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Part 4. Examining Process

Chapter 2. General Examining Procedures

Section 6. Examination of Employee Returns

4.2.6  Examination of Employee Returns

4.2.6.1  (06-01-2007)
Employee Tax Compliance

  1. As the administrators of our nation's tax system, our dedication to the highest standards of ethical behavior and conduct promotes the public trust in our honesty, fairness and efficiency. Therefore, IRS employees are expected to fully comply with all tax laws by accurately reporting and timely filing their federal, state, and local tax returns and fully paying their taxes when due. This includes paying the proper amount of tax (e.g. estimated tax payments and withholding) as income is earned during the tax year. RRA 98 section 1203(b)(8) and (b)(9) provide for the removal of IRS employees who willfully fail to file any return of tax required under the Internal Revenue Code of 1986 on or before the date prescribed therefore, or who willfully understate federal tax liability respectively. To this end, the IRS has established a comprehensive employee tax compliance program. Employees' accounts will be subjected to examination, underreporter, and annual delinquency check procedures.

  2. Each area has an employee tax compliance coordinator. The employee tax compliance coordinator is located in the area Planning and Special Procedure (PSP) office.

4.2.6.2  (06-01-2007)
Examination of Employee Returns

  1. ) IRS Policy Statement P-4-9, IRM 1.2.1.4.7, provides that standard IRS procedures relating to examinations, proposed changes, appeal rights, etc., will apply to IRS employees to the same extent that they apply to all other taxpayers.

  2. Examination of employee returns are generally in five categories:

    • New employee examinations,

    • Regularly classified employee examinations,

    • Executive selections,

    • Treasury mandate audits, and

    • Special projects to address identified employee compliance problems.

4.2.6.2.1  (06-01-2007)
Identification of Employee Returns

  1. Examiners should review Form 5546 (C), Examination Return Charge-Out Sheet, on every case file to determine if it reflects the words " Employee Return." Prior to January 2006, the hand written word "employee" will be on the Form 5546 (C). After January 2006, the typed words "Employee Return" will be on the Form 5546 (C). This designation can be found about one third of the way down from the top of the Form 5546 (C).

  2. The examiner should also check for a project and/or a tracking code. The following project and/or tracking codes apply to employee audits:

    • 0206 – Executive selections project code

    • 0207 – Treasury mandates project code

    • 0389 – New employees project code

    • 0913 - Employee audit transferred from campus project code

    • 7569 – Employee audits tracking code

      Note:

      A tracking code is used to track an employee examination that originated in a source code other than source code 46. An employee audit tracking code takes priority over all other tracking codes. Therefore, it is critical that the employee audit tracking code be input on ERCS. If the group cannot update the employee audit tracking code, they should request the update be made by their employee tax compliance coordinator. The group cannot update a case to an employee tracking code if a tracking code is currently present.

  3. When special projects are initiated to address identified employee noncompliance, they may be assigned a unique project and or tracking code.

  4. If a return has not been pre-identified as an employee case and it is found to be an employee return after further inspection/examination, the examiner should notify their supervisor and their employee tax compliance coordinator as soon as possible. The employee tax compliance coordinator will discuss with the examiner's manager if the examiner may proceed with the case or if it should be reassigned. The word "employee" should be written at the top of the Form 5546 (C). The employee tax compliance coordinator will input the employee tracking code 7569. The examiner will document their actions on Form 9984, Examining Officer's Activity Record, and Form 9984-D, Office Examiner Forecast and Activity Record for field and office examination respectively.

  5. Conversely, if a return has been pre-identified as an employee audit and the employee is no longer employed with the Service, the words " employee return" should be crossed through on the Form 5546 (C) with a notation on Form 5546 (C) that the employee is no longer with the Service. The examiner should notify their group manager and the employee tax compliance coordinator of the change. See IRM 4.2.6.2.11.

4.2.6.2.2  (06-01-2007)
Examiner Impartiality

  1. Examiners must ensure impartiality and independence when examining an employee return. If the examiner has any reason to believe that his/her impartiality and independence may be questioned, they should discuss the matter with their immediate supervisor for reassignment consideration.

  2. The impartial and independent character of examinations of Internal Revenue Service employees and officials must be ensured. See IRM 4.1.4.2.10, Employee Audits, for guidelines on assignment of employee returns for examination.

4.2.6.2.3  (06-01-2007)
Assignment of Employee Returns

  1. Employee audits are high priority cases and should be assigned within 10 business days of arrival into the group.

4.2.6.2.4  (06-01-2007)
Examiner Travel to the Employee Location

  1. When an examiner is assigned an employee return for examination and the employee is located in another post-of-duty, the examiner is authorized to travel to the employee's business, residence, or other location where the books and records are maintained. All travel costs will be borne by the examining area.

4.2.6.2.5  (06-01-2007)
Conducting the Employee Examination

  1. An examination of an employee generally should be worked as a normal examination. The employee under examination should not be given preferential treatment nor should they be held to a higher standard than any other taxpayer under examination.

  2. Normal pre-contact responsibilities apply to an employee audit. The examiner should use current risk based decision tools in any decision to adjust the scope of the examination. See IRM 4.10.2, Pre-Contact Responsibilities.

  3. Employee audits are very sensitive and require certain modifications to the examination process. The following modifications must be made:

    1. The examiner should use the normal and appropriate initial appointment letter to begin the examination. The examiner should attach the Employee Information Sheet. Forms used for employee audits are locate on the EDP - Employee Audit website. See IRM 4.2.6.7 for employee interview procedures.

    2. The examiner should include Form 8111, Employee Notification Regarding Union Representation, with the initial contact letter and attempt to secure a signed copy before the initial interview takes place.

    3. Employee tax examinations are to be kept in an orange file folder at all times.

4.2.6.2.6  (06-01-2007)
Examination of Spouse’s Separate Return

  1. The return of an employee’s spouse who has filed separately should be inspected as part of the required filing checks to determine if it should be examined. A copy, RTVUE, or MAC print of the spouse’s return must be included with the employee’s return if it is not examined. See IRM 4.8.4.2.4.3, Key Points for Reviews.

  2. If the spouse’s return is examined, each Form 3198, Special Handling Notice for Examination Case Processing, should be cross referenced with the TIN of the related return.

4.2.6.2.7  (06-01-2007)
Violations of the Code of Conduct

  1. When facts are disclosed during the examination that indicate that an official or employee is, or has been, engaged in any activity in violation of the Rules of Employee Conduct, the examiner should refer to Document 12011, Plain Talk About Conduct and Ethics Handbook.

4.2.6.2.8  (06-01-2007)
Fraud

  1. Current civil and criminal fraud procedures will be followed, where applicable. Certain Fraud Technical Advisors (FTA) have been designated to assist with employee examinations. The FTA should be identified in the packet that accompanied the case file. If no information is available contact your local FTA or the employee tax compliance coordinator.

  2. If a joint examination is initiated with Criminal Investigation on an employee audit, Form 2677, Request for Account History and Tax Audit, should be immediately sent to National Background Investigation Center.

4.2.6.2.9  (06-01-2007)
Contacts with Labor/Employee Relations

  1. Labor/Employee Relations (LR/ER) specialists will occasionally request clarification of audit status, results, and/or adjustments. Their request should be directed as follows:

    1. If the case was recently closed from the group and sent for mandatory review, the LR/ER specialist should contact Technical Services for the area in which the case closed.

    2. If the case is assigned to an examination group, the LR/ER specialist should contact the group manager.

4.2.6.2.10  (06-01-2007)
Resignation of the Employee

  1. If the employee under examination resigns, the examiner should take the following actions:

    1. Notify their employee tax compliance coordinator of the resignation and document this activity on the Form 9984 or Form 9984-D for field and office examination respectively.

    2. The examiner should discuss the scope of the examination with their group manager. Based on the facts and circumstances of the case, the examination scope may need to be concluded, limited or continued as planned. See IRM 4.10.2, Pre-Contact Responsibilities.

    3. If the employee resigns before notification of the examination is made, the status of the cases changes from one of high priority to that of an informational referral case. The group manager should decide whether to retain the case and work it into inventory or to survey it using normal survey procedures. See IRM 4.2.6.6 below for additional detail.

4.2.6.3  (06-01-2007)
New Employee Examinations

  1. New employees in certain positions, and those with less than one year of continuous IRS employment in those same positions, must undergo employee tax return reviews and/or examinations. See IRM 4.1.4.2.10.6, New Employee Examinations.

  2. The employee tax compliance coordinator establishes controls on employee examinations, builds the case file, and requests the original return(s).

  3. The package sent to the group should contain the following items:

    • Return(s) (original, copy or RTVUE);

    • MACS print(s);

    • Form 2677, Request for Account History & Tax Audit;

    • CFOL reports of account history for the open years and Information Return Processing (IRP) transcripts; and

  4. Employee returns will be examined in the same manner as all individual income tax returns which include conducting minimum income probes and required filing checks.

  5. If the primary reason for the examination of a new employee’s return is consideration for employment and the individual is no longer employed by the Service, or is no longer being considered for employment, the examiner must discuss the scope of this case with their group manager. See IRM 4.2.6.2.11. The examiner should notify the employee tax compliance coordinator of the change in the employee's employment status.

  6. At the completion of an employee examination, the examiner completes items 14 through 16 and 18 through 20 of Form 2677. Form 2677 should remain in the case file and be place on top of Form 4318, Examination Workpapers Index, or Form 4700, Examination Workpaper.

  7. Forms and letters frequently used for employee audits can be found on the EDP -Employee Audit website under employee audits.

4.2.6.4  (06-01-2007)
Audit Reconsiderations

  1. An employee under examination may avail themselves to both the formal and informal claims procedures. An informal claim is known as an " Audit Reconsideration."

  2. Employee audit reconsideration cases that are selected will be sent to the appropriate area PSP office for assignment and control. The case should be returned to the group and examiner that originally worked the case. Employee audit reconsideration cases are high priority cases. They are given the same priority status as employee audit cases.

  3. The purpose of the audit reconsideration is to examine information that was not previously considered. The examiner should review IRM 4.13.4.3, Area Office (AO) Examination Group Procedures, for guidance and procedures for examining and closing an audit reconsideration.

4.2.6.5  (06-01-2007)
Closing an Employee Examination

  1. All employee audits are mandatory review, thus the "employee audit" box in the "Forward to Technical Services" section of Form 3198 must always be checked regardless of the type of closure (this includes surveys).

  2. In the case of a joint return, identify the name and SSN of the IRS employee on Form 3198 by checking the "other" block in the "Forward to Technical Services" section.

  3. Technical Services will close the case to the appropriate CCP. CCP will scan the required documents and forward them to the requester. In the case of a joint return, the examiner must identify on the Form 3198 the name of the IRS employee and their SSN. This information should be recorded in the "Forward to Technical Services" block adjacent to the "Employee Audit" box.

  4. Once the case is closed from Technical Services, Centralized Case Processing (CCP) will forward the required employee audit information in the case file to the requesting official such as Labor//Employee Relations, TIGTA, National Background Investigations Center.

  5. In the case of a joint return, identify the name and SSN of the IRS employee on Form 3198 by checking the "other" block in the "Forward to Technical Services" section.

4.2.6.6  (06-01-2007)
Survey of Employee Returns

  1. Survey procedures are applicable only to new employee examinations and regularly classified returns. Treasury mandates (TIGTA referrals) and executive selections cases cannot be surveyed.

  2. Once an IRS employee's return has been selected for examination and assigned to a group, it can only be surveyed with the written approval of the Chief, Compliance Division, in the Campuses; and the territory manager, or equivalent position in area offices. This survey action must include a description of any documents and/or other information used to draw this conclusion. See Delegation Order 244, IRS Employees’ Returns Selected for Examination, IRM 1.2.43.37.

  3. When an examiner believes that an examination of an employee's return would result in no material change in tax liability, he/she may apply survey after assignment procedures. The examiner will prepare a Form 1900, Income Tax Survey After Assignment, stating the reasons for the survey action. If the examiner's group manager concurs, he/she will approve the case and forward it to the appropriate second level official for his/her consideration and final approval on Form 1900.

  4. If the group manager surveys before assignment an employee's return, the group manager should follow the survey after assignment procedures as outlined in the preceding paragraph. The group manager should forward the case file to their territory manager for approval and then to PSP.

  5. Check the "Employee Audit" box on Form 3198, in the "Forward to Technical Service" section, when closing the case.

4.2.6.7  (06-01-2007)
Employee Interview Procedures

  1. The initial interview in an employee tax audit has increased significance, as the outcome of the examination may initiate a conduct investigation. The examiner’s interview questions should adequately probe the employee’s role in preparation of the return, participation in any business, investments, income producing activities and the employee’s role in identifying expenses or adjustments to income.

  2. The examiner’s initial interview of an employee may be considered an investigatory interview and the employee may elect to have union representation.

    1. The examiner should provide the employee with a copy of Form 8111 with the initial contact letter, discuss the form at the initial interview and attempt to secure a signed copy. The interview should not be delayed in order to secure a signed copy of Form 8111. Oral notification and documentation in the case file that the employee was advised of their right to union representation is sufficient.

    2. The examination should not be unreasonably delayed to secure union representation.

    3. An IRS employee is barred from appearing on behalf of any taxpayer as a representative before any federal, state, or local governmental agency, in an action involving a tax matter except on written authorization of the Commissioner of Internal Revenue Service. A union representative may be present and represent the employee in a conduct issue (5 C.F.R. section 3101.106, Additional rules for Internal Revenue Service employees, subsection (b)(2)).

  3. Employee Attendance at the Audit: IRC section 7521(c) generally prohibits the agency from requiring a taxpayer to accompany the taxpayer's recognized representative to an audit in the absence of an administrative summons. IRC section 7521(d) states, however, that "[t]his section shall not apply to ... investigations relating to the integrity of any officer or employee of the Internal Revenue Service." Inasmuch as an audit of an employee relates to the integrity of the employee and may result in a disciplinary or adverse action against the employee, the employee's recognized representative may not attend the audit in lieu of the employee, although the recognized representative may accompany the employee to the audit.

    Note:

    A recognized representative is any attorney, certified public accountant, enrolled agent, enrolled actuary, or any other person permitted to represent that taxpayer before the Internal Revenue Service who is not disbarred or suspended from practice before the Internal Revenue Service and who has a written power of attorney executed by the taxpayer.

  4. An employee will be granted administrative leave to attend a tax audit or a discussion of the employee’s own tax affairs.

  5. An employee will not be granted administrative leave to prepare for an examination.


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