This section provides instructions for preparation of examination reports covering employment tax examinations. It also discusses certain related procedures that are necessary both to have an efficient report writing system and to reduce examination time applied to a case.

IRM 4.23.10 applies to all employment tax examinations whether conducted by field or office examiners.

The examination report is the record of the examiner's findings and recommendations regarding the investigation of a taxpayer's liability for tax. It is the document from which reviewers may determine whether the examiner has properly developed the case and has correctly applied the law, regulations, and so on, to the facts to a particular case. Also, it may become the evidence on which the Government relies in a court case. Since the taxpayer ordinarily receives a copy of the report, it serves as a formal presentation to the taxpayer of the findings and recommendations of the examiner.

Preparation of an examination report is a very important part of the examiner's duties. The examination report should be clear, concise, and to the point. All adjustments must be properly explained and supported by appropriate references to the applicable laws, regulations, court decisions, rulings, and so on, on which the examiner based their findings.

Under no circumstances should a change report of employment tax adjustments be incorporated into an audit report covering income tax adjustments.

Additional guidelines can be found in IRM 4.10.8, Examination of Returns - Report Writing.

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 IRS personnel regardless of operating division. The Policy Statements found in IRM 1.2.1, Servicewide Policies and Authorities, 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 Policies and Authorities, 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 IRS greatly reduces philosophical and procedural inconsistencies.

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

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

Chief, Employment Tax Examination, is responsible for ensuring examiners follow the guidance included in this IRM.

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 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 National Quality (NQ) and Embedded Quality (EQ) Performance Reports that monitor whether quality attributes are applied uniformly and consistently.

Annual Review: Program Manager of Employment Tax Policy 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:

The following table lists the primary sources of guidance:

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. See IRC 7803(a)(3). For additional information about the TBOR, see 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.

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) maintained knowledge base at https://portal.ds.irsnet.gov/sites/vl003/pages/default.aspx.

The national standard time frames facilitate timely audit resolution. Cases with gaps in audit activity outside of these time frames should be the exception rather than the rule.

Attribute 510 measures whether the time span for phases of the case is appropriate for the actions taken, and the Exam Quality Job Aid for these attributes contains the IRM time frames for case actions to ensure cases are worked in the most efficient manner. More information on the time standards is available here:

SFRs established under IRC 6020(b) procedures always use the paperless survey process for cases closed by employment tax examiners in PBC 212. Examiners in other areas should use their established procedures for non-examined closures on non-filed returns. The following disposal codes are available for use by PBC 212 examiners closing SFR cases under these procedures:

Form 5351, Examination Non-Examined Closing, or Form 5596, TE/GE Non-Examined Closings, is completed. To complete Form 5351:

The manager’s signature and date on Form 5351 is in lieu of the survey stamp. Form 3198 is not required on these non-examined closures.

The Forms 5351 and 3210 are faxed to CCP. See CCP Exam EFax Numbers at https://portal.ds.irsnet.gov/sites/vl051/Lists/ExamCentralizedCaseProcessingCCP/DispItemForm.aspx?ID=8.

Indian Tribal Government (ITG) specialists send the Form 5596, to the Austin, TX office.

Form 2503 is not required with the SFR paperless survey process; the disposal code provides an explanation as to why the return was surveyed.

Letter 1024-T is sent to notify the recipient that their employment tax return was reviewed and accepted as originally filed.

Letter 1024-T has a "Show Selectable Paragraph Pages" button at the top. Examiners should use this button to select the paragraph(s) most appropriate for the taxpayer’s situation.

To provide better communication to the taxpayer the letter may be used in the following situations:

The letter may be used when a taxpayer provides a delinquent return during an examination that is:

Returns being closed using Letter 1024-T under IRM 4.23.10.4.2(4) above should be closed agreed and not as a no change.

In agreed worker reclassification cases not subject to the CSP procedures in IRM 4.23.6, Classification Settlement Program (CSP), the examiner will advise the employer to prepare Forms W-2 for the converted worker(s). See IRM 4.23.8.10.1, Delinquent Forms W–2/W–2c Secured By Examiner Due to Exam Adjustments, for procedures on delinquent Forms W-2 secured by the examiner. IRM 4.23.8.10.2, Delinquent Forms W–2/W–2c Not Secured by Examiner, addresses procedures when the delinquent returns are not secured.

In addition, it is recommended that the examiner request the employer to notify all affected worker(s) of the determination, so as not to deprive them of any state or other regulatory agencies legal benefits afforded to an employee. The examiner will document the employer’s response to this request in the workpapers.

The examiner will provide the employer with copies of Notice 989, Commonly Asked Questions When IRS Determines Your Worker Status is Employee, for use in the employee notification process. See Exhibit 4.23.10-10, Filing Instructions for Reclassified Workers, for an example of a letter the employer could issue to employees.

For cases subject to the CSP procedures, workers are not treated as employees until the prospective date identified in the CSP agreement. Thus, delinquent Forms W-2 are not required and are not to be solicited by the examiner or filed by the employer in a CSP case. However, the employer should request Forms W-4 from the "new" employees effective with the start of the CSP agreement.

The report writing instructions for FICA tax examinations, including Additional Medicare Tax, generally apply to RRTA tax examinations.

Report writing instructions for Form 4668-C are found in IRM 4.23.10.10.9.2, Form 4668-C, and Exhibit 4.23.10-5, Form 4668-C, Employment Tax Examination Changes Report - Railroad.

