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 ET 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 provides the basics for

Employment tax provisions are found at Internal Revenue Code (IRC) 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, 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, IMD Search Servicewide Delegation Orders provides a searchable list of Servicewide Delegation Orders issued by the Commissioner of the Internal Revenue, or on their behalf by the deputy commissioner. 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. It 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 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 addressed in IRM 1.1.16.5.3.3, Employment Tax Examination, and IRM 1.1.16.5.5.2.2, Employment Tax Policy.

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

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

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 (OD-SME) status.

All information management systems have safeguard measures in place that address key components of Information Technology (IT) security requirements to restrict access to sensitive data.

The Employment Tax (ET) program has established a separation of duties of users’ roles:

The Issue Management System (IMS) is required to be used during employment tax examinations by ET examiners assigned to Specialty – ET Operations.

ET examiners will use the Employment Tax Lead Sheets (ETLS) developed specifically for employment tax cases.

ET examiners working ET Large Cases will use Large Case Lead Sheets (LCLS). LCLS are developed specifically for large case employment tax cases. Examiners working ET Large Cases will follow workpaper preparation, specific examination techniques, and case closing procedures unique to these types of examinations.

The Specialty Employment Tax Application (SETA) is a web-based application that ET examiners may use in ET exams to generate most of the documents needed to prepare an examination report and close their examination.

The delegated authorities for the IRS under the control of SB/SE Specialty Exam Policy - Employment Tax are:

The following table lists commonly used acronyms and their definitions:

The following table lists the primary sources of guidance:

Additional resources include:

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the IRC, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accordance with taxpayer rights. See IRC 7803(a)(3). For additional information about the TBOR, see Pub 5170, Taxpayer Bill of Rights, or Taxpayer Bill of Rights.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS, led by the National Taxpayer Advocate, that helps taxpayers and protects taxpayer rights. TAS offers free help to taxpayers when a tax problem is causing a financial difficulty, when they’ve tried and been unable to resolve their issue with the IRS, or when they believe an IRS system, process, or procedure just is not working as it should. TAS strives to ensure that every taxpayer is treated fairly and knows and understands their rights under the TBOR. TAS has at least one taxpayer advocate office located in every state, the District of Columbia, and Puerto Rico.

ET examiners should consider the disclosure and privacy provisions when preparing agreed and unagreed case reports. For further information, see the Privacy, Government Liaison and Disclosure (PGLD) knowledge base at Disclosure and Privacy Knowledge Base Homepage.

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

TE/GE employees must refer to IRM 4.70.13, Executing the Examination, IRM 4.70.14, Resolving the Examination, and IRM 4.70.17, Claims and Abatements, for guidance and procedures for TE/GE employment tax examinations.

During an examination of an income tax, excise tax, or exempt organization return, the examiner will follow the established procedures to determine if the taxpayer is in compliance with employment tax filing requirements. Examiners and their manager will decide if an examination of employment tax returns is warranted. If warranted, it should be conducted concurrently with the primary examination. If a concurrent examination is not possible, an employment tax referral should be made. For more information on employment tax referrals see IRM 4.23.3.4.2.2, Referral and Exam Leads. Additional information on required filing checks in other examination functions can be found in:

An income tax return or tax-exempt return classified for examination usually does not include the related employment tax returns. Examiners will evaluate whether an ET examination is warranted. For additional information on required filing check of employment tax returns, see IRM 4.10.5.5, Employment Tax Returns and Other Withholding Taxes. Examiners will evaluate the filing of nonpayroll information returns and related Form 945. Examiners will consider any indicators for unreported backup withholding (BWH) or nonpayroll FITW.

Examination of the related employment tax returns can be conducted from the taxpayer’s retained copies of such returns, TRDBV, BRTVU, or MeF/EUP (for electronically-filed employment tax returns).

Collection employees share full compliance check responsibilities. When making a field visit, the revenue officer will determine whether all required employment tax returns were filed and all employment taxes paid. If it appears that an employer is treating employees as non-employees, or if there are questionable fringe benefits, a referral will be made for LB&I or SB/SE taxpayers using the procedures provided in IRM 4.23.3.4.3 or the procedures of provided by the Collection function. Employment tax referrals for TE/GE taxpayers may use the procedures in IRM 4.23.2.2.3.1, Consultation Requests or Referrals to Employee Plans and Exempt Organizations / Government Entities or the procedures provided by collection employee’s function.

Exhibit 4.23.3-1 provides further guidance to examiners on evaluating income returns for potential employment tax issues.

Employment tax consultation services or examination referral may be requested through the Specialist Referral System Portal.

ET-WSD has the primary responsibility for evaluating referrals received from all sources. ET-WSD will make the determination on whether the taxpayer will be selected for examination.

Referrals will be submitted to ET-WSD on a Form 5346, Examination Information Report by secured email at *SBSE ET WSD Referrals for consideration.

Instructions for preparing Form 5346 are included on the reverse side of the form. Examiners should include sufficient information to allow evaluation of the examination potential. If necessary, documentation may be attached to the form.

The Form 5346 is to be completed electronically and sent with supporting documentation. If the Form 5346 and supporting information is in a paper format, they are to be scanned and sent to ET-WSD by secured email at *SBSE ET WSD Referrals. In any case where LUQ items are identified in a return submission, a copy of the return is attached to the referral. Electronic scans or copies of tax returns or information returns must be marked copy before attaching them to the referral. Do not send original returns to ET-WSD. If supporting documentation is too voluminous to scan, the manager or examiner will coordinate with ET-WSD to submit the documentation via mail to associate with the referral.

Referrals to ET-WSD include but are not limited to:

Form 5346 is not used when the information discovered is not related to an ongoing examination (for example, newspaper articles, informant, etc.). In these situations, examiners must complete Form 3949-A, Informal Referral. The public may use a Form 3949-A to voluntarily report alleged violations of tax law by individuals and businesses to the IRS and remain confidential. If Form 3949-A is prepared due to contact with the informant and the informant intends to claim a reward, the informant should be advised to file Form 211, Application for Award for Original Information. See IRM 25.2.1, General Operating Division Guidance for Working Whistleblower Claims. If a Form 3949-A is received by an IRS employee in paper format they are to be scanned and forwarded by secured email to *SBSE ET WSD Referrals. For more information regarding Form 3949-A, see IRM 3.28.2.3, What is Form 3949-A?.

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

To avoid unauthorized disclosures of return information, immediately identify the taxpayer or their authorized representative. For purposes of identification, the ET 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.

A compliance check is limited to a review of the information and tax returns that the IRS requires a taxpayer (e.g., an employer) to file or maintain; for example, Forms 940, 941, 8027, W-2, 1099, or W-4.

During a compliance check, do not:

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

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

The ET examiner is responsible for determining the scope of the examination, beginning with the issues identified by the classifier on the classification check sheet. The ET 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 following subsections outline an ET examiner’s responsibilities regarding required filing checks, scope of exams, and examination controls, and will assist the ET examiner in meeting quality standards and ensuring appropriate and consistent examination 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 ET 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 ET examiner will mail the appropriate initial contact letter to the taxpayer and a copy of the letter to the representative with Letter 937, Transmittal 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 21.3.7, Processing Third-Party Authorizations onto the Centralized Authorization File (CAF), and IRM 4.11.55, Examining Officers Guide (EOG), Power of Attorney Rights and Responsibilities.

Examiners will select an appropriate initial contact letter and schedule the initial appointment for employment tax examinations as follows:

The following documents must be mail to the taxpayer with the initial contact letter:

The ET examiner has the right to determine the time and place of the examination under IRC 7605 as long as the ET examiner does not abuse this right. The time and place of the examination must be reasonable and the ET examiner will attempt to accommodate reasonable requests. Schedule the initial appointment at a time and/or place convenient to the taxpayer and consistent with 26 CFR 301.7605–1. See IRM 4.10.2.9.2, Place and Time of Examination, and IRM 4.10.2.8.1, Making Initial Contact, for additional information regarding scheduling the initial appointment.

Examinations will 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 ET examiner and the taxpayer or the authorized representative. Field examinations (examinations not following the remote examination process) 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 will be considered but need not be regarded as paramount.

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 ET examiner a statement that the books and records are only being made available for limited purposes, the ET 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 ET examiner will 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 examination.

Form 4564 is a written record of the documents and information requested from the taxpayer during the examination. Form 4564 will be used to document all requested information and documents needed to support items being examined. Examiners should request relevant and needed information. A Form 4564 must be clear, concise, specific, and not be unduly burdensome. For more information refer to:

If, during the examination, the scope is expanded to include another tax period(s), the taxpayer must be notified orally or in writing of the expansion. If notified in writing the ET examiner should use Letter 5968, Prior or Subsequent Year Pickup. See IRM 4.10.2.7.1.2, Determining the Scope of an Examination - Current, Prior and Subsequent Years.

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

Restructuring and Reform Act of 1998 (RRA) section 3705 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.

