IRS issues guidance for examiner employment tax audits

The IRS has issued guidance on examiner employment tax audits. The purpose of the guidance to provide clarification for and updates to the examiners’ responsibilities regarding required filing checks and scope of all employment tax examinations.

Background

 

The guidance is effective upon issuance. Examiners must follow the interim guidance provided in the memorandum until IRM 4.23.3.7.4 is revised and published.

Procedural Changes

 

Examiners must determine whether:

  1. A. The taxpayer under audit filed the information returns required. Examiners must address whether the appropriate information returns were filed for any reportable payments (e.g. Form 1099-MISC; Form 1099-K; Form 1099-INT; Form W-2, etc.). If the appropriate forms were not correctly filed, the examiner must consider expanding the audit to include a penalty case file and/or Form 945, Annual Return of Withheld Federal Income Tax, for the development of the backup withholding issue;
  2. B. The taxpayer properly withheld FICA (including Additional Medicare tax for the tax periods beginning January 1, 2013 and thereafter) from wages and/or backup withholding from reportable payments. See IRM 4.23.8.4.1, IRC 3102(f)(3) – Relief for Employer When Employees Have Paid Additional Medicare Tax on Wages; IRM 4.23.8.6, FICA Tax; and IRM 4.23.8.13, IRC 3406 – Backup Withholding; and,
  3. C. All other federal return reporting requirements have been met. Examiners must ensure all required returns, including non-employment tax and information returns, have been filed properly. Any unfiled returns must be addressed. If the unfiled returns are employment tax returns, the audit will generally be expanded to include those years as part of the current examination. Other unfiled returns (e.g. income, excise, etc.) will generally be solicited as part of the package audit. If received, the examiner must date stamp the return, review for any Large, Unusual and Questionable (LUQ) items, and submit the return to the address the taxpayer would normally mail the return if it had been timely filed. If the return is not received by the time the employment tax examination is complete, or if LUQ items are noticed on the review of a submitted return, then a Form 5346, Exam Information Item, must be completed and forwarded to Employment Tax – Centralized Workload Selection and Delivery (ET-CWSD). ET-CWSD will forward the referrals to the appropriate location. All actions and decisions relating to unfiled returns MUST be fully documented in the case file.

The mailing address for ET-CWSD is: Internal Revenue Service 201 W. RiverCenter Blvd., Stop 5702-A/Employment Tax Covington, KY 41011.

In cases where LUQ items are identified in a return submission, the examiner will make a copy of the return and attach it to the referral. The original return will be mailed to the address the taxpayer would normally mail the return. In no case should the original return be attached to the referral. (IRS Small Business/Self-Employed (SB/SE) Division Memorandum: Procedures for Required Filing Checks and Scope of Employment Tax Examinations (SBSE-04-0915-0058), September 25, 2015.)

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