Required Filing Checks

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Required Filing Checks

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4.10.5  Required Filing Checks

4.10.5.1  (05-14-1999)
Overview

  1. Required Fling Checks (RFC) are necessary to ensure voluntary compliance. Examiners should determine that taxpayers are in compliance with all Federal tax return filing requirements and that all returns reflect the substantially correct tax. See Exhibit 4.10.5–1, Compliance Checks—Minimum Requirements, for a summary of required filing checks.

4.10.5.2  (05-14-1999)
General Guidelines

  1. Required Filing Checks consist of the analysis of the return information and, when warranted, expansion of the examination to include additional returns. The following guidelines are applicable to all returns included within the scope if Required Filing Checks.

4.10.5.2.1  (05-14-1999)
Filing Verification

  1. Examiners are to verify that all returns within the taxpayer’s realm of influence have been filed. To decrease taxpayer burden, examiners should use internal sources of information, e.g., Corporate Files On Line (CFOL) and Midwest Automated Compliance System (MACS), to complete required filing checks.
  2. Filing should be verified for prior and subsequent year returns, related returns, information returns, employment tax returns, gift tax returns, excise tax returns, pension plan returns, etc.

4.10.5.2.2  (05-14-1999)
CFOL and MACS

  1. CFOL and MACS are used to obtain information relating to the taxpayer’s prior and subsequent years, related returns, and any other return the taxpayer is required to file.
  2. MACS provides a three-year comparative analysis of the return under examination. CFOL provides on-line access (research only) to tax account, tax return and other related information through Integrated Data Retrieval System (IDRS). CFOL information is transcribed from most individual line items on the tax return and accompanying schedules.
  3. If, after analysis of CFOL and MACS information, it is determined that additional return information is needed, the return should be requested from either the service center or the taxpayer for inspection. The inspection of a return is essentially the same as classifying a return for examination potential; no records should be examined and the taxpayer should not be questioned about items on the inspected return. The inspection of a return is not an examination, but asking questions or verifying items may constitute an audit, requiring an audit report.
  4. WARNING: Treasury employees (including IRS employees) are prohibited from accessing tax account information, unless such employee’s official duties require access for tax administration purposes. See IRC section 6103 (h) (1) . BROWSING IS ILLEGAL; CONSTITUTES UNAUTHORIZED ACCESS AND IT COULD RESULT IN SEVERE ACTION AGAINST THE IRS EMPLOYEE.

4.10.5.2.3  (05-14-1999)
Assessing Audit Potential: Area of Expertise

  1. Examiners are responsible for assessing the audit potential of all returns within their area of expertise. Area of expertise is the area of tax in which the examiner has been formally trained and currently works. If it is determined that additional returns require examination, the examiner is responsible for expanding the audit to include those returns, unless otherwise instructed by management. Examiners should verify that the returns are not currently under examination, before opening as part of his/her audit.
  2. For returns outside the examiner’s area of expertise, examiners should verify filing and consider managerial involvement to determine audit potential. If audit potential exists, examiners should ensure these issues are examined by a specialist or with specialist assistance. Returns may be referred to a specialist, or an Information Report may be prepared (Form 5346 for income tax examiners, Form 5665 for EP/EO examiners). See IRM 4.10.8.13 for the use of Information Reports.

4.10.5.2.4  (05-14-1999)
Returns Not Filed

  1. If examiners find that a required return has not been filed, either during an examination or upon receiving a Collection referral as a result of a Taxpayer Delinquency Return (Del Ret), they should request a delinquent return, Per Policy Statement P–5–133, (except when fraud or willful failure to file is indicated).
  2. If there is an indication that the failure to file was willful, or if there is any other indication of fraud, no return should be solicited and the case should be referred to Criminal Investigation under the procedures in IRM 25.1, Fraud.
  3. If delinquent returns are secured, the IRS received date is to be annotated on the return. All delinquent returns are to be assessed for audit potential. If the return is outside the examiner’s area of expertise, the return should be referred to the appropriate function.
  4. If the examiner determines that there is no filing requirement, this should be noted in the case file. For Del Rets, Collection is to be notified in order to suppress the filing requirement for the appropriate return periods.
  5. If the taxpayer is uncooperative and does not provide the examiner with the delinquent return(s), examiners should consider substitute return procedures, with managerial approval. See IRM 4.4, AIMS/Processing for processing information on both delinquent and substitute returns. When substitute return procedures are considered, Policy Statement P–5–133 outlines the extent to which compliance for prior years will be enforced. If the return is not in the examiner’s area of expertise, Form 5346, Examination Information Report, should be prepared and forwarded to the appropriate function.
  6. In excise tax cases, when a taxpayer refuses to file a delinquent Form 11–C, Special Tax Return and Application for Registry-Wagering, determined to be due during an examination , a return will be prepared under authority of IRC Section 6020(b) on Form 11–C showing the delinquent taxes due. The word "Delinquent" and "IRC 6020(b)" are to be imprinted on the return. Since the return is being filed under protest, the examiner will establish NMF-AIMS control and give the taxpayer their appeal rights. If the taxpayer does not wish to protest, establish Master File AIMS control and process the return under procedures in IRM 4.4, AIMS/ Processing. The temporary NMF-AIMS control previously established must be closed using Form 5351, Examination Nonexamined Closing, with Disposal Code 28. If the taxpayer protests to Appeals, the return and case file will be closed to Appeals using NMF-AIMS.

4.10.5.2.5  (05-14-1999)
Nonfilers

  1. Nonfilers must be brought current in their filing requirements following the guidelines in Policy Statement P–5–133, Taxpayer Delinquency Investigations.

4.10.5.2.5.1  (05-14-1999)
Nonfilers: IDRS Research

  1. When working nonfiler cases, the examiner should include the following information in the case file (if not in the file when received):
    1. MFTRA (including lower levels on the nonfiler, spouse, and any cross-referenced SSNs) except for years obtained on IMFOL.
    2. MFTRA, E (or ENMOD entity prints on any EINs associated with the nonfiler on Master File).
    3. TDI supplements.
    4. CC IRPTR research for Primary and Secondary SSN.
    5. CC INOLE research.
    6. IROLE/IRPOL research.
    7. Available RTVUE print.
    8. Currency and Banking Retrieval System (CBRS) research (A computer generated list of CBRS matches will be used to request CBRS prints of available records.)
    9. CC PMFOL research on all cross-referenced EINS located.
    10. CC IMFOL on-line entity and tax data (do not duplicate MFTRA research).
    11. Directory Assistance research for current telephone listings.

     

  2. Additional information may include research to determine last return filed; Form 4759, Address Information Request (addressed to the U.S. Post Office); CC BRTVU for businesses related to the nonfiler, and CBRS on the spouse’s SSN.

4.10.5.2.5.2  (05-14-1999)
Nonfilers: Related Cases and Spin-Offs

  1. During examinations of nonfilers, determine if related return (corporate, partnership, employment tax, and excise tax returns) are filed as required. If not, secure the delinquent returns. See the Examination Nonfiler section for additional procedures.
  2. In addition, be alert for spin-off cases (relatives, employees, employers, subcontractors, and even return preparers and representatives) who have not filed returns.
    1. If the nonfiler is involved in a family business, determine if all family members have filed returns.
    2. If the nonfiler is involved in a partnership, determine if partnership returns have been filed and if all partners have filed returns.
    3. If the nonfiler has employees and/or subcontractors, determine if Forms W–2 or 1099 have been filed. The possible improper classification of employees as independent contractors must also be addressed.
    4. For delinquent corporate returns, determine if all shareholders have filed returns.

     

  3. Managerial approval is required prior to opening an examination on any related or spin-off case. If an examination appears warranted and is not initiated, Form 5346, Examination Information Report, is to be submitted to the Planning and Special Programs (PSP) Support Manager to determine if:
    1. the delinquency investigation is warranted,
    2. it should be transferred to another area, and/or
    3. it should be investigated by Criminal Investigation or Compliance Field Territories.

     

  4. If Form 5346 is prepared due to contact from an informant and he/she intends to claim a reward, the informant should be requested to file Form 211, Application for Reward For Original Information (See IRM 25.2, Information and Informants’ Claims for Reward).
  5. In cases where the examination is expanded to other delinquencies, the original non-filer package may be closed before closing the spin-off case.

4.10.5.2.6  (05-14-1999)
International Jurisdiction

  1. If a secured delinquent return is within the jurisdiction of the Director, Compliance (International) , Office of International Area Operations, OP:IN:D:C, the examiner will not examine the return, but will immediately forward it to the Philadelphia Service Center, Philadelphia, PA 19255, to be filed. The return is to be stamped with the IRS received date.
  2. If there are any circumstances present which the examiner believes should be brought to the attention of the Director Compliance (International), (e.g., recommendations for or against the application of the delinquency penalty) , a memorandum covering these circumstances will be prepared and attached to the return. See IRM 4.60 Enforcement Program, for cases under International jurisdiction.

4.10.5.2.7  (05-14-1999)
No Examination Warranted

  1. The taxpayer will be notified if the inspection of returns does not result in an examination. The taxpayer should also be told that such action does not preclude the return(s) from being selected for examination as a result of another selection method: e.g., DIF, CIP, etc.

4.10.5.2.8  (05-14-1999)
Case File Documentation

  1. Examiners are required to document RFC actions taken and decisions made on Form 4318 Examination Workpapers, Form 4700, Examination Planning and Workpapers or Form 5773, (EP/EO) Workpaper Summary Continuation Sheet.
  2. If the taxpayer has correctly filed all required returns, the examiner should identify the specific returns in the comments.
  3. If the minimum required checks are not completed, an explanation is to be included and managerial involvement documented. See Exhibit 4.10.5–2 for proforma casefile documentation for the required filing checks.

4.10.5.3  (05-14-1999)
Prior and Subsequent Year Returns

  1. The taxpayer’s prior and subsequent years’ returns should be inspected for proper filing and to evaluate audit potential. The returns should be evaluated for issues related to the year under examination and for large, unusual, and questionable items.

4.10.5.3.1  (05-14-1999)
Pre-Contact Analysis

  1. As part of the pre-contact analysis, the examiner should requisition CFOL to obtain copies of the prior and subsequent years’ tax return information to confirm filing and evaluate audit potential.
  2. If the CFOL information does not provide enough detail, the examiner should inspect the taxpayer’s retained copy or requisition the original return.

4.10.5.3.2  (05-14-1999)
Inspected Returns Not Examined: Mandatory Comments

  1. If the inspection of the prior and/or subsequent year return does not result in examination of either or both returns, the examiner should document on Form 4700/4318 why an examination was not warranted. If adjustments were made to the return(s) under audit, the examiner must specifically document why the other years were not examined.

4.10.5.3.3  (05-14-1999)
Examination Information Reports

  1. When an examiner develops an issue or receives information of sufficient compliance value to warrant follow-up actions concerning a return filed out of area or to be filed by another taxpayer, Form 5346, Examination Information Report, will be prepared and submitted to the examiner’s immediate supervisor for approval.
  2. Example: An examiner audited the taxpayer’s 1997 income tax return and reduced the net operating loss from $300,000 to $240,000. The taxpayer carried back the net operating loss to the prior three years and had an unabsorbed loss available for carry forward totaling $100,000. Since the audit adjustments reduced the net operating loss carry forward from $100,000 to $40,000 and the 1998 tax return had not been filed, the examiner should prepare Form 5346 to reflect the changes made to the net operating loss carry forward.
  3. An Examination Information Report should also be issued when there are significant balance sheet adjustments. See section 3 of this chapter.

4.10.5.3.4  (05-14-1999)
Inspected Returns Examined

  1. If the examiner decides that examination of the inspected return(s) is warranted, the return(s) will be examined concurrently with the assigned return. However, the examiner should follow the 26/27 months examination cycle time guidelines. See IRM 4.10.2.2.2 for more information on examination cycles.
  2. The examiner will inform the taxpayer of the decision to examine the return and ask whether the return(s) is currently under examination. If the taxpayer states that the return is under examination, the examiner should verify this through AIMS research (i.e., obtain a copy of a transcript and/or AMDISA) before commencing any examination based on the taxpayer’s retained copy.
  3. If the requested return is under examination in another area, the examiner will contact that area to coordinate the transfer of the return(s) to one examiner.
  4. If the return is located in the area, but at another post of duty (POD), the group manager will contact the POD to coordinate the transfer of the case.
  5. If the research reveals that the return is not under examination, AIMS control must be established.

4.10.5.3.5  (05-14-1999)
Closing Case On Taxpayer’s Retained Copy

  1. If the case is closed on the taxpayer’s retained copy, the examiner should use either the Settlement Codes printed on Form 5546, Examination Return Charge-Out Sheet, or a transcript to confirm the tax shown on the retained copy. See Exhibit 4.4.1-1, AIMS/Processing, for instructions for closing when using this method.

4.10.5.3.6  (05-14-1999)
Returns Not Filed

  1. See 5.2.4 above, Returns Not Filed, above for more information.

4.10.5.4  (05-14-1999)
Related Returns

  1. Related returns are returns that have a relationship to the return under audit. Returns are considered related if:
    1. adjustments made to one return require corresponding adjustments to the other return, to ensure consistent treatment. Also refer to IRC Sections 1313(c) and 267.
    2. returns are for entities over which the taxpayer has control and which can be manipulated to divert funds or camouflage financial transactions.

     

  2. Returns should be inspected to determine:
    1. whether the effects of the examined taxpayer’s activities are correctly reflected on the related taxpayer’s return; and
    2. if there is audit potential (see 5.2.3 above).

     

4.10.5.4.1  (05-14-1999)
Pre-Audit Analysis

  1. CFOL information is to be obtained on all known related returns that have been filed. An evaluation of all information available is to be made and, if needed, the return may be requested on Form 4564, Information Document Request, sent with the initial appointment letter.
  2. PMFOL is used to determine what related returns have been filed and RTVUE and BRTVU information is used to evaluate audit potential.
  3. A copy of the related return may be requested from the taxpayer if necessary.

4.10.5.4.2  (05-14-1999)
Interview

  1. The examiner should ask about the taxpayer’s involvement with partnerships, corporations, and related family transactions.
  2. The taxpayer should be questioned to identify all related returns and determine if they have been filed. Delinquent return procedures should be followed for any unfiled returns.
  3. Specific questions regarding information on these related returns should not be asked. This would constitute an examination.

4.10.5.4.3  (05-14-1999)
Examination Issues

  1. When examining books and records, examiners should consider the effect of items on related returns. Correct reporting of flow-through items should be observed, whipsaw issues checked, and reporting of related transactions verified.
  2. If the examiner determines there is audit potential, the audit should be expanded or Form 5346, Examination Information Report, will be prepared and submitted to the examiner’s supervisor for approval.

4.10.5.4.4  (05-14-1999)
Closing On a Copy

  1. Examination of Form(s) 1040, 1041, 1065, 1120, 1120S, 720 and 2290 may be closed based on the taxpayer’s retained copy. The examiner should use either the Settlement Codes printed on Form 5546, Examination Return Charge-Out Sheet or a transcript to confirm the tax shown on the retained copy. See Exhibit 4.4.3.1–1, AIMS/Processing for instructions for closing when using this method.

4.10.5.5  (05-14-1999)
Employment Taxes and Other Withholding Taxes

  1. Employment tax returns of a business taxpayer are to be considered for examination at the same time the income tax return is examined, as required by Policy Statement P–4–4.
  2. Withholding taxes include employment taxes such as FICA, RRTA, FWT, and FUTA, as well as back-up withholding, withholding on income paid to foreign persons, and withholding on gambling winnings.
  3. Withholding also includes the tax imposed on a buyer or other transferee (withholding agent) when a U.S. real property interest is acquired from a foreign person (IRC Section 1445).

4.10.5.5.1  (05-14-1999)
Pre-Audit Analysis

  1. The examiner should inspect CFOL information for each withholding tax return filed up to and including the last quarter for which a withholding tax return was due. BMFOL identifies returns filed by the taxpayer and BRTVU provides return information for the Form 940 series of returns.

4.10.5.5.2  (05-14-1999)
Examination of Employment Tax Returns

  1. A withholding tax examination is warranted if:
    1. available information indicates that the withholding tax liabilities have not been correctly reported;
    2. delinquent returns are secured and indicate audit potential; or
    3. the potential additional liability or the resulting improvement in voluntary compliance will justify the expenditure of time required to make necessary verification and adjustment.

     

  2. IRM 4.23, Employment Tax, provides information on employment tax procedures and instructions for the preparation of examination reports covering withholding examinations.
  3. If a payer willfully fails to collect or pay over withholding taxes, the examiner will consider asserting the penalty provisions under IRC Section 6672 (See IRM 20.1, Penalties).
  4. If an examination is warranted, it is to be made concurrently with the income tax examination and should cover the same periods. See Exhibit 4.10.5–3 for a Pro Forma Employment Tax Checksheet.
  5. If an examination results in a no change of employment tax, or of the amount claimed under IRC Sections 6420, 6421 or 6424 as a credit on the income tax return or allowed on a separate claim, the examiner will include a statement to that affect in the "Other Information" space on the report form and identify the employment tax returns and claims examined. Appropriate comments will be made on Form 4318.

4.10.5.5.3  (05-14-1999)
Worker Classification Issues

  1. Examiners are also required to consider the issue of employee versus independent contractor. The status of a worker as either an independent contractor or employee must be determined accurately to ensure that workers are properly classified for withholding purposes. If employees are improperly classified as independent contractors, examiners are required to give taxpayers written notice of the relief available under Section 530 of the Revenue Act of 1978, prior to beginning an audit involving worker classification.

4.10.5.6  (05-14-1999)
Information Returns

  1. Internal Revenue Code Sections 6041 through 6053 and Title 31, United States Code require that taxpayers report various types of payments to both the Service and the recipients of payments. These payments include such items as dividends, interest, rents, royalties, wages, payments made in the course of a trade or business to another person (see 5.7 below guidance on cash transaction reporting requirements).
  2. When payors file information returns (W–2s and 1099 series) , these documents become important leads in identifying income for both taxpayers and the IRS. The Information Returns Program (IRP) matches information returns to individual tax returns to determine compliance. Therefore, it is important that taxpayers (payors) timely file these returns.
  3. A Payor Master File (PMF) is created to assist in compliance filing of 1099 series information returns. The PMF is a master file listing of entities, businesses and individuals filing form 1099. A PMF indicator, "1099 Filer," will appear on Form 5546 Examination Charge Out if the taxpayer is listed on the PMF and a PMF transcript will normally be included in the case file.

4.10.5.6.1  (05-14-1999)
Minimum Requirements

  1. To ensure the timely and correct filing of information returns, examiners are required to ascertain that all information returns required to be filed by the taxpayer are filed from the period of the return under examination to the most current period. The following minimum requirements are to be considered by the examiner:
    1. During the preplanning stages of the examination, the examiner should determine the potential of filing requirements (see Exhibit 4.10.5–4, Information Returns or Statements, for a list of payments requiring the issuance of information reports) . Line items of the return are often indicative of an information return filing requirement.
    2. The examiner will use CFOL command PMFOL to determine if the taxpayer has filed information reports. Sometimes the examiner will not be able to tie the amounts on the PMFOL transcript to a line item on the tax return because some payments made to the payees may be under the threshold amounts for reporting, or fragmented between several deductions on the tax return.
    3. The examiner should question the taxpayer regarding their internal procedures for information reporting and verify all reporting requirements have been met.

     

4.10.5.6.2  (05-14-1999)
Examination Warranted

  1. Generally, a detailed examination, including penalty consideration, is warranted if:
    1. available information indicates that information returns were not filed;
    2. available information indicates that the income amounts were materially incorrect as reported;
    3. the payee TIN or address is missing;
    4. internal procedural controls are lacking; or
    5. the resulting improvement in voluntary compliance (payor or payee) will justify the expenditure of time required to make the necessary verifications and/or to secure copies of the incorrect or delinquent information returns.

     

4.10.5.6.3  (05-14-1999)
Delinquent Information Returns

  1. An examiner may find that a taxpayer failed to file information returns or furnish certain statements required under IRC Sections 6041, 6044, 6049, 6050I, 6050L, 6047, 6051(d), and 3402 (q) . Appropriate penalties for failure to file should be imposed for all years for which delinquent forms are secured, within the guidelines of IRM 20.1, Penalties. If there are no indications of fraud, the examiner will, if practical, secure the following delinquent forms which the taxpayer failed to file, regardless of years involved:
    1. Forms W–2 and W–2P—send forms to the Social Security Administration under cover of Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
    2. Forms W–2G and 1099–R—send forms to the appropriate Service Center under cover of Form 1096, Annual Sumary and Transmittal of U.S. Information Returns.
    3. Forms 5471 and 5472—Refer to IRM 4.4 AIMS/Processing for processing procedures.

     

  2. The examiner will secure delinquent forms 1099 series, and 5498 (for amounts received after 1984) for the last complete calendar year and four prior years.
    1. For delinquent returns prior to the last complete calendar year, an Examination Information Report, Form 5346 will be submitted for each payee/recipient to report any significant income amounts reported on delinquent Forms 1099 series.
    2. Delinquent Forms 1099 series for the latest complete calendar year will be sent to the service center (contact the PSP staff for the appropriate address.)
    3. Form 8300 will be sent to the Detroit Computing Center (contact the PSP staff for the address.)

     

  3. The examiner will prepare a penalty case file for all delinquent information returns if it is determined that there is no reasonable cause for failing to file information returns. (See IRM 20.1, Penalties) Forms 1099 series, and 5498 for earlier calendar years cannot be used for the information matching programs but, should be retained in the penalty case file.
  4. Since many payors of interest, dividends, and other types of payments will be required to withhold, under the back-up withholding requirements, examiners should be familiar with these requirements and consider them during the compliance check.
  5. Generally, back-up withholding is required if a payee fails to supply a Taxpayer Identification Number or fails to certify that they are not already subject to back-up withholding. It is also required if the payor is notified by the IRS that a particular payee has become subject to back-up withholding.

4.10.5.7  (05-14-1999)
Forms 8300 and Currency Transaction Reports

  1. IRC Section 6050I was enacted to assist the IRS in discovering unreported income from legal and illegal sources by identifying taxpayers with large cash income. This law requires any person engaged in a trade or business and who, in the course of a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions) to file a return with respect to such transaction(s) at such time. Financial institutions and casinos must also report each deposit, withdrawal, exchange of currency or other payment or transfer which involves a transaction in currency of more than $10,000.

4.10.5.7.1  (05-14-1999)
Currency and Bank Retrieval System (CBRS)

  1. CBRS is an on-line retrieval system which contains information on the forms listed below that have been filed. Examiners may access this data base via the Consolidated Data Network (CDN) to verify that the taxpayer has complied with IRC Section 5060I.
  2. The Detroit Computing Center currently transcribes, validates, and builds databases for the following forms:
    1. Form 4789, Currency Transaction Report
    2. Customs Form 4790, Report of International Transportation of Currency or Monetary Instruments Report
    3. Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business
    4. Form 8362, Currency Transaction Report by Casinos
    5. Form 8852, Currency Transaction Report by Casinos—Nevada
    6. Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts.
    7. Form TD F 90–22.47, Suspicious Activity Report (filed by Financial Institutions)
    8. Form TD F 90–22.49, Suspicious Activity Report (filed by casinos

     

4.10.5.7.2  (05-14-1999)
Minimum Requirements

  1. During the course of an examination the examiner will perform minimum requirements with respect to required filing checks for currency transactions.
  2. Determine if the taxpayer is a financial record keeper or listed as a cash business (see the Currency and Banking/Money Laundering Handbook) . A financial record keeper would be an entity such as:
    1. bank or savings and loan associations
    2. broker or dealer in securities
    3. currency exchange
    4. check cashing business
    5. seller or redeemer of money orders
    6. transmitter of funds
    7. telegraph company

     

  3. If the taxpayer is a financial record keeper or cash business, review the taxpayer’s internal control system for filing of Form(s) 8300 and other CTRs as listed. A questionnaire, containing Form 8300 Interview Questions, has been provided in Exhibit 4.10.5–5, as an auditing tool and covers the minimum required interview questions.
  4. If the examiner determines that there are inadequate internal controls, compliance with Forms 8300 and CTR filing requirements include inspection of the cash receipts and sales journals, and bank statements to verify:
    1. whether there were transactions involving cash receipts of more than $10,000.
    2. whether there were consecutive or related transactions with totals in excess of $10,000.
    3. whether the currency transactions in excess of $10,000 were reported.

     

  5. All examiners should be alert to situations that may be an attempt to circumvent the reporting requirements of IRC Section 6050I.
  6. Requirements for securing delinquent returns are the same as for Form 1099 (See 5.6.3 above) except that delinquent Form 8300 will be sent to the Detroit Computing Center (contact the PSP staff for the appropriate address.)

4.10.5.7.3  (05-14-1999)
Information Reports

  1. Examiners should prepare an Examination Information Report, Form 5346, for unusual or questionable transactions, discovered during an examination. Information reports can be submitted on the "recipient" or the "identified person," depending on which party to the transaction is under examination, when the questionable item is discovered.
  2. Prior to submitting Form 5346, the examiner should consider the following factors:
    1. Does the transaction appear to be an isolated incident, or one of many, which may have been unreported?
    2. Depending on the type of business, is it normal and customary for the business to conduct its transactions in cash?
    3. Is it reasonable for the business to receive large amounts of cash for any single transaction?
    4. Does the business pay its suppliers or vendors in cash, other than for petty cash type items?

     

4.10.5.7.4  (05-14-1999)
Penalties

  1. Penalties for failing to comply with the requirements of IRC Section 6050I and the regulations are provided for in IRC Sections 6652 and 6678 for returns filed before 1987. For returns due after 1986, without regard to extensions, the Tax Reform Act of 1986 consolidated penalties, for failure to file various information returns and failure to furnish statements to certain "payees," in Sections 6721 through 6724. (See 5.6.3 above).

4.10.5.8  (05-14-1999)
Excise Tax Returns

  1. Excise taxes are special taxes assessed on various items and industries (IRC Sections 4003 through 5000) . There are over 30 different categories which include luxury tax on automobiles and special fuels taxes (Form 720), highway use tax (Form 2290), and wagering tax (Form 11–C) . Guidelines for excise tax examinations are found in IRM 4.24 Excise Tax.
  2. It is important to consider the applicable excise tax requirements for different market segments. ISP guidelines and MSSP Audit Technique Guides can provide useful information on excise taxes.
  3. Examiners should verify that required excise tax returns have been filed. If audit potential is noted, a referral to an excise tax specialist should be considered.

4.10.5.9  (05-14-1999)
Pensions Plan Returns

  1. Employers who have a pension plan for their employees are required to file the Form 5500 series return. Examiners will review the pension plan return to determine whether a referral of the plan to the Tax Exempt and Government Entities (TEGE) function is required.
  2. Form 4632–A, Employee Plans Referral Checksheet, should be used when reviewing the pension plan return. Instructions are found on the back of the form. Contact TEGE for assistance, as needed. Any plan which does not meet the requirements on Form 4632–A is a mandatory referral.
  3. Form 4632 will be used to make a referral to TEGE. A copy of the Form 5500 series return and a copy of the latest IRS determination letter should accompany the referral. Contact the TEGE for assistance.

4.10.5.10  (05-14-1999)
W–4 Compliance Check

  1. The area office’s primary responsibility in the W–4 Compliance Program is to ascertain that employers are complying with the Federal Income Tax Regulations Section 31.3402(f)(2)–1(g) . The compliance checks outlined below are to be performed for every income tax examination of a business return.
  2. IRC Sections 3401 and 3402 state that, in general, every employer shall deduct and withhold Federal Income taxes from wages paid to their employees, and each employee shall furnish to the employer, on or before the date of commencement of employment, a signed Form W–4, Employee’s Withholding Allowance Certificate.
  3. The employer must send a copy of any Form W–4 to the Service Center at the end of each quarter along with Form 941 or 941E if the employee claims more than 10 withholding allowances, or claims exemption from withholding and has wages normally exceeding $200.00 per week.

4.10.5.10.1  (05-14-1999)
Minimum Requirements: W–4 Compliance Check

  1. The examiner will perform the following minimum compliance checks:
    1. During a field or office income tax examination, the examiner will inform the taxpayer that compliance with the W–4 requirements will be considered.
    2. The examiner will inspect the most recent four quarters of retained Forms W–4 and review the taxpayer’s internal control system for forwarding questionable W–4s to the service center. If the examiner is not able to gather enough information to make a determination, due to the taxpayer’s filing system, Forms W–2 and payroll records should be reviewed.
    3. The examiner will query the taxpayer to determine if the employer received any "lock-in" letters from the Service Center and if they are complying with the letters. Lock-in Letter 1659 tells the employer to disregard employees’ Form W–4 and Letter 1660 tells the employer to disregard an exempt W–4 until further notice.

     

  2. The following chart outlines actions to be taken as results of the W–4 Compliance Checks:
    IF THE TAXPAYER THE EXAMINER WILL
    Received and forwarded questionable W–4s Request all copies of questionable W–4s submitted to the service center
    Did not forward questionable W–4s Secure copies and forward to *SCCB—W–4 Coordinator
    Did not comply with "lock-in" letter Forward information to SSCB—W–4 Coordinator
    No longer employs employee with questionable W–4 and did not previously forward questionable W–4 Do Not forward W–4

    *SCCB: Service Center Coordinator Branch

  3. The taxpayers will be liable for the under withholding if they fail to withhold, as instructed by the W–4 determination letter (i.e. "Lock-In Letters" 1659 or 1660) and have not received other instructions from the IRS.

4.10.5.10.2  (05-14-1999)
Submitting Questionable W–4s To The Service Center

  1. When the examiner finds questionable W–4s that have not been submitted to the service center as required, they will ascertain that the following information is included on Form W–4:
    1. Employee name, address, and Social Security number;
    2. Employer name, address, and employer identification number;
    3. Marital status and number of allowances being claimed by the employee;
    4. The date of the W–4; and
    5. Items pertaining to exempt status should be completed when applicable.

     

  2. The questionable W–4s must be complete, legible, and the most current form on file. Form 3210, Document Transmittal, addressed to the Service Center Collection Branch (SCCB) W–4 Coordinator, should be used to transmit the W–4s to the service center where the taxpayer files their Form 941. The employer’s name, address, employer identification number, and the number of forms attached should be notated on the 3210.
  3. If no Forms W–4s were filed with the service center and all of them are questionable, flag the Form 3210 with a transmittal indicating, "Multiple Questionable W–4 Employer: Pattern may indicate compliance problem" and follow the instructions above.

4.10.5.10.3  (05-14-1999)
Penalties For Willful Failure To Comply

  1. The examiner should discuss the case with their manager and consider a referral, to the Criminal Investigation (per IRC Section 7202 or 7203) , any employer who willfully fails to comply with the submission requirement for W–4s or willfully fails to withhold tax, based upon a notification letter (see IRM 20.1, Penalties, for assessing penalties).

4.10.5.10.4  (05-14-1999)
Workpaper Documentation

  1. The examiner should document in the workpapers on Form 4318/4700/5773 the inspection of and/or the disposition of questionable W–4s and/or the reason why W–4s are not inspected.

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