If the examination will address worker classification or IRC 7436 wage issues, Pub 1976, Do you Qualify for Relief under Section 530?, must be provided to the taxpayer before initiating examination of these issues. 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 LB&I Team Audit examinations where it is not practical to hold an initial interview, the ET examiner will follow and document in the case file the direction of the LB&I Income Tax Team Lead on obtaining the necessary information to conduct the ET examination.

In situations where the taxpayer is being uncooperative, ET examiner must discuss the use of a summons or third party contacts with their manager before making the decision to issue a report based on the available information. For more information on third party contacts see IRM 4.23.3.8.5.2, Third-Party Contacts. For more information on summons, see:

ET examiners will 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.

If not previously addressed, the ET examiner must document that they took the following actions before or at an initial interview or opening conference:

The ET examiner should inform the taxpayer that Appeals will only accept employment tax cases with 365 days remaining on the statute of limitations. See IRM 4.23.22.11.10, Precautions Against Expiration of Period of Limitations for Assessment.

A discussion of the taxpayer’s rights must be conducted before or at the initial interview. See IRC 7521(b)(1) and IRM 4.23.3.8.4 (8).

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the IRC, putting them in simple language, and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accordance with taxpayer rights. See IRC 7803(a)(3). For additional information about the TBOR, see Pub 5170 or Taxpayer Bill of Rights.

Under IRC 7521, the taxpayer has a right to:

When working with someone other than the taxpayer, IRS employees must remember unauthorized disclosure of taxpayer and return information is strictly prohibited. A valid power of attorney provides authorization and avoids unauthorized disclosure.

Form 2848, Power of Attorney and Declaration of Representative, specifically authorizes the representative to receive and inspect confidential tax information. Therefore, IRS employees are not prohibited from providing a copy of a notice or communication to a representative if the box on Form 2848 indicating copies are to be sent to the representative is not checked. However, representatives cannot expect courtesy copies of notices and communications when the box is not checked. For more information see IRM 4.11.55.2.9, Notices and Communications. The representative is authorized to:

Form 8821, Tax Information Authorization, specifically authorizes the designee to receive and inspect confidential tax information. It does not permit the third party to represent the taxpayer before the IRS. Therefore, IRS employees are not prohibited from providing a copy of a notice or communication to an appointee unless the box on Form 8821 stating the taxpayer does not want copies of notices or communications sent to the appointee is checked. Appointees cannot expect courtesy copies of notices and communications when the box indicating copies will be sent is not checked. For more information see IRM 4.11.55.2.9, Notices and Communications. Form 8821does not permit the third party to:

Review BMFOLT or TXMODA to determine if the Form 2848 or Form 8821 is on file for the tax periods and type of tax under examination. If a TC 960 is posted the ET examiner must secure a CFINK and retain a copy in the file. For more information on IDRS CC CFINK see IRM 4.11.55.6.2, CFINK.

If Form 2848 or Form 8821 is not on file, the ET examiner must secure a copy. The Form 2848 or Form 8821 must be reviewed to determine if an essential element is missing or incomplete. If an essential element is missing or incomplete the authorization is unproccessable. See IRM 21.3.7.5.1, Essential Elements for Form 2848 and Form 8821.

An ET examiner must submit a copy of the Form 2848 or Form 8821 to the CAF function within five workdays of receipt. The ET examiner is to fax Form 2848 or Form 8821 to the CAF function at 855-214-7522. For more information see IRM 21.3.7.1.6, Audience-Processing Sites (CAF Function). Note across the top of page 1 of the Form 2848 or Form 8821 "Faxed to (Appropriate Campus) on (Date)."

Forwarding the Form 2848 or Form 8821 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.

Form 2848 or Form 8821 filed for specific issues are not 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 Form 2848 or Form 8821 must be sent to the CAF Unit to input the return portion. Examples of specific issues include, but are not limited to, the following:

A taxpayer, POA, or designee may revoke or withdraw an existing Form 2848 or Form 8821, see the Instructions for Form 2848, Power of Attorney and Declaration of Representative or Instructions Form 8821, Tax Information Authorization for the procedures. In general, 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. The signed revocation or withdrawal statement is sent to the CAF Unit to delete the existing POA or designee.

Form 5348, AIMS/ERCS Update, (or Form 5595, TE/GE Update, in RCCMS) is used with examination labels to make changes to Audit Information Management System (AIMS) and ERCS.

The following updates are input on ERCS by the Shared Administrative Assistant or clerk:

The following updates must be sent to the local AIMS/ERCS Analyst for input:

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 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 4.23.4.5.4, 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. Also, see IRM 4.9.1, Examination Technical Time Reporting System, Outline of System, and its exhibits for complete explanations.