If RRTA and income tax withholding are both adjusted by the examination, separate forms, Form 4668-C and 4668, are prepared for each type of tax, as income tax withholding is reported quarterly on Form 941 and the RRTA tax liability is reported annually on Form CT-1, Employer's Annual Railroad Retirement Tax Return, by railroad employers to pay Tier 1 and Tier 2 taxes as provided by IRC 3201 and IRC 3231. In addition, Form CT-2, Employee Representative's Quarterly Railroad Tax Return, is a quarterly return filed by employee representatives to pay Tier 1 and Tier 2 taxes as provided in IRC 3211 and IRC 3212. Examinations of Form CT-2 are also reflected on Form 4668-C. See IRM 4.23.10.10.9.2, Form 4668-C, for additional information.

Item Reference Number (IRN) "070" is necessary for adjusting the total of railroad retirement tax (including Additional Medicare Tax for calendar years beginning after December 31, 2012). Line 16 of Form 4668-C identifies the total RRTA wage adjustment as "070" for Form CT-1 examinations only. This IRN is also entered on Item 15, "Credit and Tax Computation Adjustments," of Form 5344. See IRM 21.7.2.6.5.1, Form CT-1 Tax Adjustments.

The case file will include a memorandum to the Railroad Retirement Board (RRB) stating each employee's name and SSN, the name of the railroad employer, and the increase or decrease in the amount of compensation subject to RRTA for each employee. Due to disclosure concerns, do not include references to income tax withholding, FICA wage, or FICA tax adjustments in the memorandum.

All agreed railroad employment tax examination cases will be flagged on Form 3198 in the "Special Features" section under "Other Instructions" with the following statement: "Railroad Retirement Board Case, Special Disclosure Action Required." IRC 6103(l)(1)(C) authorizes disclosure of federal tax returns and return information to the RRB for administering the RRTA. Also, additional instructions should be provided to enable CCP to accurately process the case in the "Letter Instructions for CCP / Other Instructions" section, with the following statement:
"Forward copies of Form 4668-C, Form 886-A (or copies of the issue lead sheets, if applicable), and RRB Memorandum to RRB."

Upon closing an employment tax case involving a railroad, the examiner should include an additional copy of the report in the file, clearly marked as an RRB referral. The RRB referral will consist only of those items pertinent to RRTA taxes, that is :

Questions involving railroad employment taxes should be directed to the SB/SE Employment Tax Policy Analyst assigned to Railroad Employer issues. Additional information for railroads is available on the Knowledge Management website under Transportation at https://portal.ds.irsnet.gov/sites/vl025/lists/railroad/landingview.aspx including the Railroad Retirement Tax Act Desk Guide.

Examiners will prepare reports for cases in which claims are allowed in-full or in-part under the same procedures prescribed for other cases. Include a statement regarding the disposition of the claim in the "Other Information" section of Form 4666 and attach Form 4667, 4668, 4668-B, and/or 4668-C , and/or to identify the tax adjustments.

Refer to IRM 4.23.13, Employment Tax - Adjusted Returns, Abatements and Claims, for instructions.

If all employment tax returns/periods examined result in no change, the no-change report will be issued using Form 4666 and the appropriate closing letters. See IRM 4.23.10.5, Notification Letters in No-Change or No-Liability Cases. In Employee Plans/Exempt Organizations (EP/EO) examinations, the examiner will also enter the no-change disposal code on Form 5772, EP/EO Workpaper Summary.

All no-change reports should include the caveat on the Form 4666: "This examination report is subject to the approval of the (appropriate designee):" Examples of the appropriate designee include:

If the examination did not address worker classification issues, the following disclaimer must be entered on the Form 4666: "The examination of your employment tax returns as reflected on this report did not include an examination for employment tax purposes of whether any individuals should be treated as employees of the taxpayer."

If the examination addressed worker classification issues for some classes of workers and not for others and those workers were determined not to be employees, the following disclaimers must be entered on Form 4666 to specify which classes of workers that were examined:

In examinations, examiners should control all four quarters of Form 941 when an examination covers the entire year. This applies even if the case results in a no-change, as this will more accurately reflect the audit work conducted. In some cases, the fourth quarter return for each calendar year examined may initially be controlled. Controls on prior/subsequent or related quarters should be requested using status code 10 as soon as it is determined they will be included as part of the exam. This will ensure that proper inventory controls are in place and prevent delays when the case is ready for closure from the group.

When a Form 941 examination for less than a calendar year results in a no-change, no-change only those quarters examined. Explain in the workpapers the reason for not examining the other quarters in the calendar year.

The taxpayer will be issued a no-change report on Form 4666 indicating the period(s) and return form(s) examined and closed as no-change.

Guidelines for notification letters to the taxpayer and the taxpayer's representative in no-change cases are found in IRM 4.23.10.5, Notification Letters in No-Change or No-Liability Cases.

IRM 4.23.10.5, Notification Letters in No-Change or No-Liability Cases, procedures will not be used for an examination if there are issues involving both change and no-change results for the various returns examined in a calendar year examination or multiple year examination. Rather, the no-change results will be included with the change results in a single examination report:

When a taxpayer's employment tax returns are examined concurrently with other returns (income tax returns or TE/GE returns such as Form 990, Return of Organization Exempt from Income Tax) and the employment tax examination results in a no-change, a statement to that effect will be included in the income tax or TE/GE examination workpapers. The statement must identify the employment tax returns examined and indicate briefly the extent of the examination.

In examinations, examiners should control all four quarters of Form 941 when an examination covers the entire year. This will more accurately reflect the audit work conducted. In some cases, the fourth quarter return for each calendar year examined may initially be controlled. Controls on prior/subsequent or related quarters should be requested using status code 10 as soon as it is determined they will be included as part of the exam. This will ensure that proper inventory controls are in place and prevent delays when the case is ready for closure from the group.

