Purpose: This section explains the procedures for the receipt, control, and processing of requests received under the Voluntary Closing Agreement Process – Employment Tax (VCAP - ET).

Audience: This section contains instructions and guidelines for Exam Case Selection, Employment Tax Workload Selection and Delivery, Small Business/Self-Employed (SB/SE) examiners, and LB&I examiners to use when VCAP - ET requests are submitted and assigned.

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 and to support compliance with employment tax laws.

Primary Stakeholders:

Treasury Regulation section 301.7121-1(a) provides that a closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement, and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of an agreement. Subject to the guidelines provided in the regulations, whether an agreement will be entered into is a matter within the Commissioner’s sole discretion and therefore, within the discretion of those to whom the Commissioner has delegated the authority to enter into and approve such agreements. In exercising such discretion, the Service may properly decline to enter into voluntary closing agreement.

IRM 8.13.1, Closing Agreements – Processing Closing Agreement in Appeals, provides general advisory procedures for Service personnel, including employees in the Wage and Investment (W&I), Small Business/Self-Employed (SB/SE), and Large Business and International (LB&I) operating divisions, to address closing agreements entered into under IRC 7121. In addition, examiners and taxpayers may refer to IRM 8.13.1 for general information and procedures regarding closing agreements under IRC 7121 for content, preparation, execution and other general closing agreement procedures. Final determinations of specific matters pursuant to IRC 7121 are ordinarily reflected on Form 906, Closing Agreement on Final Determination Covering Specific Matters. Form 906 will be used under this Voluntary Closing Agreement Process for employment taxes (VCAP - ET).

The information contained in this IRM pertains specifically to requests made by taxpayers who are not currently under audit with respect to a particular federal employment tax issue (non-worker classification), but who desire to come forward to the Commissioner to disclose an error with respect to federal employment tax liabilities for which exigent circumstances exist. This IRM is not intended to replace or eliminate the requirement for or otherwise substitute for the regulatory corrected return procedures, (such as Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund) when appropriate.

Unless otherwise indicated, the term "exigent circumstances" means situations for which the Form 94X-X or other corrected return procedures would not allow for prompt, permanent, and conclusive resolution of the particular employment tax issue(s) at hand and the taxpayer demonstrates the existence of such circumstances.

VCAP - ET issues addressed in this IRM do not include requests for refunds or adjustments of overpayments of employment taxes nor do they include requests for voluntary closing agreements to resolve employment tax issues where the taxpayer making such request has not filed employment tax returns for the tax periods to which the requested voluntary correction pertains. See IRM 4.23.25.3(2) below. In circumstances in which a taxpayer believes it is entitled to a refund or adjustment of employment taxes already paid, the taxpayer must follow regular claim for refund or adjustment procedures. In circumstances in which the taxpayer has failed to file the required employment tax returns, voluntary requests for closing agreements will not be entertained under these IRM provisions, and the taxpayer will be instructed to file the required returns under regular return filing procedures.

The VCAP - ET process does not apply to worker classification issues. The Voluntary Classification Settlement Program (VCSP) for worker classification is available for voluntary requests to resolve the prospective classification of workers. The VCSP enables taxpayers to resolve past worker classification issues and achieve certainty under federal employment tax law at a low cost by voluntarily reclassifying workers for future tax periods. VCSP is described in Announcement 2012-45. VCSP provides an opportunity for taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other non-employees to reclassify their workers as employees for employment tax purposes for future tax periods, with partial relief from incurred federal employment tax liabilities. The VCSP is available for all businesses, including tax-exempt organizations and government entities. See IRM 4.23.20, Employment Tax - Voluntary Classification Settlement Program (VCSP) Procedures.

Closing agreements arising from VCAP - ET issues may be entered into when:

The following represent some examples of acceptable reasons for entering into a closing agreement based upon a voluntary closing agreement request to resolve employment tax issues in non-worker classification matters:

A VCAP - ET may not be entered into when entering into a closing agreement will prejudice the interests of the government. The following represent some examples, although not exhaustive, of requests for closing agreements that generally should not (or cannot, in the case of a, b, c, and d below) be accepted:

In applying paragraph (3), the Service may consider whether any of the above circumstances apply to related entities of the taxpayer.

There is not a specific form for use in requesting consideration for a VCAP - ET; however, all requests must include at least the following information:

All VCAP - ET requests must be submitted to the following address:
Employment Tax/Voluntary Request Coordinator
Internal Revenue Service
7940 Kentucky Drive
Mail Stop 5702A,
Florence, KY 41042

The role of the Voluntary Closing Agreement Coordinator (Coordinator) is to ensure the process for VCAP - ET requests is consistently applied and to provide a contact point for Service personnel who receive requests for voluntary closing agreements not involving classification issues. An Employment Tax Policy Analyst assigned the VCAP - ET process is available to work with the coordinator. The Coordinator has the following responsibilities:

All requests accepted for further investigation will be opened for examination using the established classification process for assignment to the appropriate field group.

Controls will be established on the last quarter of the most current calendar year covered by the request. Examiners will expand the scope to the appropriate quarters affected by the adjustments requested. If previous years are involved, statute controls must be considered and any necessary consent to extend the time to assess employment taxes, via Form SS-10, Consent to Extend the Time to Assess Employment Taxes, must be requested as soon as possible. Tax periods with barred statutes that are covered by the request will not be controlled, but may be included in the closing agreement.

Coordination with the appropriate group manager is required since these cases will be assigned directly to the field group for assignment after examination controls have been established.

Upon receipt of a VCAP - ET case, the examiner will contact local TEGE Area Counsel to request assignment of the designated local counsel attorney to:

Examiners will obtain any missing information and ask follow-up questions as necessary. To the extent that the request for a closing agreement is dependent on the conclusion that:

Examiners must document Counsel involvement and subsequent approval of the closing agreement in the case file.

Examiners should refer to IRM 8.13.1.3.4, Guidelines for Preparing Closing Agreements, IRM 8.13.1.2.5, Execution By Taxpayer, and IRM 8.13.1.3.13, Execution for the Commissioner, for general guidelines regarding the preparation and execution of closing agreements and pattern closing agreement language. TEGE Area Counsel is responsible for reviewing closing agreements solely for legal sufficiency, and is not responsible for rendering a determination as to whether entering into a closing agreement will cause the United States to sustain a disadvantage.

In general, all taxpayers requesting to resolve employment tax issues in non-worker classification matters will be required to file a Form W-2, Wage and Tax Statement, or Form W-2c, Corrected Wage and Tax Statement, for each affected employee for each affected tax year in connection with the resolved matters.

If the Service has determined that it is not necessary for the taxpayer to issue a fully completed Form W-2 or W-2c, the taxpayer may file and furnish Form(s) W-2 or W-2c for the affected employees for the affected tax years with no changes to the information entered in Box 1. However, the taxpayer must report the increased social security/Medicare wages in Boxes 3 and 5 on each Form W-2 or W-2c.

Filing the Form W-2 or W-2c in the manner described will reflect increased wages for social security and Medicare benefit purposes, but will not require employees to file Form 1040X, Amended U.S. Individual Income Tax Returns, for the year to which the Form W-2c relates. The following suggested language may be provided to the employee with a copy of the Form W-2c:
You are receiving a copy of Form W-2c, Corrected Wage and Tax Statement, that reflects a correction and increase in social security wages and Medicare wages reported to the Social Security Administration. The corrected wages are reported in Box 3 for social security wages and Box 5 for Medicare wages. The Form W-2c does not include any increase to your wages reported in Box 1 for federal income tax purposes. The Form W-2c is for informational purposes only relating to social security and Medicare wages; it does not require any action by you. You are not required to file Form 1040X, Amended U.S. Individual Income Tax Return based on receipt of this Form W-2c.

The taxpayer must file each original Form W-2 or W-2c (along with transmittal Form W-3, Transmittal of Wage and Tax Statement, or Form W-3c, Transmittal of Corrected Wage and Tax Statements) with the Social Security Administration, and must furnish copies of the W-2 or W-2c to the affected employees and to the revenue agent prior to finalizing the closing agreement. The examiner will request verification of filing and document the action in the case file.

Any adjustment to the employment taxes made as part of the closing agreement under this IRM shall be made without interest pursuant to IRC 6205(a)(1) and Treas. Reg. section 31.6205-1 as long as the taxpayer pays the liability at the time the closing agreement is executed.

Determinations concerning whether taxpayers are liable for penalties in connection with requests for voluntary closing agreements in connection with employment tax matters will be made on a case-by-case basis.

Once the taxpayer and the Service representative have signed an agreement, it is final and conclusive. It cannot be reopened as to the matters agreed upon, nor may it be annulled, modified, set aside or disregarded in any suit, action or proceeding unless there is a showing of fraud, malfeasance, or misrepresentation of material fact.

Examiners will prepare the closing agreement, Form 906, in triplicate and obtain the appropriate original signatures from the taxpayer or duly authorized Power of Attorney (POA) on all three agreements.

The examiner’s report and/or work papers must discuss all significant factors relating to the closing agreement (including the source of modifications to pattern agreements). This discussion should be prominently located in the file and should explain the reasons for obtaining the agreement (or denying it) and what the parties intend to accomplish by it.

Significant matters are to be set forth in the closing agreement in original print. Examiners may not type over an erasure or use correction tape or correction liquid.

Examiners may not change or add to the agreement after receiving the signed closing agreement and payment due without obtaining the written agreement of the taxpayer. If a correction is necessary after the closing agreement has been executed by the taxpayer, the correction may be handwritten, and all parties to the agreement must initial and date the change.

Examiners will prepare an Employment Tax Examination Report (ETER) that reflects the appropriate adjustments and penalties, if any, agreed to in the executed closing agreement. The report is to be shared with and signed by the taxpayer. If the adjustment meets the criteria, it will be treated as interest-free pursuant to IRC 6205(a)(1) and Treas. Reg. section 31.6205-1.

Application of penalties should be specifically addressed in the closing agreement.

All audits conducted under these procedures will generally be limited to the issue raised by the taxpayer in their request unless the examiner identifies new issues or a gross misrepresentation of the facts is found. Workpapers and appropriate lead sheets will be completed detailing all audit steps taken and conclusions reached.

Examiners will follow normal employment tax case closing procedures outlined in IRM 4.23.10, Employment Tax - Report Writing Guide for Employment Tax Examinations. Examiners will check the block "Closing Agreements – Form 906" under the section "Forward to Technical Services" on Form 3198, Special Handling Notice for Examination Case Processing.

The examiner will process all payments received prior to closing the case. If a closing agreement resolves a taxable year barred from assessment by the period of limitation, payment with respect to the barred statute year is processed by the examiner to the general fund. See IRM 4.23.25.10 below.

The Voluntary Closing Agreement Coordinator in Employment Tax Centralized Technical Services will approve all Closing Agreements for SB/SE Employment Tax. The case is to be updated to Status "21" , closed agreed, and the entire file to be shipped to:
Voluntary Closing Agreement Coordinator
Internal Revenue Service
550 Main Street, Room 9010-E
Cincinnati, OH 45202-3222

The authorized person under Delegation Order 8-3 will sign all three copies of the Closing Agreement. One copy of the agreement will be maintained in Technical Services; one copy will be sent to the taxpayer; and one copy will remain in the case file. Technical Services will close the case to Centralized Case Processing (CCP) for final assessment and closure.

If a VCAP - ET case includes a barred ASED period as described in IRM 4.23.25.3(2)(c), the payment(s) for the barred year(s) will be processed as follows: