Employment tax returns generally do not contain information that would provide a basis for identifying issues for examination potential. Examination of returns are focused on known or probable areas of non-compliance. There are a number of programs and criteria used to identify those issues or returns that have the greatest potential.

The Employment Tax Examination Program is a lead-driven program. Examinations can originate from a variety of sources, some of which are listed in this section.

This IRM also provides the basics for initiating an employment tax examination.

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, Servicewide Policies and Authorities apply to all employment tax issues and examinations. Examiners should review these Policy Statements to properly perform their examination duties.

A website, Delegation Orders by Process, located at https://www.irs.gov/privacy-disclosure/delegation-orders-and-policy-statements-by-process summarizes data contained in the applicable IRM sections under IRM 1.2, relating to Delegation Orders, in a single, electronic source.

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, Specialty Examination 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 1.1.16.3.3.3, Employment Tax Examination and for Employment Tax Policy, found in IRM 1.1.16.3.5.2.2, 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.

Program Reports: Information regarding the reporting of program objectives are included on, but not limited to, the following reports:

The Quarterly Business Performance Review (BPR) provides updates on the status of the Whistleblower claims in Operating Division SME status.

The following table lists commonly used acronyms and their definitions:

The following table lists the primary sources of guidance:

Additional resources include:

The IRS adopted the Taxpayer Bill of Rights in June 2014. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3). For additional information about TBOR, see https://irssource.web.irs.gov/SitePages/Taxpayer%20Bill%20of%20Rights.aspx and IRM 1.2.1.2.36, Policy Statement 1-236, "Fairness and Integrity in Enforcement Selection."

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal procedures, or who believe that an IRS system or procedure is not working as it should. Pub 1546, Taxpayer Advocate Service - We Are Here to Help You, provides contact and additional information. The program is designed to alleviate taxpayer hardships that arise from systemic problems or the application of the Internal Revenue Code. In addition, see IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria, and IRM 13.1.19, TAS Operations Assistance Request (OAR) Process, for additional information.

Employment tax examiners should consider the disclosure provisions when preparing agreed and unagreed case reports. See the Knowledge Management Disclosure web site at: https://portal.ds.irsnet.gov/sites/VL003/Pages/default.aspx for additional information.

The purpose of the IRS Combined Annual Wage Report (CAWR) program is to ensure that employers paid and reported the proper amount of taxes, withholding, and advanced earned income credit. This is done by comparing five fields:

Employers filing Forms W–2 but no Form 941 may be non-filers. Employers consistently out of balance between Form W–2 and Form 941, coupled with other indicators, may indicate increased audit potential.

See IRM 4.19.4, Liability Determination - CAWR Reconciliation Balancing, for additional information on CAWR notices.

The Backup Withholding (BWH) program provides notices to payers who file information returns with incorrect payee Taxpayer Identification Numbers (TINs). The Computer Paragraph (CP) 2100 Notice (CP2100) advises payers that backup withholding could become necessary if a payee fails to certify or validate their TIN. The CP2100 instructs the payer to provide a "B" Notice to each payee whose Name/TIN combination and account number are identified as incorrect by the IRS. The "B" Notice informs the payee that the Name/TIN combination furnished to the payer does not match IRS or SSA records and describes the steps the payee must take to avoid backup withholding.

The CP2100 Notice also lists payee accounts with missing TINs on which the payer was required to backup withhold under IRC 3406(a)(1)(A). Payers with missing or obviously incorrect TIN accounts should not wait to receive a CP2100 to begin backup withholding. The BWH program includes a number of different information returns, including but not limited to:

Payers with payees receiving Form 1099-MISC with missing or obviously incorrect TINs have the highest audit potential; backup withholding on qualifying amounts should have been withheld at the time of payment.

See IRM 5.19.3, Backup Withholding Program, IRM 4.23.8.13.1, Overview of Backup Withholding Notices, and IRM 20.1.7.6, Notice 972CG, for additional information on CP2100 notices.

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is the form used by either a firm or a worker to request a determination or ruling letter regarding the federal employment tax status of a class of workers (firm), or of the individual worker. If the firm/worker submits a request for a determination by letter, they should be provided with Form SS-8 and advised to resubmit their request for determination on Form SS-8. There is no user fee for this type of ruling request.

The first revenue procedure issued every year provides procedures for issuing rulings, determination letters, and information letters, and should be referred to for guidance when responding to a request for determination on a Form SS-8.

The SS-8 Program has been centralized for better coordination and management of the program. Taxpayers are required to forward their request to the address identified in the instructions for Form SS-8.

A determination letter or ruling will not be issued if the worker objects to the disclosure to the firm of his/her identity or a copy of the information he/she submitted.

Form SS-8 is a potential source of leads for employment tax examinations. After completing all actions related to issuance or non-issuance of the determination letter, the SS–8 centralized location should determine whether there is any audit potential in the forms received. For additional information on referrals, see:

SB/SE Specialty - Employment Tax will provide guidance to the SS-8 Unit in support of the worker classification process.

The Service will not issue a determination letter pursuant to the filing of Form SS-8 on whether a worker is a bona fide partner and, therefore, not an employee of the business. See section 3.01(104) of Rev. Proc. 2016-3.

For information on procedures for examiners coordinating worker classification issues between the SS-8 Program and Examination, see IRM 4.23.18, Employment Tax - Coordinating Worker Classification Determinations Between SS-8 Program and Exam.

For information on procedures for Brookhaven Campus employees responsible for handling determinations of employee-independent contractor status when Form SS-8 is filed with the Service, see IRM 7.50.1, Form SS-8 Worker Classification Determinations, Form SS-8 Processing Handbook.

The Classification Settlement Program (CSP) allows businesses and tax examiners to resolve worker classification cases without involving an appeal, thereby reducing taxpayer burden. The procedures ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied. Under the CSP, examiners are able to offer businesses under examination a worker classification settlement using a standard closing agreement. See IRM 4.23.6.15.3, CSP Standard Closing Agreement.

Monitoring and follow-up activities are centralized in the ET-WSD for agreements secured in SB/SE and Appeals; TE/GE will monitor its own agreements. Since CSP closing agreements include a provision that the taxpayer complies prospectively, research using Corporate Files On-Line (CFOL) command codes will ensure that taxpayers are in compliance with their agreement. See IRM 4.23.6.17, Monitoring CSP Agreements.

Taxpayers not in compliance with CSP closing agreements have a high worker classification audit potential. See IRM 4.23.6, Employment Tax - Classification Settlement Program (CSP), for additional information.

Under a Voluntary Classification Settlement Program (VCSP) closing agreement, businesses not under examination can apply for a worker classification settlement using a standard closing agreement. Monitoring and follow-up activities for SB/SE and LB&I will be centralized in the ET-WSD; TE/GE will monitor its own agreements. Because the VCSP closing agreement includes a provision that requires the taxpayer to comply prospectively, research using CFOL command codes will ensure that taxpayers are in compliance with the VCSP closing agreements. See IRM 4.23.20, Employment Tax - Voluntary Classification Settlement Program (VCSP) Procedures, for additional information.

Some lead-driven initiatives require an approved Compliance Initiative Project (CIP). CIPs involve groups of taxpayers characterized by unique employment tax compliance issues. All employment tax specialists are encouraged to identify areas where CIP procedures can assist in identifying employment tax non-compliance. Any suggestions should be discussed with the manager before contacting Employment Tax Policy to discuss the issue and determine if development of a CIP is appropriate.

The criteria mentioned in IRM 4.17.1.2, Purpose and Scope, must be used to determine when CIP procedures apply for Employment Tax projects.

CIP procedures are not required in the case of "routine business operations," as defined in IRM 4.17.1.3, Activities Not Subject to CIP Procedures.

ET-WSD has the primary responsibility for reviewing leads received from sources other than SRS and making a determination on whether the case will be selected for examination or rejected for lack of potential. Group managers and examiners receiving referrals from sources other than the SRS will submit these referrals to ET-WSD via the electronic mailbox "*SBSE ET WSD Referrals" for consideration.

Employment Tax Examination group managers receive all Specialist Referral System (SRS) referrals for their area of coverage. Group managers will ensure that the referrals received are given appropriate consideration, consistent with available staffing and resources. Compliance efforts and follow-up actions will also be determined in accordance with resource availability. If the receiving group manager cannot work the case due to resource issues, consideration must be given to transferring the case to a different employment tax group to work. Non-compliance with tax laws within the geographic area should be considered when determining if a transfer is warranted.

Several CFOL command codes can be used to research case potential and priority. These include:

Exhibit 4.23.3-1, Guidelines for Evaluation of Referrals and Income Tax Returns, contains further guidance that can be used when evaluating referrals received through the SRS system.

Tip cases are classified when tipping is customary for the employer’s industry and a return reflects low or zero tip wages reported on its Form 941.

A tip examination is warranted on entities, including food and beverage establishments, if an analysis of tip reporting by the entity indicates a significant amount of unreported tips. The analysis for a tip examination includes, but is not limited to, the type and size of the business, the historical tip reporting by the entity, and the Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.

Examiners will schedule a compliance check by letter and enclose Pub 3114, Compliance Checks,, Pub 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, as enclosures to the compliance check appointment letter. At the review, the examiner must explain to the taxpayer that the appointment is merely a compliance check and does not qualify as an inspection under IRC 7605(b) or as an audit for purposes of section 530 of the Revenue Act of 1978.

To avoid unauthorized disclosures of return information, immediately identify the taxpayer or his/her authorized representative. For purposes of identification, the examiner must verify and document the complete name, title, and the purpose of the call/contact. For further information, see IRM 21.1.3.2.3, Required Taxpayer Authentication.

Limit the scope of the check to IRS documents that have already been voluntarily prepared and filed with the Service including any amended returns. In addition, the compliance check should inspect forms that are not required to be filed (e.g., Form W-4).

During a compliance check, do not:

If the examiner is able to determine the taxpayer is in compliance or is able to bring the taxpayer into compliance at the initial interview without reviewing the books or records or asking common law questions, the examiner may recommend that no examination be conducted. If delinquent returns are submitted to the examiner by the taxpayer, the examiner will follow procedures as described in IRM 4.23.12, Employment Tax - Delinquent Return Procedures.

If the examiner cannot determine the taxpayer’s compliance at the initial compliance interview, the examiner will inform the taxpayer that the compliance check is completed and a full employment tax examination will be opened. At that time, the examiner must follow all established examination procedures.

The examiner is responsible for determining the scope of the audit, beginning with the issues identified by the classifier on the classification check sheet. The examiner must perform a pre-contact analysis including a thorough review of the case file to identify LUQ items beyond those selected on the classification check sheet. For additional information regarding the Pre-Contact Analysis, see IRM 4.10.2.3, In-Depth Pre-Contact Analysis.

The group manager should be alert for possible employment tax issues when assigning non-employment tax cases and should, when appropriate, inform the examiner to consider the required filing checks procedures. See IRM 4.23.3.6.3, Procedures for Required Filing Checks, Scope, and Controls of Employment Tax Examinations, and IRM 4.10.5, Required Filing Checks.

The related employment tax returns are not usually associated with the income tax returns or tax-exempt returns classified for examination. Examination of the related returns will ordinarily be made from the taxpayer’s retained copies of such returns, TRDBV, or a BRTVU. If an employment tax examination is warranted but the examiner cannot secure copies of the returns, the examiner may request the originals of those returns for association with the case file.

Collection employees share full compliance check responsibilities. When making a field visit, the revenue officer should determine whether all required employment tax returns were filed and all employment taxes paid. If the revenue officer encounters a situation where it appears that the firm is treating employees as non-employees or where there are questionable fringe benefits, a referral will be made for LB&I or SB/SE taxpayers to ET-WSD using the electronic mailbox at "*SBSE ET WSD Referrals." Referrals for TE/GE taxpayers should be sent to the appropriate Classification Area; see IRM 4.23.2.2.3.1, Referral to Employee Plans and Exempt Organizations. Collection employees should refer to the Collection Handbook for further guidance.

When an employment tax specialist is needed to assist the income tax examiner with employment tax issues on open income tax cases, a referral must be made by the income tax examiner through the Specialist Referral System (SRS). If an income tax examiner becomes aware of employment tax non-compliance on a return not directly related to an open income tax case, a referral can be made to ET-WSD using the electronic mailbox at "*SBSE ET WSD Referrals" for review and potential selection for a future examination.

The following subsections outline an employment tax examiner’s responsibilities regarding required filing checks, scope of exams, and examination controls, and will assist the examiner in meeting quality standards and ensuring appropriate and consistent audit procedures.

Prior to making initial contact, examiners must check BMFOLT or TXMODA to determine if a valid power of attorney is on file for the tax periods and type of tax under examination. If a TC 960 is posted the examiner must secure a CFINK and retain a copy in the file. If CFINK indicates that a valid power of attorney is on file, the examiner will mail the appropriate initial contact letter to the taxpayer and a copy of the letter to the representative with Letter 937, Transmittal Letter for Power of Attorney. After mailing the initial letter, and sufficient time has elapsed for the taxpayer to respond (allow 14 calendar days from the mailing of the letter), employees can initiate contact by telephone, as needed. For additional information regarding a power of attorney see IRM 4.11.55, Power of Attorney Rights and Responsibilities.

Letter 3850, Employment Tax Appointment Letter, or Letter 3851, Employment Tax Call-in Appointment Letter, will be used in all instances to schedule a field appointment for an employment tax interview, except for LB&I team audit cases. When the taxpayer calls in response to the Letter 3851, the examiner will discuss documents necessary for the examination. The examiner will send Letter 3253, Taxpayer Appointment Confirmation Letter, confirming the appointment and detailing documents needed in the attached Form 4564, Information Document Request. If the taxpayer does not call in response to Letter 3851, the examiner will issue Letter 3850 scheduling the appointment.

Employment Tax TCOs generally conduct audits using remote audit procedures; Letter 3850-T, Employment Tax TCO Appointment, will be used to schedule this type of audit. This letter may also be used by any examiner following the remote audit process.

See IRM 4.10.2.8.1, Making Initial Contact, for additional information regarding scheduling the initial appointment.

Schedule the appointment at a time and/or place convenient to the taxpayer and consistent with Treasury Regulation 301.7605–1. For examinations not following the remote audit process, efforts should be made to conduct the examination at the taxpayer’s place of business. Field examinations are normally conducted at the taxpayer’s place of business. Enter a taxpayer’s private premises only when invited in by the rightful occupant. If fraud is a feature or if the interests of the government may be jeopardized, the convenience of the taxpayer should be considered but need not be regarded as paramount.

Examinations should generally be conducted at the location where the taxpayer maintains the books and records of the business operations. However, the examination may be conducted at a place other than the location of the business operation if agreed to by the examiner and the taxpayer or the authorized representative.

Publication 1, Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, must be included with all initial contact letters. Publication 5146, Employment Tax Returns: Examinations and Appeal Rights, will also be mailed with the initial appointment letter. If not mailed to the taxpayer in advance of the interview, provide the documents at the initial appointment. Workpapers and the Activity Record should include when and how these documents were provided to the taxpayer.

Examiners are not authorized to assure taxpayers that their books and records will be used solely for civil purposes. If a taxpayer insists upon such assurances or gives the examiner a statement that the books and records are only being made available for limited purposes, the examiner will ask for and document the taxpayer’s reason(s) for refusing to furnish the records without restriction, discontinue the examination, and report this information to the group manager. The group manager and the examiner should then discuss the matter, addressing the use of summons, third-party contacts, and other potential avenues to secure cooperation and the necessary information to finalize the audit.

See IRM 4.23.3.6.4.2, Examination of Prior and Subsequent Returns, for instructions on secondary/follow-up appointments.

To avoid unauthorized disclosures of return information, immediately identify the taxpayer or his/her authorized representative before disclosing tax information. For such purposes examiners must know and document with whom they are speaking, including the complete name, title, and the purpose of the call/contact. For further information, see IRM 21.1.3.2.3, Required Taxpayer Authentication.

Section 3705 of the Internal Revenue Service Restructuring and Reform Act (RRA 98) requires that during personal and telephone contacts and on all manually generated correspondence by an employee working tax related issues, the employee’s title (e.g., Mr., Mrs., Miss), first name, last name, and unique identification number must be provided. This requirement ensures that taxpayers are able to contact the appropriate employee to address any further questions they may have about their tax matter. For additional information, see IRM 4.10.1.2.2.2, Employee Contact Information.

Provide Pub 5146, Pub 1, and Notice 609 to the taxpayer at the initial appointment if not provided as enclosures with the appointment letter.

If the examination is to address worker classification issues, Publication 1976, Do you Qualify for Relief under Section 530?, must be provided to the taxpayer before initiating any worker classification or IRC 7436 wage issue examination. See IRM 4.23.5.3.1, Section 530 Relief.

The initial interview is an important part of the examination and/or compliance process. An initial interview must be conducted except in special circumstances, such as:

When an interview cannot be conducted, document the reasons in the case file. In situations where taxpayers are being uncooperative, examiners must discuss the use of a summons with their manager before making the decision to issue a report based on the available information.

Examiners should ensure a full interview is conducted to establish that the taxpayer is in substantial compliance with all employment tax laws and filing requirements. Do not limit the interview to the classified items if facts developed during pre-contact or initial contact indicate other issues may be present.

In the initial interview or opening conference:

Do not settle tax due, or agree not to examine a taxpayer where noncompliance is known, in exchange for prospective compliance. Where settlement of tax appears to be advantageous to Service objectives, Area Counsel should be contacted for assistance. On LB&I coordinated industry cases, the attorney assigned to the case should be contacted for advice. In situations where execution of a closing agreement is warranted to resolve an issue, Counsel will assist in providing the appropriate language.

Under IRC 7521, the taxpayer has a right to:

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. TAS helps taxpayers whose problems with the IRS are causing financial difficulties; who have tried but have not been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. Pub 1546, Taxpayer Advocate Service - We Are Here to Help You, provides contact and additional information.

Refer taxpayers to TAS when the contact meets TAS criteria (see IRM 13.1.7, Taxpayer Advocate Case Processing - TAS Case Criteria) and the taxpayer's issue cannot be resolved the same day. "Same day" cases include those the examiner can completely resolve in 24 hours, as well as cases in which the examiner has taken steps within 24 hours to resolve. Do not refer same day cases to TAS unless the taxpayer asks to be transferred to TAS and the case meets TAS criteria. Refer to IRM 13.1.7.4, Same Day Resolution by Operations for additional requirements before referring a same day case to TAS.

All inquiries being referred to TAS should be documented on Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or Form e-911, and forwarded to TAS immediately.

Accountants, attorneys, enrolled agents or other representatives, from whom a taxpayer has requested assistance on tax problems, may submit inquiries to the IRS to assist in clarifying issues with their client. To authorize a third party reply, the representative may submit a Form 2848, Power of Attorney and Declaration of Representative, (POA), or Form 8821, Tax Information Authorization, (TIA). The examiner will ensure that the authorization or a similar privately designed form is properly executed. See IRM 4.11.55.2.6, Authorized Forms, and IRM 4.11.55.2.7, Receipt of POA or TIA Form, for additional guidance.

Upon receipt of a POA/TIA, the examiner must submit a copy of the form to a Centralized Authorization File (CAF) Unit within five workdays of receipt. See IRM 21.3.7.1.3, Audience-Processing Sites (CAF Function), to determine where to send the POA/TIA. The original or a copy of the POA/TIA should also be retained with the case file.

Forwarding the POA/TIA to the CAF Unit will trigger required actions to ensure input of a POA code to the entity on the appropriate master file or non-master file and will result in subsequent mailings of copies of computer-generated communications to the authorized representative.

POAs/TIAs filed for specific issues are not to be detached from the related document and are not sent to the CAF Unit unless the document authorizes specific return(s) and specific return periods in addition to the specific issue. In this case, a copy of the POA/TIA should be sent to the CAF Unit to input the return portion. Examples of specific issues include, but are not limited to, the following:

Occasionally, the POA of record states he or she is no longer representing the taxpayer, or the taxpayer indicates they wish to cancel the existing POA. If the POA withdraws from the representation, or the taxpayer revokes the POA’s authority, the CAF record will need to be updated to delete the existing POA. All revocations or withdrawals must be in writing. The taxpayer’s signature and date are required to process a revocation. The representative’s signature and date are required to process a withdrawal. Such signed statements will generally be sent to the CAF Unit.

The Form 8821 does not authorize a representative to sign documents on behalf of the taxpayer or to represent the taxpayer before Appeals.

Form 5348, AIMS/ERCS Update, (or Form 5595, TE/GE Update, in RCCMS) is used with examination audit labels to:

Form 5348, AIMS/ERCS Update, (or Form 5595, TE/GE Update, in RCCMS) is used with examination audit labels to:

Instructions on the use of Form 5348 can be found in IRM 4.4.34.4, Items that can be Updated/Corrected/Deleted and Form to Use. Form 5348 will be submitted to the shared administrative assistant for input on ERCS.

Form 4844, Request for Terminal Action, will be completed where the results of a compliance check or examination reveal that the taxpayer has filing requirements that are not currently on IDRS. Document 6209, IRS Processing Codes and Information, lists the correct codes for BMF Filing Requirements.

Accurate time and activity reporting is essential to effective Employment Tax Program planning, budgeting and evaluation.

For information on time reporting in IMS, see IRM 4.23.4.4.4, Charging Time on Cases/Returns and Issues.

For those employees working mixed inventories, time will be charged to the appropriate activity codes. Activity codes can be found in Chapter 12, "Examination," of Document 6209, IRS Processing Codes and Information. Also, see IRM 4.9.1, Examination Technical Time Reporting System and Procedures, Outline of System, and Exhibits for complete explanations.