The restriction on assessment in IRC 7436 created the requirement for a separate agreement form, Form 2504-T. This form is used for soliciting agreement for issues relating to IRC 7436 issues. Exhibit 4.23.10-8, Form 2504-T, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment (Employment Tax Adjustments Subject to IRC 7436), has instructions on completion of the form.

Form 2504, is the agreement form used in three situations:

Form 2504-S is used when non-IRC 7436 audit issues are examined and adjusted and the examination did not address issues with regard to employee classification and worker status. The form contains the following disclaimer statement: "The examination of your employment tax returns as reflected on this agreement did not include an examination for employment tax purposes of whether any individuals should be treated as employees."

Examiners may encounter situations in which there are IRC 7436 and non-IRC 7436 issues in an examination. Separate Form 4666, 4667, 4668, 4668-B and 4668-C and agreement Form 2504-T and 2504 or 2504-S MUST BE prepared if both IRC 7436 and non-IRC 7436 issues are present. Examiners may encounter situations in which there are a combination of agreed and unagreed adjustments involving IRC 7436 and non-IRC 7436 issues.

When agreement is reached with the taxpayer, the examiner prepares and furnishes an examination report (Form 4666, 4667, 4668, 4668-B, 4668-C, 2504, 2504-S and/or 2504–T) to the taxpayer at the closing conference. A copy will also be given to the taxpayer's representative if provided for by a power of attorney Form 2848. The taxpayer and representative will be provided final notice by Letter 3382 after the case has cleared technical review.

All agreed reports are to include the following caveat on Form 4666 This examination report is subject to the approval of the (appropriate designee). Examples include:

As the reason(s) for adjustment(s) are explained at the conclusion of the examination, a written explanation is not required unless it is deemed necessary by the examiner. A written explanation will be furnished if specifically requested by the taxpayer or the representative and for all unagreed examination issues.

When an examination results in an agreement to the findings on one type of tax or issue and no agreement on another, separate reports are prepared. See IRM 4.23.10.15.1, Partial Assessment / Quick Assessment Processing, for instructions.

When income tax withholding is computed without using IRC 3509, the examiner will advise the taxpayer of their rights under IRC 3402(d) and furnish a supply of Forms 4669, Statement of Payments Received, and a Form 4670, Request for Relief of Payment of Certain Withholding Taxes.

Employer requests under IRC 3402(d) for relief from the payment of income tax withholding or backup withholding can be handled by either the campuses or the examiner. The examiner has the authority to accept the Forms 4669/4670 for income tax withholding adjustment under IRC 3402(d).See IRM 4.23.8.4.3, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners, for additional instructions on granting relief under IRC 3402(d). If the examiner does not receive Forms 4669/4670 from the employer by the time the case is closed, the taxpayer will be instructed to wait until a notice of assessment is received before submitting Forms 4669/4670 to the address identified in the instructions for Form 4670 abatement.

Employer requests under IRC 3102(f)(3) for relief from the payment of Additional Medicare Tax (AdMT) can be handled by either the campus or the examiner. The examiner has the authority to accept the Forms 4669/4670 for AdMT withholding adjustment under IRC 3102(f)(3). See IRM 4.23.8.4.3, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners, for additional instructions on granting relief under IRC 3102(f)(3). If the examiner does not receive Forms 4669/4670 from the employer by the time the case is closed, the taxpayer will be instructed to wait until a notice of assessment is received before submitting Forms 4669/4670 to the address identified in the instructions for Form 4670 abatement.

For further information on the partial assessment procedures and report writing for IRC 3402(d) and/or IRC 3102(f)(3) examinations involving field abatements, see:

Special requirements apply to household employers with domestic employees under IRC 3510 and IRC 3121:

Household employers generally report FICA taxes, FUTA tax, and any withheld income tax with respect to household employees on Schedule H, Household Employment Taxes, which is filed with the employer's individual income tax return.

Household employers who file Schedule H must pay FICA taxes, FUTA tax, and any withheld income tax by the due date for their individual income tax returns, not including any extensions, for the applicable year. An employer may be subject to a penalty for the underpayment of estimated tax if the employer did not pay enough income and household employment taxes during the year. The employer for purposes of Schedule H is whoever applied for the EIN on Form SS-4, Application for Employer Identification Number. If the income tax return is a joint return, only one taxpayer can be the employer of record on Schedule H, and this should be the same taxpayer who obtained the EIN. The employer is responsible for filing Forms W-2 and W-3, Transmittal of Wages and Tax Statements, for the household employee(s).

Employers that have both household employees and other employees who are not household employees may choose either of two options for reporting employment taxes, including any withheld income tax, with respect to the household employees. These employers may either:

For FICA, FUTA, and income tax withholding purposes, an administrator or executor of an estate who maintains a private home for the decedent's family, or a trustee that maintains a home as a private home for a beneficiary of the trust, is a household employer of any employee that performs domestic services in the home.

Home care service recipients (HCSR) are individuals enrolled in government programs under which they receive health care and personal attendant care that usually constitute domestic services for employment tax purposes. They are generally the employer of the home care service providers for employment tax purposes. A HCSR may designate an agent under IRC 3504 to perform acts required of them as an employer. Generally, IRC 3504 agents for HCSRs file aggregate Form 941, attaching Schedule R (Form 941), to report FICA taxes and withheld income taxes, and file aggregate Form 940, attaching Schedule R (Form 940), to report FUTA taxes. See Rev. Proc. 2013-39, 2013-52 IRB 830 for special rules that apply to state and local government agencies that act as agent for HCSRs.

If the "cash wages" paid to any household employee by a household employer is more than the dollar threshold in a calendar year, all of the "cash wages" paid to that employee are subject to FICA taxes. The dollar threshold is adjusted annually for inflation. Refer to Schedule H and Publication 926, Household Employer's Tax Guide, for the current year thresholds and additional information.

The threshold for FUTA "cash wages" is not adjusted annually. Unlike the FICA threshold, the FUTA threshold is based on total "cash wages" paid by the employer to all domestic employees. A household employer must file a FUTA tax return only if cash wages of $1,000 or more was paid in any calendar quarter in current year, or the previous calendar year, for household work. Thus, if in a calendar quarter an employer pays $500 each to a baby sitter and a housekeeper, FUTA taxes are due on wages paid to all household employees this year and next year. Because different criteria apply, it is possible to be liable for FUTA but not FICA tax for a domestic employee, or vice versa.

IRC 3510 does not transform the taxes withheld and paid by household employers from employment to income taxes, it merely changes the manner of reporting and collection. Therefore, any employment tax audit adjustments should not be reflected on report Form 4549, Report of Income Tax Examination Changes. Examiners use employment tax report forms (Form 4666, 4667, 4668, 2504, 2504-S, and/or 2504-T) for adjustments of employment taxes for household employees. Adjustments to the annual Schedule H are made in the fourth quarter of these forms. If no Schedule H is included with the employer's filed income tax return, the statute of limitations for assessment of employment taxes has not started.

All Schedule H examinations must be controlled on AIMS and ERCS using MFT 30. If the taxpayer did not file Form 1040, U.S. Individual Tax Return, a substitute for return (SFR) must be filed to process the Schedule H adjustment. As employment tax changes, adjustments to Schedule H are not included in a statutory notice of deficiency (SNOD).

When a Schedule H adjustment is made, Form 3198 is attached to the case file with the following notation in Other Instructions: "Schedule H Adjustment – Forms 4666, 4667, 4668 and [insert appropriate Form 2504 type] enclosed for the primary/secondary (whichever applies) taxpayer." It is important to designate the primary or secondary taxpayer as the employer for joint filers, since this determines the reference numbers used in accurately completing Form 5344.

Schedule H employers may be eligible for the relief provisions of section 530, the relief provisions of IRC 3509, the relief provisions under IRC 3402(d) and/or IRC 3102(f)(3), and the special procedures of IRC 7436 if the applicable requirements are met. See IRM 4.23.22, Employment Tax, Unagreed Employment Tax Case Procedures, and IRM 4.23.5.3, Section 530 of the Revenue Act of 1978, for additional information.

Form 4665, Report Transmittal, is used in unagreed cases. It is not required in agreed cases but may be used if deemed necessary by the examiner.

Form 4665 summarizes the unagreed issues, if necessary, and indicates whether the taxpayer was offered the opportunity to discuss the unagreed issues with a manager.

Rev. Proc. 2012-18 provides the following guidance on any transmittal to Appeals in section 2.03(4)(b) "Transmittal:" "The transmittal memorandum, a T-Letter, or any similar document that the originating function uses to transmit the administrative file (transmittal) should not include statements or comments intended to influence Appeals decision-making process. This includes recommendations concerning what Appeals should consider and how Appeals should resolve the case. In contrast, it is permissible to include in the transmittal a neutral list of unagreed issues, without discussion, and to indicate which ones, if any, are coordinated issues."

If the transmittal includes the type of statements or comments described in the second sentence of Rev. Proc. 2012-18 section 2.03(4)(b) or includes other prohibited communications in a document that is either placed in the administrative file as a transmittal or uploaded to the administrative electronic file in conjunction with preparing the case for transmission to Appeals, the document must be shared by the originating function with the taxpayer/representative at the time that the administrative file is sent to Appeals.

Form 4666 is used as a cover and reference sheet and summarizes the adjustments to FICA taxes, RRTA, income tax withholding, and FUTA. It also summarizes adjustments to tax credits and penalties.

Form 4666 is the first page of the report and will be numbered "1 of xx" . Form 4667, 4668, 4668-B, and 4668-C will also be numbered and the numbers shown in column (g) of Form 4666.

See Exhibit 4.23.10-1, Form 4666, Summary of Employment Tax Examination, for specific instructions for completing Form 4666. The form is used in all employment tax reports:

If a worker classification issue was examined and the workers were determined to be independent contractors (or non-employees) or section 530 relief was granted, a statement must be included on the Form 4666 noting the job category accepted. Section 530(e)(2)(A) limits the prior audit safe haven for audits commenced after December 31, 1996, that included an examination for employment tax purposes of the status of the category of workers at issue or of a substantially similar category of workers.
Also, if no worker job classification was examined, a statement to that effect should be included. See IRM 4.23.10.10.3, Employment Tax No-Change Report and IRM 4.23.10.10.3.1, No-Change Reports for Section 530 Eligible Taxpayers.

Form 4667 is the basic report form for examinations of Form 940. Form 4667 summarizes the examination changes made to the taxpayer's FUTA liability.

Examiners must indicate whether the adjustments are "Non-7436 Adjustments," "7436 Adjustments (Worker Classification Issue)," or "7436 Adjustments (Wage Issue)" by checking the appropriate box at the top portion of Form 4667. Examiners must prepare separate report forms for each of the above categories of adjustments even if the adjustments can be included on the same agreement form (for example, Form 2504, 2504-S, or 2504-T).

See Exhibit 4.23.10-2, Form 4667, Examination Changes - Federal Unemployment Tax, for specific instructions for completing Form 4667. They are self-explanatory except for the following:

Form 4668 is the basic report form for examinations of Form 941, Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, Form 944, and Schedule H. It is used for additional tax, overassessment, or delinquent tax proposals. See Exhibit 4.23.10-3, Form 4668, Employment Tax Examination Changes Report, for specific instructions.

Form 4668 reports adjustments to total wages/tips, withholding taxes, and various credits and computes the additional tax, applicable penalties and interest. These adjustments are allocated either quarterly or annually based on the required return.

Use separate Form 4668 for each calendar year or portion of a calendar year examined for each return examined. In addition, multiple Forms 4668 may be necessary for each period if IRC 7436 and non-IRC 7436 issues are present, or if there is a partial agreement.

Form 943 is used to report FICA wages (including wages subject to Additional Medicare Tax withholding) and any income tax withholding. Examinations of Form 943 are conducted under MFT Code 11 and Activity Code 467. Since Form 943 is an annual return, only column (e), 4th quarter of Form 4668, should be completed to show the increase or decrease in FICA wages (including wages subject to Additional Medicare Tax withholding) and income tax withholding.

Form 944 is designed to allow the smallest employers (those whose annual liability for social security, Medicare, Additional Medicare tax, and withheld federal income taxes is expected to be $1,000 or less) to file and pay these taxes once a year instead of every quarter. Examinations of Form 944 are conducted under MFT Code 14 and Activity Code 462. Since Form 944 is an annual return, only column (e), 4th quarter of Form 4668, should be completed to show the increase or decrease in FICA wages (including wages subject to Additional Medicare Tax withholding) and income tax withholding. For additional information on Form 944 examinations, see IRM 4.23.8.14, Form 944 Examinations and Filing Requirements.

Examiners must indicate whether the adjustments are "Non-7436 Adjustments," "7436 Adjustments (Worker Classification Issue)," , or "7436 Adjustments (Wage Issue)" by checking the appropriate box at the top portion of Form 4668. Examiners must prepare separate report forms for each of the above categories of adjustments even if the adjustments can be included on the same agreement form (for example, Form 2504, 2504-S, or 2504-T).

Forms W-2 or Forms W-2c, Corrected Wage and Tax Statement, must be filed with the SSA and furnished to employees for adjustments affecting the wages reported in boxes 1, 3, or 5 for Form W-2 except for worker classification adjustments for which a CSP agreement was secured. See IRM 4.23.10.8.2, CSP Procedures. Insert the number of employees requiring a Form W-2 or W-2c to be filed and furnished in the information section at the bottom of Form 4668. Enter the last day for filing and furnishing Form W-2/W–2c and Form W-3/W-3c in the applicable space.

For adjustments to the Paid Sick and Family Leave Credits, Forms W-2c must be furnished to the affected employees to correct the amount reported in box 14. Form 4668 must include a paragraph for furnishing Forms W-2c, separate from the previous paragraph for filing and furnishing Forms W-2/W-2c. Insert the number of employees requiring a Form W-2c to be furnished in the information section at the bottom of Form 4668.

If the examiner secures original or delinquent Forms W-2 during the examination, refer to IRM 4.23.8.10, Delinquent Forms W–2/W–2c, for mailing and processing instructions.

If the Forms W-2 are not secured prior to closing, the employer should be instructed to file the forms in accordance with the SSA website. If e-filing, instruct the employer to visit the SSA’s website at www.socialsecurity.gov/employer. If the employer is filing paper returns, file with the SSA at the appropriate address in the "General Instructions for Forms W-2 and W-3, (Including Forms W-2AS, W-2CM, W-2GU, W-2VI, W-3SS, W-2c, and W-3c)" .

The examiner’s name, group number, and BOD information must be included on the Form 4668.

Form 2504 and 2504-S are the agreement forms for an employment tax examination or the portion of an employment tax examination, involving non-IRC 7436 issues. These summarize the total tax adjustments and penalties. No-change periods are not reflected on either Form 2504 or 2504-S. Instructions for completing Form 2504 are in Exhibit 4.23.10-6, Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment Tax Adjustments Not Subject to IRC 7436). Instructions for Form 2504-S are in Exhibit 4.23.10-7, Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment Employment Tax Adjustments Not Subject to IRC 7436; Worker Classification or Section 530 Not Addressed in this Exam).

Form 2504-T is the agreement form used for taxes related to adjustments for the portion of an employment tax examination involving IRC 7436 issues of worker classification and section 530, as well as wage issues determined to be IRC 7436 issues. See Exhibit 4.23.10-8, Form 2504–T, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment (Employment Tax Adjustments Subject to IRC 7436), for instructions on completing Form 2504-T.

Taxpayers should be requested to sign the agreement form. The examiner should furnish the taxpayer with a signed copy of the agreement form. Taxpayers must be informed that signing Forms 2504, 2504-S, and/or 2504–T requires them to prepare and file Form W-2 or W-2c for employee wage issues.

Form 886-A is used when written explanations of adjustments are required. Exhibit 4.23.10-11, Form 886–A Format for Employee vs. Independent Contractor Adjustment, contains an illustration of the recommended format for a worker classification adjustment.

In lieu of Form 886-A, a copy of the examiner's Employment Tax Lead Sheets (ETLS) relating to each adjusted issue may be attached to the examination report. The copy of each issue lead sheet used as an attachment to the examination report should be modified to remove extraneous information (for example, work paper cross-referencing, audit steps that were not employed during the audit, and so on) that would not be useful to the taxpayer or representative.

Form 5701, Notice of Proposed Adjustment (NOPA), is used to summarize proposed adjustments and is used as a coversheet for Form 886-A for large cases. Form 5701 and 886-A are attached to the final audit report. See IRM 4.23.4.5.6, Form 5701 - Notice of Proposed Adjustment.

An IRC 6020(b) return does not meet the requirements for allowing the credit for state unemployment contributions. When preparing a 6020(b) return, the IRS does not have an employer certification under penalties perjury statement, which means that the taxpayer does not meet the regulatory requirements for claiming the credit solely through a 6020(b) return. See IRM 4.23.10.11(5).

The IRS must have a signed statement from the taxpayer, not just the third-party reporting from the state or other third party. Two requirements must be met under the regulations:

The examiner will identify cases in which the issue on Form 4668 is the conversion of workers from independent contractor (or non-employee) status to employee status. Annotate "Reclassification - Employee Status" in the special instructions section of Form 3198, Form 3198-A, or the "other" section of Form 9231. This procedure will assist the support operation in identifying any Form W–2/W–2c if they are subsequently filed by the employer with the SSA.

Effective November 19, 2015 in a memo issued by the Deputy Commissioner for Services and Enforcement, the policy for use of fax and signature stamps (fax policy) was revised to eliminate the dollar ceiling for acceptance of consents to assess additional tax and taxpayer closing agreements by fax.

Specifically, consents to assess additional tax (Forms 2504, 2504-T, 2504-S, 870, and others) can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax.

The fax policy was clarified October 29, 2019 in a memo from the Deputy Commissioner for Services and Enforcement to clarify that the term faxed signatures in the "Policy for Use of Fax" should be construed to include electronic images of scanned original signatures transmitted by Enterprise Electronic Facsimile (EEFAX) or e-mail.

IRM 4.20.1.2, Pre-Contact and Fact Finding - Determining the Scope, describes collectibility considerations and processing procedures in the pre-contact and fact finding phases of the examination.

IRM 4.20.1.3.4, Coordinate with Collection, provides procedures for agreed BMF cases with unpaid liabilities in excess of $100,000.

A referral is mandatory for agreed cases with total unpaid liabilities over $100,000. See IRM 4.20.1.3.4, Coordinate with Collection, and IRM 4.20.1.4.2, Examiner Responsibilities.

When a case meets the criteria above:

The examiner will document these actions in the Form 9984 and in the payment section of Lead Sheet 105-2, Pre-Audit Plan Work Paper, which is part of the SB/SE Employment Tax Lead Sheets (ETLS).

The local Collection office will proceed with the appropriate action to ensure prompt assessment, and proceed with the necessary collection actions.

A streamlined process for cases requiring expedited assessments is available for:

Expedited process procedure: Prepare a fax cover sheet for transmittal with all relevant information, including identification of all parties, the forms attached, and the number of pages. The fax will consist of:

CCP will make the partial/quick assessment within a few days and fax the originator copies of Form 5344 marked "Request Completed" and BMFOLT’s showing the pending assessments for association with the case file.

Forms 5344 must be completed in their entirety when the case is ready for final closure from the group. For periods where there is no additional assessment due to the processing of the partial assessment, enter a TC 300 with a zero amount. The final disposal code is based on the final case resolution (Disposal Code (DC) "02" if no additional assessments are proposed; DC "03" /"04" agreed or DC "07" /"08" unagreed or appealed).

Additional instructions for Form 5344 for partial assessments are found in IRM 4.4.12, AIMS/Processing Handbook, Examined Closings, Surveyed Claims, and Partial Assessments.

TE/GE examiners should refer to their own procedures for their respective organizations.

This section applies only to examinations where abatement procedures under IRC 3402(d) or IRC 3102(f)(3) apply. To properly assess:

This modified Partial Assessment is a two-step process which ensures the gross amount of tax, penalty, and interest are computed and assessed and that the IRC 3402(d) and/or IRC 3102(f)(3) abatement performed by CCP at case closing only recomputes the income tax and/or Additional Medicare Tax portion of the examination; ensuring no reduction of penalties and interest computed on the gross tax.

The examiner should discuss the two-step process with the taxpayer using the statement included on the Form 4666. See IRM 4.23.10.15.3, Examination Report Forms for IRC 3402(d) and IRC 3102(f)(3) Abatements. This should alleviate taxpayer concerns that the Forms 4669 were not properly processed upon receipt of the first notice.

The following instructions apply for report writing using the two-step process.

The key to sustaining an examiner's adjustment is the narrative in the explanation of adjustments. See IRM 4.23.10.10.11, Explanation of Adjustments: Form 886–A, Form 5701, and Employment Tax Lead Sheet (ETLS) Copies. These narratives should be prepared for each unagreed issue and any alternative issue proposal. See Exhibit 4.23.10-11, Form 886–A, Format for Employee vs. Independent Contractor Adjustment, for example.

The narrative should be divided into five parts, with modifications as needed for specific cases. The five parts are:

Issues: The issue(s) involved in a case (for example, reclassification, backup withholding, unreported remuneration, and so on) will be listed and their relevance to the case explained. For worker classification cases, the explanation should address:

For IRC 7436 wage issues, the explanation should address:

Facts: Address the business background and the taxpayer's operations in general. In developing and presenting evidence, secure and document information in the workpapers to make it easy to identify the nature of the evidence and the location (for example, a document or a witness). Include facts and documentary references supporting the amount of wages determined. All facts should be included in the facts section even if they need to be repeated when explaining the IRS’s position later in the Form 886-A. Conclusions and opinions should not be included in the facts section. Facts should be stated objectively.

Law: Cite relevant court cases, revenue rulings, revenue procedures and other compelling sources. The relationship of sources cited to the subject case must be clearly established. Citations should be written out and include an explanation of the law when appropriate. Examiners should not simply list a Code section or Revenue Ruling number.

Taxpayer's Position: If known, the taxpayer's position regarding all issues, including section 530, will be stated objectively. Include all legal or other citations relied upon in support of the taxpayer’s position.

Service's Position: This is a summation of the position taken by the examiner and explanation how the law applies to the facts. The examiner will address the taxpayer's position point by point. Specific reference will be made to information developed through on-site observation of the business premises, third-party interviews, interviews with the taxpayer, answers to common law questions, statutory authority, or other legal resources and any other relevant sources to support the IRS's position.

Tax Computation: The tax computation rate must be explained in worker classification cases. If IRC 3509(a) or IRC 3509(b) rates are not used, a full explanation is required. In addition, a statement on the application and computation of CSP should be included.

Penalty: If proposed, explain the reasons for penalty proposal(s) and address any reasonable cause factors. Also, include the computation or spreadsheet used.

Unagreed Form 940 examination and additional tax or over-assessment cases, including changed delinquent return cases:

Unagreed Form 940 examination and substitute for return (SFR) cases:

Unagreed Form 941, 943, 944, 945, CT-1, and CT-2 examinations and additional tax cases, including changed delinquent return cases:

Unagreed Form 941, 943, 944, 945, CT-1 and CT-2 examinations and over-assessment cases:

Unagreed Form 941, 943, 944, 945, CT-1 and CT-2 examinations and SFR cases:

Prepare separate unagreed reports for IRC 7436 and non-IRC 7436 issues. See IRM 4.23.10.10.3.1, Employment Tax Change Report.

The explanation of adjustments will follow the format described in IRM 4.23.10.16.1, Preparing Explanation of Adjustments, above.

Follow the procedures for issuance of the 30–day letter for unagreed cases. See IRM 4.23.10.16, Unagreed Employment Tax – Examination Reports. See IRM 4.23.10.7, Unagreed Cases and 30–Day Letters.

Taxpayer and their representative will receive a copy of the unagreed employment tax reports with the 30–day letter.

Rev. Proc. 99-28 section 2.03(6) defines the term "whipsaw" as a situation produced when the government is subjected to conflicting claims of different taxpayers. A potential whipsaw situation exists when there is a transaction between two parties and differing characteristics of transactions will benefit one and hurt the other for tax purposes.

Examples of potential whipsaw issues in employment tax include:

For additional information on whipsaw issues and examples, see IRM 4.10.13.5, Adjustments Between Correlative U.S.Taxpayers to Achieve Consistent Tax Treatment (a/k/a Whipsaw Issues), and IRM 4.10.7.4.9, Whipsaw (a/k/a correlative adjustments).

An alternative position for an issue in an unagreed case is a secondary position that the IRS may ultimately rely on if the primary position cannot be upheld. An alternative position is recommended in unagreed cases due to the fact that Appeals will not raise new issues. See IRM 1.2.1.9.2, Policy Statement 8-2 (rev. 1) (formerly P-8-49), "New issues not to be raised by Appeals." It is the responsibility of Examination to identify all potential issues during the audit.

There may be more than one alternative position. Therefore, the examiner must outline all alternative positions with regard to the contested issue that may be applicable in case the primary position is not sustained. See IRM 4.10.8.12.5, Alternative Positions.

Examples of potential alternative positions in employment tax include:

When a worker provides the income tax examiner with sufficient evidence that the services he/she performed for someone else (individual, partnership, corporation, and so on) were that of an employee rather than a non-employee, yet he/she was treated as a non-employee (for example, Form 1099), the examiner should correct the worker's return (for example, Form 1040) to eliminate the self-employed status and correct for the employee share of FICA/RRTA and AdMT taxes.

For employee adjustments to FICA in a Form 1040 examination, the income tax report (for example, Form 4549) will contain an explanation of the adjustment to FICA taxes and/or AdMT on wages paid by an employer in the "Other Information" section of the income tax report:

For employee adjustments to RRTA on Form 1040, the income tax report (in other words Form 4549) will contain an explanation of the adjustment to RRTA taxes in the "Other Information" section of the income tax report:

To ensure proper processing of the adjustment for employee share of FICA/RRTA taxes, Form 3198 must be prepared and included with the case file. Check "Other Instructions" in the "Special Features" section. For FICA tax adjustments, enter "Computation of FICA taxes enclosed (and Form 8959, if Form 8959 is applicable)." For RRTA adjustments, enter "Computation of RRTA taxes enclosed (and Form 8959, if Form 8959 is applicable)."

Any SE Income/SE Tax Adjustment Information is forwarded to the Social Security Administration (SSA) electronically. The Form 3198 must indicate the SE Income/SE Tax Adjustment figures for primary and/or secondary taxpayer. The computer-generated page of the Revenue Agent Report (RAR) must be attached to the Form 5344 that contains the reference number information entered in Item 15 of the Form 5344.

If a worker is determined to be an employee but due to section 530 the employer is not liable to withhold any employment taxes, including the employee share of social security and Medicare Taxes, RRTA, and/or AdMT on wages paid by an employer, the worker remains liable for these employee taxes.

If a worker received a Form W–2 from an employer as a result of a worker status determination, the worker is liable for the employee share of FICA/RRTA taxes, including AdMT, unless the employer paid the employee share of FICA/RRTA taxes including AdMT that the employer should have withheld from the employee.

If a worker received a Form W–2 from an employer as a result of a worker status determination and the employer paid the employee share of FICA/RRTA taxes (including AdMT that the employer should have withheld from the employee), any subsequent changes to AdMT on Form 1040 would be subject to deficiency procedures. See IRM 4.23.10.17.4 for additional information.

For adjustments to the employee share of FICA and AdMT on wages paid by an employer, the income tax report (for example, Form 4549) will contain an explanation of the adjustment to FICA taxes in the "Other Information" section of the income tax report:
"In connection with the examination of your income tax return (Form 1040) for the year(s)__________, an adjustment is reflected on Form 2504 for the employee share of FICA taxes. FICA taxes are composed of the old-age, survivors, and disability insurance taxes (also known as social security tax, IRC 3101(a)), the hospital insurance tax (also known as Medicare tax, IRC 3101(b)), and the AdMT (IRC 3101(b)(2)). See the computation accompanying this report."

For adjustments to the employee share of RRTA and AdMT on wages paid by an employer, the income tax report (for example, Form 4549) will contain an explanation of the adjustment to RRTA taxes in the "Other Information" section of the income tax report:
"In connection with the examination of your income tax return (Form 1040) for the year(s)__________, an adjustment is reflected on Form 2504 for the employee share of RRTA taxes. RRTA taxes are composed Tier 1 and Tier 2 taxes, and includes AdMT (IRC 3101(b)(2)). See the computation accompanying this report."

To ensure proper processing of the adjustment for employee share of FICA/RRTA taxes including AdMT on wages paid by an employer, Form 3198 must be prepared and included with the case file. Check the "Other Instructions" box in the Special Features section and insert "Tax Computation enclosed (and Form 8959, if applicable)." For RRTA adjustments, enter "Tax Computation enclosed (and Form 8959, if applicable)."

The Form 3198 must indicate the tax adjustment figures for primary and/or secondary taxpayer. The computer generated page of the RAR must be attached to the Form 5344 that contains the reference number information entered in Item 15 of the Form 5344.

For additional procedures on report writing and computation, including the preparation of Form 2504, see IRM 4.23.10.17 and following subsections.

When an income tax examination is unagreed and includes an adjustment for the employee share of FICA/RRTA taxes (including an adjustment to AdMT on wages paid by an employer), a taxpayer may request Appeals consideration for the income tax adjustment, as well as the adjustment(s) to FICA/RRTA/AdMT taxes on wages paid by an employer. If the income tax case is being closed for a Statutory Notice of Deficiency (SNOD) or to Appeals (in situations where the FICA/RRTA/AdMT on wages paid by an employer adjustment was agreed to or not part of the appeal request), the FICA/RRTA/AdMT on wages paid by an employer adjustment must be closed as a partial assessment to CCP. Once the partial assessment for FICA/RRTA/AdMT on wages paid by an employer has been completed by CCP, the income tax case will either be closed to Technical Services for the issuance of a SNOD or forwarded on to Appeals. See IRM 4.4.10.3, Processing Employee Share of FICA - CCP Responsibility

Since the FICA and RRTA taxes are not income taxes, they are not subject to deficiency procedures and cannot be included on a SNOD. However, AdMT can be either subject to deficiency procedures or excluded from deficiency procedures.

A partial assessment should be closed using Disposal Code (DC) "08" without an agreement date. DC "08" should be used since the 30-day interest-free period is not applicable to employee FICA, RRTA, and AdMT under IRC 3101 and 3111. All partial assessment information should be faxed to the appropriate CCP campus. For additional information, refer to:

Individual liability for AdMT on wages paid by an employer can differ from the amount of AdMT withheld by an employer because individual AdMT liability is calculated based on Form 1040 filing status (for example, joint). Employers are required to withhold AdMT from wages they pay to an individual in excess of $200,000 in a calendar year, without regard to the individual's filing status or other income received by the individual or the individual's spouse. Refer to Treas. Reg. 31.3102-4(a).

Thus, any additional liability for AdMT on Form 1040 must be analyzed to determine whether the liability is based on SE Income or on wages paid by an employer. This difference affects the procedures that must be followed prior to assessment (deficiency procedures prior to assessment or assessment without deficiency procedures).

This difference also affects how the statute of limitations is extended using either Form 872, Consent to Extend the Time to Assess Tax or Form SS-10, Consent to Extend the Time to Assess Employment Taxes. See IRM 4.23.14.2, Period of Limitation for Assessment, and following sections for additional information.

There is no provision for the coordination with AdMT on RRTA compensation, nor is there a provision for coordination between AdMT on FICA wages and AdMT on RRTA compensation. Thus, AdMT is always applied separately to RRTA compensation in situations where individuals or joint filers have compensation subject to RRTA in addition to wages subject to FICA and/or SE Income. See Form 8959, Additional Medicare Tax, for assistance in computation.

In general, LB&I employment tax case file assembly instructions:

LB&I Workpaper Assembly:

See IRM 4.23.10.19.2, Assembly of Employment Tax Case File Folder - SB/SE, for guidance on required closed case assembly, forms and letters beyond those specifically mentioned in this section.

The following procedures apply only to paper case file assembly.

Tax returns are assembled in case files by year and type of return.

Attach the following to the face of the folder:

Attach the following to the inside of the folder (stapled to left side):

Forms and documents to be included in the case file:

Forms and documents to be attached to the tax return, Substitute for Return, TRDBV, or BRTVU:

Workpaper Assembly

See IRM Exhibit 4.4.1-2, Case Assembly, and IRM 4.10.9.9, Case File Assembly for Closing, for additional information.

EOE and FSL/ET examiners should consult their operating procedures in IRM 4.75.16, Case Closing Procedures, for case file assembly instructions and the use of Report Compliance Case Management System.