discuss the specific information that is needed with the taxpayer. The taxpayer may be able to explain what type of information is available and may suggest a preferred wording for the IDR.

For ET examiners working LB&I team audits, the examiner should discuss the IDR with the team coordinator. Conferring with the team coordinator ensures the examiner does not ask for already available information.

Three copies of each IDR request are to be prepared and distributed as follows;

IDRs should only include one issue or subject. This results in a faster turnaround time since information covering multiple topics may need to come from several sources.

ET examiners assigned ET Large Cases using a team approach will follow the IDR Management Process found in IRM 4.46.4.7, Information Document Request Process. Examiners using a team approach will also follow the IDR enforcement procedures found in IRM 4.46.4-1, Requirements for Issuing IDRs, and IRM 4.46.4-2 , IDR Enforcement Process.

The IDR process states that a reasonable response time to each IDR is determined after the draft IDR is discussed with the Taxpayer, prior to final IDR issuance. The importance of timely responses is emphasized as it improves cycle time and promotes earlier issue resolution. Refer to IRM 4.46.4.7, Information Document Request Process, IRM 4.46.4-1, and IRM 4.46.4-2.

IDR procedures found at IRM 4.46.4.7.3, IDR Enforcement Process, will be followed by the ET examiner working with the LB&I income tax team.

The mandatory Enforcement Process has three graduated steps:

The process does not preclude the examination team from using judgment on a case-by-case basis. Continuous collaboration is needed to reach realistic due dates and dates can be revised based upon the facts and circumstances. A detailed description of the IDR Management Process can be found at IRM 4.46.4.7, Information Document Request Process and IRM 4.46.4-1, Requirements for Issuing IDRs. The IDR Enforcement Process procedures can be found at IRM 4.46.4-2, IDR Enforcement Process.

If the taxpayer does not agree with the examiner’s determination and the issue is likely to be appealed, prepare a Form 886-A, Explanation of Items, containing the facts and solicit the taxpayer’s written acknowledgment of the facts (AOF). Refer to IRM 4.46.4.11.3, Issue the Draft Form 886-A with a Pro-Forma AOF IDR. ET Specialists on team audits with the LB&I income tax team will generally use the AOF; ET Specialists working stand-alone employment tax audits can follow AOF at their discretion.

ET examiners working ET Large Cases following a team approach are required to use Form 5701. ET examiners conducting stand-alone audits may use Form 5701 at their discretion, except as noted in paragraph 5 below.

All adjustments are proposed on a Form 5701 as they are developed. This form serves as a cover sheet to Form 886-A which is attached to fully explain the basis for proposing each adjustment.

Potential adjustments are to be discussed with the team coordinator and the taxpayer prior to issuing the notice.

The ET group manager reviews and signs the Form(s) 5701. This signature indicates the group manager has accepted the examiner’s position on the issue.

An ET territory manager’s signature is required on all Form(s) 5701 involving issues on:

All Form(s) 5701 must be prepared in IMS. The examiner must update the status of Form(s) 5701 in IMS throughout the examination. There is no "Approved" status. After the group manager has approved the Form 5701, the next status that should be selected by the examiner is "Issued."

The Form(s) 5701, if required, and Form(s) 886-A must be attached to the final audit report.

All ET examiners working ET Large Cases will use the LCLS as described in IRM 4.23.4.4, Guide for Examiners Using LCLS - Large Case Lead Sheets, to document pre-examination planning activity.

Issue lead sheets serve as an index and summary for supporting workpapers. ET examiners working ET Large Cases may use Form 4764-B as the technical issue lead sheet describing the audit procedures applied and the conclusions reached for each technical issue. Form 4764-B will:

Use of Form 4764-B will help the examiner meet issue lead sheet and workpaper requirements. Use of stand-alone issue lead sheets, while not prohibited, does not relieve the examiner from meeting lead sheet and workpaper requirements. See IRM 4.23.4.2.2, Workpaper Preparation: General.

Supporting documentation must be included in the case file as a workpaper when further explanation is needed to support the conclusions reached.

Lead sheets also serve as an index for any workpapers that relate to a specific issue. All workpapers should be numbered, indexed, and referenced to the issue lead sheet. Workpapers must be uploaded to IMS following standard naming conventions. For more information see IRM 4.23.4.5.5, File Naming Convention.

All workpapers will be associated with the appropriate issue SAIN number and issue name. This will ensure all team members' audit case files are organized in a consistent manner, allowing for ease of review by the team coordinator, group managers, and others.

SAIN codes for ET examiners can be found by referring to the current ET IMS SAIN and UIL Job Aid, available on the Employment Tax Small Business Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB014) in the Employment Tax Resources library.

In support of the LB&I Executive Compensation Strategy, ET examiners are required to verify up-to-date filing of officers’ and key executives’ returns using IDRS command code IMFOLI when conducting an LB&I stand-alone employment tax examination. The examiner should use their judgement to determine if key officer and executive returns should be further inspected. If issues are found, Form 5346, Examination Information Report, will be completed and forwarded per local procedures. Additional guidance on inspection of officers' returns is found in IRM 4.46.3-6 , Inspection of Key Officer and Executive Returns. For further information see "Corporate Executive Compliance" at http://www.irs.gov/Businesses/Corporations/Corporate-Executive-Compliance.

The employment tax audit workpapers provide important historical information and are valuable for any subsequent cycles that may be opened.

Employment tax audit workpapers and related forms (such as, copy of audit reports and attachments, Form 4764-Examination Plan Series work papers, Form 9984, relevant workpapers, Risk Analysis, NOPAs, etc.) must be uploaded to IMS and named using standard naming conventions. For further information see IRM 4.23.4.5.5, File Naming Convention, and IRM 4.23.4.5.7, Other IMS Issues, File Size, File Limitations and Encryption Policy.