The purpose of the IRS CAWR program is to ensure that employers paid the proper amount of taxes, withholding and advanced earned income credit. This is done by comparing the Forms W–3/W–2/W–3c/W–2c totals and the Form 1099–R and W–2G withholding amounts to the amounts reported on the employment tax returns.

Case Types 1 and 9 (non-filers) are extracted and reviewed for audit potential.

) Employers filing Form W–2 but no Form 941 may be non-filers. Employers consistently out of balance between Form W–2 and Form 941 coupled with other employment tax audit potential indicators, may have increased audit potential.

See IRM 4.19.4 for additional information on CAWR notices.

The BWH program provides "B" notices to payers who file information returns with incorrect Taxpayer Identification Numbers (TINs). The "B" notice (CP2100) advises payers that backup withholding could become necessary if payees fail to certify their TIN. The CP2100 Notice also lists accounts with missing TINs, on which the payer should have been backup withholding under IRC section 3406(a)(1)(A). Payers with missing TIN accounts should not wait to receive a CP2100 to begin backup withholding. The BWH program includes Forms 1099-B, 1099–DIV, 1099–INT, 1099–MISC, 1099–OID, 1099–PATR information returns.

Payers with payees receiving Form 1099–MISC with missing or false TINs have the highest audit potential. Backup withholding should have been taken upon filing of the Form 1099.

See IRM 5.19.3 and IRM 20.1.7.1.6.3.3 for additional information on CP2100 notices.

Notice 972CG, Notice of Proposed Civil Penalty, will be mailed to give filers an opportunity to establish reasonable cause for waiver of penalties prior to assessment. The notice will include proposed penalties for late filing, failure to file on magnetic media and missing and incorrect TINs.

This is the penalty portion of the BWH program. Payers repeatedly penalized for filing missing TINs may establish a pattern of noncompliance that may indicate other noncompliant actions.

See IRM 20.1.7.1.6.3 for additional information on Notice 972 CG.

The mission of the Questionable Form W–4 (QW–4) Program is to promote compliance with the income tax and withholding system by taxpayers (employees) who reduce or eliminate tax withheld from their wages by filing incorrect Forms W–4, Employee's Withholding Allowance Certificate. To accomplish this mission, we secure questionable Forms W–4 from employers, examine them, and where appropriate, require increases in employee's tax withholding and assess civil penalties. See IRM 5.19.7 for additional information.

The Area Office's primary responsibility in the QW–4 Program is to ensure that employers are complying with the Federal Income Tax Regulations Section 31.3402(f)(2)-1(g). The section provides that employers must submit to the Internal Revenue Service copies of withholding certificates, Forms W–4, filed by employees if the employee claims:

Employers who have a pattern of reporting questionable Forms W–4 or have a pattern of not sending in Forms W–4, may have a tendency for other noncompliant actions.

This project is an extract of employers issuing Forms 1099–MISC to workers. The selection criteria are:

A worker receiving only one Form 1099–MISC with no other income may be an employee and not an independent contractor. If the report indicates that the employer has other workers that are employees, this may indicate inconsistent treatment of workers performing the same job and indicate a worker classification issue.

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is the form used by a business or worker to request a determination or ruling letter regarding a worker's federal employment tax status.

Forms SS-8 are a potential source of leads for employment tax examinations. Group Managers should contact the appropriate SS-8 site to arrange the referral of leads for their coverage area, if they have not already done so.

The Classification Settlement Program or CSP establishes procedures under an optional classification settlement program that will allow businesses and tax examiners to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. The procedures will also ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied. Under the CSP, Internal Revenue Service (IRS) examiners will be able to offer businesses under examination a worker classification settlement using a standard closing agreement.

CSP Coordinators will identify taxpayers participating in CSP and Areas will establish systems for follow up. Since the CSP closing agreement includes a provision that the taxpayer complies prospectively, CFOL command codes will be researched to ensure that taxpayers are in compliance with the CSP closing agreements.

Taxpayers not in compliance may have high worker classification audit potential. See IRM 4.23.6, Classification Settlement Program, for additional information.

The Tip Rate Determination and Education Program was initiated by the Internal Revenue Service to improve and ensure compliance by employers and employees in industries where tipping is customary. Under this program, employers can agree to voluntarily enter into one of two arrangements, the Tip Rate Determination Agreement (TRDA) or the Tip Reporting Alternative Commitment (TRAC). See IRM 4.23.7.1, TRDA/TRAC Agreements, for additional information.

These procedures shall apply starting with the monitoring phase of the agreements and only after the employer has been given a reasonable amount of time to implement the program.

Responsibility for the Tip Rate Determination and Education program involving chain restaurants rests with the area where the chain is headquartered, the Headquarters Area (HQA). The HQA is responsible for monitoring the chain as a whole as well as all individual units throughout the chain. Monitoring will include keeping impacted area offices aware of any actions.

The HQA Tip Coordinator will provide timely status reports to all affected area offices (Member Areas) to include any actions initiated. In addition, the HQA Tip Coordinator is responsible for contacting the chain restaurants to make them aware of their tip compliance rates pursuant to a tip agreement.

Monitoring activities will include review of reports supplied to the IRS under the agreement as well as IRS forms filed including Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, and Form 941. The monitoring activities with chain restaurants also apply to non–chain restaurants and other non-restaurant establishments under agreements (i.e. gaming and cosmetology).

Taxpayers under tip agreements with egregious noncompliance issues will be considered for audit.

Tell the taxpayer upon initiation of a check that this is merely a compliance check and does not qualify as an inspection under IRC section 7605(b) or as an audit for purposes of Section 530 of the Revenue Act of 1978. This should be followed up by providing the taxpayer with a written notice of the same information. Exhibit 4.23.3–3 contains a contact letter that furnishes this information.

Limit the scope of the check only to IRS documents that have already been voluntarily supplied to the Service. This includes forms that are not actually in our possession (e.g., Form W–4). The taxpayer’s books and records should not be requested or examined.

Do not ask how the taxpayer made determinations that a Form W–2 or 1099 should be filed. If no form was filed, however, it would be reasonable to ask how much was paid and whether the recipient was incorporated or other questions designed to determine whether or not filing was appropriate.

If there is a need to go further, initiate an examination. Advise the taxpayer, orally and in writing, that the check has been expanded into an examination, and be prepared to proceed with an employment tax audit.

If there is no need to initiate an examination, advise the taxpayer of the same. Exhibit 4.23.3–4 contains a letter that is used for this purpose.

The examiner should generally be able to secure the information described above in one or two contacts with the taxpayer or his or her representative (i.e., if a corporation, the officer with access to the necessary information, or if a sole proprietorship, the owner). If more than two contacts are necessary, an examination should be opened (with the concurrence of the group manager.)

The examiner can recommend that no examination be conducted when:

Leads will be carefully considered before they are assigned to an examiner for an examination to prevent unproductive and no change examinations, and to prevent establishment of a "prior audit safe haven." See Publication 3114, Compliance Checks.

The group manager should be alert to possible employment tax issues in assigning non-employment tax cases and should, when appropriate, call this to the attention of the examiner for consideration under the required filing checks procedures. See the Examination of Returns Handbook, IRM 4.10.

The related employment tax returns are not usually associated with the income tax returns or tax-exempt returns classified for examination. Examination of the related returns will ordinarily be made from the taxpayer’s retained copies of such returns or a BRTVU. If an employment tax examination is warranted and the examiner needs, but cannot secure, copies of the returns, the examiner will requisition the originals of those returns for association with the case file.

Collection employees share full compliance check responsibilities. When making a field visit, the revenue officer should determine whether all required employment tax returns were filed and paid. If the revenue officer encounters a situation where it appears that the firm is treating employees as independent contractors or where there are questionable fringe benefits, they will make a referral to the territory Employment Tax Group Manager, or to the PSP Support Manager, if no employment tax group manager is located in the territory. Refer to the Collection Handbook for further guidance.

The relief provisions under Section 530 apply only to federal employment taxes, therefore the worker should be treated as an employee for all other purposes. There is potential that an Employee Plans issue exists. If an examiner encounters an employer entitled to the relief provisions of Section 530, a referral determination will be made. Exhibit 4.23.3–5 contains an employee plans referral checksheet.

If a referral to TE/GE– Employee Plans is required as a result of a compliance check or an examination, the examiner will report the findings on Form 3449, Referral Report, and mail to:

It is recognized that examinations, whether change or no-change, vary in scope. Normally, the examiner is expected:

In some cases, the examination will be extensive to properly determine the taxpayer’s employment tax liability and information return compliance. In other cases, examiners will be able to complete the examination after inquiry into only a few items because, in their judgment, to proceed any further with the examination would result in no material change in tax liability.

Initially, employment tax returns are established only for the fourth quarter (or last quarter field) of each calendar year under examination. Other Form 941 periods and Form 940 should not be controlled on ERCS/AIMS until such time as the examiner determines an examination is warranted for those periods. For example, an examination is opened because of information received by SB/SE from a TE/GE lead, the SB/SE examiner will control (on ERCS/AIMS) the fourth quarter only. If the SB/SE examiner later determines that the remaining returns for that calendar year should be examined, then ERCS/AIMS control of those returns should be requested. If, however, the examiner determines that the remaining quarters should not be examined, then only one return, the fourth quarter, will be closed as a no-changed case. No other return will require a no-change or a survey, since no other return is controlled on ERCS/AIMS.

The examination report will not include any calendar quarters for the current year, unless the taxpayer is no longer in business. Inform the taxpayer to correct any errors for these quarters in accordance with IRC section 6205 and the Federal Income Tax Regulations there under. For example, if the examination was concluded on November 1, 2001, prepare an examination report for 2000 and 1999 and advise the taxpayer, assuming the same issue existed for 2001, to correct the error for the first three quarters of 2001 in accordance with IRC section 6205. This procedure is consistent with Policy Statements P-4-4 and P-5-133.

An employment tax examination should not be started for a calendar year until after the last filing date for all employment tax returns of that year. Normally, this is January 31, following the end of the calendar year. If the employment tax is to be computed under IRC section 3509, it will be necessary to wait until after the filing date for information returns in order to determine the applicable employment tax rate. These returns are due the last day of February following the end of the calendar year.

Copies of the prior and subsequent year returns will be inspected. Expand the audit to include open periods where the issue is recurring or where there appears to be other large, unusual or questionable items.

Document any factors used to limit the scope of the examination and the managerial approval of such action.

In arranging for a convenient time and place to start an examination, it is advisable to telephone the taxpayer or the representative. If the initial appointment is scheduled by telephone, mail an appointment letter to confirm the appointment and summarize the list of records to be made available during the examination.

At all times endeavor to make appointments at a time and place that will meet the convenience of the taxpayer and be consistent with Federal Income Tax Regulations section 301.7605–1 on time and place of examination. Field examinations will normally be 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 need not be regarded as paramount.

Examinations should be conducted at the place where the taxpayer maintains 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 examiner and the taxpayer or the authorized representative. Once the appointment is made, try to avoid cancelling it.

If the case file indicates that a power of attorney is on file or if a taxpayer or duly authorized representative requests, orally or in writing, that Service notification be made through the representative, the examiner will determine if there is a valid power of attorney on file with the Service and if any restrictions are contained therein.

Publication 3498, The Examination Process, must be included with all initial contact letters. If it has not been mailed to the taxpayer in advance of the interview, it will be provided at the initial meeting. Workpapers should be documented to confirm that Publication 3498 was provided to the taxpayer.

Examiners are not authorized (See the Criminal Investigations Handbook) 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 examiner a statement that the books and records are only being made available for limited purposes, the examiner shall find out the taxpayer’s reasons for refusing to furnish the records without restriction and then discontinue the examination and report this information to the group manager. The group manager and the examiner should then discuss the matter with the Criminal Investigation function. That office will study any available information on the taxpayer and will advise on further steps to be taken. It may decide that in view of all known factors, including the taxpayer’s refusal to furnish records unconditionally, that there is a possible indication that fraud exists. When appropriate, a referral to Criminal Investigation function will be made in accordance with procedures in IRM 4.23.9.6.4, Referrals to the Criminal Investigations, of this Handbook. Advice should be sought from Area Counsel when necessary.

IRC section 7521 was enacted by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) as part of the Omnibus Taxpayer Bill of Rights. Under the Taxpayer Bill of Rights, the taxpayer has a right to:

The Taxpayer Bill of Rights authorizes the Taxpayer Ombudsman or designee to issue Taxpayer Assistance Orders (TAO) to cease an action, or to take an action, after determining that a significant hardship to the taxpayer either has, or would, otherwise result from the way in which the Internal Revenue Code is being administered. See Delegation Order 232, (as revised) in the Handbook of Delegation Orders, IRM 1.2.2.

Accountants, attorneys, enrolled agents or other representatives, from whom a taxpayer has requested assistance on tax problems, may submit inquiries to the Internal Revenue Service. The third party expects a reply to the inquiries so the problem can be explained to the taxpayer. To authorize this third party reply, the representative may submit a Form 2848, Power of Attorney and Declaration of Representative, (POA), or Form 8821, Tax Information Authorization (TIA).

The Form 2848 and Form 8821 should contain the following information:

If the POA/TIA is not attached to any return or document, either the original or a copy of the form should be promptly forwarded to the Taxpayer Relations Branch at your servicing Campus. The original or a copy of the POA/TIA should also be retained with the case file. (Note: Original documents, photocopies, or documents submitted by facsimile transmission (FAX) are acceptable for processing.)

Forwarding the POA/TIA to the Campus 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 communications to the authorized representative. POAs/TIAs are maintained on an automated system know as the Centralized Authorization File (CAF).

POAs/TIAs filed for specific issues are not to be detached from the related document and sent to the campus, unless the document authorizes recognition for a return in addition to the specific issue. In this case, a copy of the POA/TIA should be sent to the Taxpayer Relations Branch in the campus to input the return portion on the CAF system. Examples of specific issues include, but are not limited to the following:

Occasionally, the POA of record states he or she is no longer representing the taxpayer, or the taxpayer indicates they wish to cancel the existing POA. In such instances it is important that the CAF be corrected to delete the existing POA. Cancellation of an existing POA can be effected by securing a statement to that effect, signed by the existing POA or the taxpayer. Such signed statements will be sent to the Taxpayer Relations Branch in the campus.

The Form 8821 does not authorize a representative to sign documents on behalf of the taxpayer or represent the taxpayer before Appeals.

In accordance with IRC section 3401(d)(1) and the holding of the Supreme Court in Otte v. U.S., 419 U.S. 43, a trustee in bankruptcy is an employer for purposes of income tax withholding and withholding the employee’s share or FICA. This is because the trustee in bankruptcy has control of the payment of wages. The payor is obligated to prepare and file Form 941 and to prepare, file and distribute the related Form W–2 for each wage claimant. Furthermore, Otte has been extended to provide that the person having control of the payment is also an employer for purposes of the employer’s share of FICA and FUTA. See In re Armadillo Corp., 410 F. Supp. 407 (D. Col. 1976), aff’d 561 F.2d 1382 (10th Cir. 1977).

The Otte doctrine may be applied in cases other than trustee in bankruptcy situations. Accordingly, in any case in which the payer is required to withhold and pay over Form 941 taxes, the current supplemental wage withholding rate plus the current FICA withholding percentage can be used. Alternatively, each employee’s withheld amount may be calculated using the Tax Withholding Tables.

As soon as it is determined that an examination will be conducted, the examiner will complete Form 5345B in duplicate (one copy for terminal input, and one copy to remain in the case file). A maximum of five tax periods for the same taxpayer may be requested on each Form 5345B. TE/GE examiners may continue to use Form 5597. (Areas with automated inventory controls systems, such as RGS and ERCS should follow locally established procedures in lieu of using Form 5345B for requesting or updating controls.)

Examinations of LMSB coordinated industry cases (CIC) must be annotated on Form 5345B. This will create AIMS aging code 04 and the corresponsing ERCS activity code will have a "2" as the fourth digit. The 04 aging code can also be input at a later date using Update Form 5348.

After obtaining group manager approval, forward the Form 5345B for terminal input. Retain a copy of each Form 5345B in the case file.

Form 5348, AIMS/ERCS Update, (or Form 5595, EO Update) is used with examination audit labels to:

Instructions on preparing Form 5348 appear on the reverse of the form.

A 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. The IDRS Handbook, Document 6209, lists the correct codes for BMF Filing Requirements.

Accurate time and activity reporting is essential to effective planning, budgeting and evaluating the Employment Tax Program. Currently, each division has separate reporting procedures.

For those employees working mixed inventories, time, as it relates to the specific tasks, will be charged to the appropriate codes. Activity codes can be found in Chapter 12 of the ADP and IDRS Information Handbook, Document 6209. See IRM Handbook 4.9 Exhibits 1-1, 1-2, and 1-3 for complete explanations.

It is important to accurately identity LMSB CIC inventory by using Aging code 04.