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Internal Revenue Manual - Part 5. Collecting Process

5.7.1  Federal Tax Deposit Alerts

• 5.7.1.1   Federal Tax Deposit (FTD) Alerts
• 5.7.1.2   Criteria for FTD Alert Issuance
• 5.7.1.3   Process for Alert Issuance
• 5.7.1.4   Receipt of FTD Alerts
• 5.7.1.5   Pre-Contact Research and Analysis
• 5.7.1.6   Contact Procedures
• 5.7.1.7   Taxpayer Not in Compliance
• 5.7.1.8   Alert Closing Procedures
• 5.7.1.9   Transfer of FTD Alerts

5.7.1.1  (04-01-2005)
Federal Tax Deposit (FTD) Alerts

1.       FTD Alerts are used to determine an employer’s compliance with employment tax deposit requirements for the quarter of Alert issuance, and for subsequent quarters until the taxpayer is brought into full compliance.

2.       The FTD Alert process identifies, at an early stage (i.e., before the return is due), taxpayers who have fallen behind in their deposits.

5.7.1.2  (04-01-2005)
Criteria for FTD Alert Issuance

1.       FTD Alerts are issued on taxpayers who are classified as semiweekly depositors and who have not made FTDs during the current quarter or who have made them in substantially reduced amounts. They may be identified by the presence of TC 971 AC 046 on a tax module.

2.       There are two levels of Alert issuance, both of which are assigned for field contact. They are identified by the following systemically generated codes:

·         Potential Pyramider, identified by an Alert priority code of "A" .The taxpayer had an unresolved account in notice status in each of the prior two quarters.

·         Potential Noncompliant, identified by an Alert priority code of "B" .The taxpayer is considered to be likely to owe without intervention based on our identification and selection process.

5.7.1.3  (04-01-2005)
Process for Alert Issuance

1.       Master File conducts the analysis cycle for FTD Alerts in the twelfth week of each calendar quarter. This will be in March, June, September, and December.

5.7.1.4  (04-01-2005)
Receipt of FTD Alerts

1.       FTD Alerts are sent directly from Master File to the Integrated Collection System (ICS) for direct assignment to the field.

2.       Contact the taxpayer within 15 calendar days of receipt of the Alert. If timely contact is not possible, notify the group manager. The group manager will decide if reassignment of the Alert is appropriate. If contact is delayed for more than 15 calendar days, note the reason for the delay in the case history.

5.7.1.5  (04-01-2005)
Pre-Contact Research and Analysis

1.       If the pre-contact research and analysis reveal:

A.      the taxpayer is not liable for deposits, close the Alert. Final return information may have posted after the Alert analysis.

B.      the taxpayer is assigned to ACS , contact ACS . Determine the account’s status. If ACS indicates that the taxpayer is current or no longer liable for employment taxes, close the Alert. If this information is unavailable, work the Alert and request that ACS transfer the account.

C.      the taxpayer is in bankruptcy, verify that Insolvency is monitoring the taxpayer’s compliance. Request input of TC 136 and close the Alert. A TC 136 prevents future Alerts from generating. It is reversed with a TC 137.

5.7.1.6  (04-01-2005)
Contact Procedures

1.       Follow the procedures in IRM 5.1.10, Taxpayer Contacts.

2.       Explain the reason for the visit. Recognize that Alerts generate based on the probability that the taxpayer has fallen behind in deposit payments.

3.       Provide the taxpayer with Publication 1, Your Rights as a Taxpayer.

4.       If the taxpayer provides documentation or other substantiating information that he or she is in full compliance, close the Alert.

5.       If the taxpayer is no longer required to deposit (i.e., out-of-business, no employees), promptly request input of TC 591 and close the Alert.

6.       If the taxpayer is in compliance and due to sporadic or seasonal payrolls the Alert analysis is unable to predict deposit compliance, request input of TC 136 and close the Alert. During the contact, briefly review Federal Tax Deposit requirements with the taxpayer and provide Notice 931, Deposit Requirements, or other document outlining the deposit rules to help explain the requirements. This may help to ensure the taxpayer remains in compliance.

5.7.1.7  (04-01-2005)
Taxpayer Not in Compliance

1.       FTD Alerts on delinquent taxpayers provide an early opportunity to assist taxpayers before their liability pyramids and the growing debt becomes more difficult to resolve.

2.       Review Federal Tax Deposit requirements with the taxpayer. Give the taxpayer Notice 931, Deposit Requirements, or other document outlining the deposit rules to help explain the requirements.

3.       Discuss the cost for failing to deposit taxes on time. Explain the FTD penalty to the taxpayer. Consider illustrating the cost to the taxpayer by showing the taxpayer the penalties incurred in the Alert quarter as well as prior quarters.

4.       Ensure that the taxpayer understands the consequences of continued noncompliance. Discuss levy and seizure provisions; discuss monthly filing and the special bank deposit provisions found in IRC 7512; and when applicable, discuss the provisions for the Trust Fund Recovery Penalty.

5.       Monitor the taxpayer’s compliance with deposits for the Alert quarter and subsequent quarters until the account is resolved. If the taxpayer cannot satisfy past due deposits while meeting current deposits, encourage the taxpayer to make current deposits first while working to resolve past due deposits.

Note:

When discussing Federal Tax Deposits with the taxpayer, explain and recommend the Electronic Federal Tax Payment System (EFTPS).

6.       Input a record of FTDs made by the taxpayer as a result of FTD Alert contacts using the <F3> DEPOSIT application within the ICS FTD Alert module. All FTDs (TC 650 only) made by the taxpayer for the Alert quarter from the point of initial contact until the Alert is closed should be input to the module using this application. These inputs do not upload to IDRS and are for tracking purposes only.

5.7.1.8  (04-01-2005)
Alert Closing Procedures

1.       Secure the 941 return for the Alert quarter. Use the appropriate closing code with TC 599 for the return secured.

2.       If full payment of tax, penalty, and interest is not received with the return, take pre-assessment action to resolve the outstanding liability.

3.       If resolution of the account is not imminent, consider prompt assessment action.

4.       Close the Alert when the taxpayer is brought into full compliance or when the prompt assessment, Bal Due, or Del Ret is received.

5.       The following options are available to close an Alert:

A.      Return Secured: The taxpayer was not in compliance with FTDs and the revenue officer secured a balance due return for the Alert quarter. The revenue officer should close the FTD Alert, create a pre-assessed or prompt-assessed Bal Due on ICS, and pursue collection.

B.      TP is in Compliance: The taxpayer was required to deposit and was fully current in doing so at the time of initial contact on the Alert.

C.      Not Required to Deposit: The taxpayer was not required to deposit for the Alert quarter.

D.      TP is Sporadic/Seasonal: The taxpayer is either a sporadic or seasonal employer with a fluctuating payroll. If the Alert analysis would be unable to predict the taxpayer's deposit compliance, the revenue officer should close the Alert and manually request input of TC 136 to suppress future Alerts.

E.      Brought into Compliance: The revenue officer ensured the taxpayer made all required deposits and secured the return for the Alert quarter. The taxpayer is fully current at the time of closure, and there are no additional balances owed.

F.      TDA/ TDI Received: The revenue officer received another module by which to control the case. FTD Alerts should be closed and the subcode changed to "000" when there is an open Bal Due or Del Ret on the account.

6.       If a new FTD Alert is issued while an Alert from a prior quarter is still open in inventory, the old Alert will be closed systemically and replaced with the new Alert.

5.7.1.9  (04-01-2005)
Transfer of FTD Alerts

1.       If the taxpayer is in another area, the FTD Alert can be transferred without a prior Courtesy Investigation.

2.       Due to the time-sensitive nature of FTD Alert contacts, call and advise the receiving office of the transfer.

3.       Transfer FTD Alerts only if the business itself, not merely one or more officers or partners, is located in the transferee area.

5.7.2  Monthly Filing and Special Deposits

• 5.7.2.1   Letter 903 (DO)
• 5.7.2.2   Monthly Filing and Special Deposit Procedures
• 5.7.2.3  
• 5.7.2.4   Processing of BAL DUE Cases
• 5.7.2.5   Referrals For Civil Enforcement
• 5.7.2.6   Referrals For Criminal Enforcement
• 5.7.2.7   Cancellation of I.R.C. § 7512(b) Requirements

5.7.2.1  (06-04-2002)
Letter 903 (DO)

1.       Letter 903 (DO) alerts taxpayers to the provisions of I.R.C. § 7512, Separate Accounting for Certain Collected Taxes and I.R.C. § 7215, Offenses With Respect to Collected Taxes.

Note:

These procedures should only be used in the most egregious cases of noncompliance and where the collection procedures have already been unproductive or would be futile to stop or reduce trust fund pyramiding.

2.       After issuance of Letter 903(DO), subsequent delinquencies by the taxpayer will be accelerated to the field for prompt enforcement action.

3.       Issuance of Letter 903(DO) is required before a taxpayer can be recommended for monthly filing and special bank deposits.

4.       Issuing Letter 903 (DO):

5.       When the Letter 903(DO) is approved:

a.       Hand deliver Letter 903(DO) and Notice 931, Deposit Requirements for Employment Taxes, to the taxpayer. If the taxpayer is not available, the letter and notice may be left at the place of business.

b.       Prepare Form 4844, Request for Terminal Action, to request input of TC 148–9. This provides for systemic control and subsequent follow-up. If a subsequent BAL DUE, DEL RET, or FTD Alert, is issued it will be coded with an "L" and it will be accelerated.

c.       Associate the copy of Letter 903(DO) with the case file.

Note:

The basis for the $100,000 figure used in the Letter 903(DO) is as follows:

·         I.R.C. § 7215 violations are punishable by up to one year of imprisonment;

·         Under federal sentencing guidelines, offenses punishable by one year or less, but more than six months are Class A misdemeanors (18 U.S.C.§ 3559(a)(6));

·         Under federal sentencing guidelines, Class A misdemeanors not resulting in death are punishable against individuals by fines of not more than $100,000 (18 U.S.C. § 3571(b)(5)).

6.       If the taxpayer has previously abandoned other business ventures, leaving unpaid and uncollectible tax liabilities, it may not be necessary or appropriate to place the taxpayer on monthly filing or special deposit requirements before seeking a civil injunction to stop further pyramiding. Consult with local Counsel when dealing with this situation.

5.7.2.1.1  (06-04-2002)
Revenue Officer Follow-up After Letter 903(DO) Issuance

1.       For cases received in the Collection Field function coded "L" indicating that the taxpayer previously was issued Letter 903(DO), take firmer actions, as described below.

·         If the taxpayer is not in compliance with filing and payment requirements, place the taxpayer on both:

A.      Monthly filing (See Treas. Reg. 31.6011(a)–5)

B.      Special bank deposit requirements (See I.R.C. § 7512)

·         The case should be monitored for ongoing compliance. The revenue officer should make a documented contact with the taxpayer at least once each month to remind the taxpayer of trust fund obligations.

2.       Document the case history with the reason for not proceeding with any or all of the above.

3.       If the taxpayer is in compliance, request input of TC 149 to reverse the TC 148–9.

5.7.2.2  (06-04-2002)
Monthly Filing and Special Deposit Procedures

1.       All administrative collection procedures should be taken before initiating Trust Fund Compliance procedures. For instance, appropriate levies and liens should first have been considered and appropriate trust fund recovery penalty investigations should have been pursued. With approval from local counsel, it may also be appropriate to use monthly filing and special deposit procedures while a taxpayer is exercising its collection due process hearing and appeal rights under I.R.C. § 6320 or 6330.

2.       Form 2674, Report of Trust Fund Violators, is used to recommend the number of months the taxpayer must file monthly or semimonthly. The taxpayer will remain on a monthly or semimonthly filing schedule for six months unless it is determined a longer period is appropriate.

3.       If the taxpayer is required to file Form 941–M, a return must be filed for each month in the quarter. If the taxpayer is required to file Form 720, recommend monthly or semimonthly filing based on the taxpayer’s Federal tax deposit requirements.

Example:

If the taxpayer is required to make semimonthly tax deposits with Form 720, recommend semimonthly filing.

4.       If you are recommending a monthly return, you will:

A.      Complete a Form 2674.

B.      Prepare a notification letter to the taxpayer. (See Exhibit 5.7.2–1 Letter 1608(P)).

C.      Submit the Form 2674 and notification letter to the group manager for approval.

D.      Retain a copy of the letter in the case file.

E.      Deliver the notification letter to the taxpayer personally.

F.      Request acknowledgment of receipt of the original letter; if the taxpayer declines to acknowledge receipt, leave the letter with the taxpayer.

G.     Give the taxpayer Form 941–M and/or Form 720, with your mailing address for filing the returns.

H.      Explain monthly and/or semimonthly filing requirements.

Note:

Begin the period covered by the first monthly or semi-monthly return on the first day of the first month of the calendar quarter.

I.         Explain Special Deposit of Taxes requirements and issuance of Form 2481. (See IRM 5.7.2.2.3).

5.       Inform the taxpayer that failure to comply may result in:

·         Prompt assessment of unpaid monthly liabilities.

·         Assessment of monthly liabilities based upon a return executed under I.R.C. § 6020(b).

·         Prompt enforcement action prior to the end of the calendar quarter.

·         More stringent requirements authorized by I.R.C. § 7512(b), and possible civil or criminal referral.

6.       Change the taxpayer’s Form 941 filing requirement from 1 to 10. Request input TC–136 to suppress FTD Alerts, if not previously done.

7.       I.R.C. § 7512(b) applies to withheld employment taxes, backup withholding, and certain withheld and collected excise taxes (i.e., local telephone service, toll telephone service, teletypewriter exchange service, and air transportation). It requires the creation of a separate bank account and deposit therein of such taxes. Deposits to the separate bank account are paid over the government when a return for the deposit period is due, instead of through the FTD system, which is one reason that monthly or semi-monthly return requirements are ordinarily established at the same time that I.R.C.§ 7512 requirements are imposed.

8.       Failure to comply with provisions of I.R.C. § 7512(b) subjects the taxpayer to criminal prosecution under I.R.C. § 7215.

·         Pursue cases that do not meet LEM 5, Section 4.1.(2) criteria (or where criminal prosecution will otherwise not be sought) for a potential civil injunction.

·         Form 2674, Section II, provides for revenue officer recommendation for issuance of Form 2481 under civil or criminal sanctions.

5.7.2.2.1  (06-04-2002)
Monitoring Compliance with Monthly Filing

1.       When monitoring taxpayer compliance, ensure:

·         Form 941–M and/or Form 720, with return envelope, is mailed to monthly filers between the 25th and 28th of each month.

·         Form 720 is mailed to semimonthly filers between 10 and 12 days before the due date of the return.

·         Form 940 is sent with the Form 941–M between the 25th and 28th of December.

2.       Upon receipt from the taxpayer of the completed form, you will:

·         Review the return for accuracy and compliance with deposit and paying requirements.

·         Ensure that a received date is present on the return.

·         Use Form 2482, Record of Trust Fund Compliance Program Case, sections I and III , to monitor Special Deposit of Taxes and filing compliance.

·         Retain the case in active inventory for a full filing quarterly period. Thereafter, local management may determine other appropriate means of monitoring such cases.

Note:

If the taxpayer has moved after receipt of the notification letter, then issue a Courtesy Investigation to monitor compliance.

5.7.2.2.2  (06-04-2002)
Processing Monthly Forms 941–M and/or Monthly or Semimonthly Forms 720

1.       To process the Forms 941–M and/or Form 720 follow the procedures below: