This section explains the workpapers used in employment tax examinations and their functions. Examiners should also refer to IRM 4.10.9, Workpapers, for further guidance. LMSB examiners and SB/SE examiners working Coordinated Industry Cases (CIC) and Industry Cases (IC) should also refer to the section entitled LMSB Workpapers. See IRM 4.23.4.6.

The examination workpapers and reports provide the basis for the decision reached by the employment tax examiner. Only on the basis of the material in the workpapers can a reviewer determine if the examination was complete and correct. The workpapers should show explanations, analyses and conclusions developed and should be sufficiently complete so, generally, no additional comments will be needed in the transmittal letter for any items covered. Workpapers should clearly and concisely state the issue, facts, audit steps, law, taxpayer's position and conclusion for each issue examined. Workpapers should document that the examiner determined if the proper items were included in wages (i.e. fringe benefits, bonuses, etc.). Workpapers should also document acceptance of the Forms W-2 and 1099 as correctly filed and comment on the consideration of potential employer/employee relationships. All notes made before, during and after the examination should be included in the workpapers.

The workpapers are prepared by the employment tax examiners so the information will be available for the following purposes:

The use of workpapers in every case serve to effectively explain the areas covered during an examination. Workpapers should include all the evidence gathered by the examiner to show the work performed, methods and procedures followed and conclusions reached.

Workpapers prepared by an examiner may be utilized in the preparation of the report and its review as reference in cases where the determination is to be litigated, and as a source of more detailed information which may be requested later in writing.

Workpapers are the best evidence to reflect the scope and depth of the examination. The workpapers further constitute the background for the determination of the tax liability. Documentation of transactions or other significant events should be complete and accurate. Workpapers should facilitate tracing the transaction or event and related information from beginning to end.

Properly prepared workpapers must provide adequate documentation to support conclusions. Without sufficient documentation, it is not possible for managers or review function personnel to review the examiner’s work and be assured that the scope of the examination or the basis for the examiner’s professional judgement is adequate.

Workpapers should be neat, legible, clear and concise. The legibility of examination workpapers and reports is an important aspect of the overall quality of the examination. This is true from a reviewer’s as well as a taxpayer’s point of view. The easier it is to read workpapers and reports, the easier it is to understand them.

Each of the workpapers should be headed clearly, showing the name of the taxpayer, taxpayer's identification number (TIN), tax period examined, date workpapers were prepared, name or initials of the examiner and the issues or items being examined. The pages should be indexed, numbered, and securely fastened together. The workpaper footer should indicate the computer file name, if applicable.

You should always cite legal authority such as Internal Revenue Code, applicable regulations, court cases, revenue ruling and/or revenue procedures to support your conclusions.

The first step in a quality tax examination is the development of a pre-examination analysis and a work plan of action. The time and effort spent during this phase of the audit process will result in an efficient and quality examination.

Risk based decision making is critical to the effective allocation of limited examination resources. The Risk Analysis Workpaper has been changed from an issue by issue approach to one of a global or case focus. The Risk Analysis Workpaper is no longer required for each new issue added or for each issue declassified. It is now only required for each taxpayer/entity and is designated as W/P #150. This design supports the Value-Added Decision Making (80/20) concept and the Mid Audit Decision Point (50% Rule) concept of the reengineering process.

Form 4318–ET, Employment Tax Examination Workpapers - Index, is the examination workpapers cover sheet used by employment tax examiners. It is used for pre-employment tax examination planning and as the first page and index to the audit workpapers. When needed, Continuation Sheet for Form 4318-ET will be used. TE/GE examiners may use Form 5773, EP/EO Workpaper Summary Continuation Sheet, in place of Form 4318–ET.

Form 4318-ET is part of the employment tax workpaper templates available on the Specialty Programs Reengineering Employment Tax SharePoint webpage. These templates are part of the Specialty Program Reengineering Process, which is required in all employment tax examinations. All mandatory lead sheets that are a part of the workpaper templates should be utilized.

The sections of Form 4318-ET are arranged by specific purpose;

Each mandatory section, 1XX through 3XX, has references and links to additional mandatory lead sheets.

Refer to the Specialty Programs Reengineering Employment Tax SharePoint webpage for the most current version of Form 4318-ET and all workpapers.

Enter all wage adjustments by year and amount for each rate used in the "Adjustments to Wages" columns in sections 4XX and 5XX. This provides source data for report preparation and highlights adjustments for reviewers and other uses of the case file.

Index workpapers as you prepare them. When additional workpapers for explanations, analyses, schedules, computations, etc. are required, prepare and index them under the index number and subheading assigned to the specific issue. These are referred to as "subsidiary" workpapers. All subsidiary workpapers related to an issue should be numbered in the appropriate sequence. For example, if an issue in the "Description" column is placed on the line 400, the lead sheet workpaper for the issue would be labeled 400-1.1. Any subsidiary workpapers for the issue would be labeled 400-2.1, 400-2.2, 400-3.1, 400-3.2, etc.

The case file should include a well-documented contemporaneous case history sheet. Form 9984, Examining Officer's Activity record, is used for this purpose and should include a summary of each contact made, action taken and work performed on the case. The form should be numbered as Workpaper 100.

The examiner should ensure that the taxpayer has been provided the most recent revision of Publication 1, Your Rights as a Taxpayer, prior to contacting a worker. This publication includes the advance general notice of potential third-party contact that is required by IRC 7602. Document the case history/activity record with the date and fact of mailing or personal delivery of the Publication 1 to the taxpayer. See IRM 4.23.3.9, Initial Contact with Taxpayers, and IRM 4.23.3.10.4, Scheduling the Appointment, for additional requirements.

When an examination results in a no change, Form 4318-ET is required. Form 4666, Summary of Employment Tax Examination, is provided to the taxpayer by the examiner to indicate that no changes are being proposed. For additional procedures regarding examinations resulting in no-changes, see IRM 4.23.10.12.4, Employment Tax No-Change Report.

For most employment tax issues, the employment tax workpaper templates include an issue specific lead sheet with the audit steps and references to the IRC, regulations and IRM procedures.

The volume of subsidiary workpapers prepared during examinations will vary depending on the size of the entity and the number and type of items or activities reviewed. There is no minimum volume standard for subsidiary workpapers. Subsidiary workpapers must be prepared when detail is needed that is not included in the issue lead sheet workpaper. For example, subsidiary workpapers would be used to schedule out wage adjustments by employee.

There are no fixed requirements to include specific schedules or analyses in the subsidiary workpapers. However, the issue lead sheet workpapers should include a summary of those items which were analyzed and/or specifically verified and all other pertinent notes of the work performed during the examination.

The workpapers should not include superfluous documentation or copies of irrelevant data. For example, copies of CPA workpapers or reports should not be included in the workpapers where they do not contribute to a conclusion. To be meaningful, the workpapers should reflect what was actually accomplished during the examination.

Where necessary, the workpapers should cite legal authority such as the Code, regulations, revenue ruling or procedures, or court decisions to support the conclusions reached in the examination. This requirement is usually met with the use of the issue lead sheets, each of which has a section for listing the legal authority. The notes and specific citation assure the reviewer that the examiner has seen the issues, studied them, applied the appropriate provisions of the law in resolving them, and reached what the examiner considered a proper conclusion.

Due to the large volume of workpapers in LMSB cases, it is critical that they be well organized and properly prepared. The discussions that follow are intended to be suggestions and to provide guidance to employment tax examiners.

The LMSB web page contains links to many of the job aids that are used in these cases. They can be found at: http://lmsb.irs.gov/reference/audit_tools/index.asp .

The LMSB employment Tax website contains a link to many of the workpapers that are used in these cases. These links can be found under ET Audit Resources at: http://lmsb.irs.gov/hq/fs/employment_tax/index.asp.

The LMSB Issue Management System (IMS) is required to be used in all LMSB employment tax cases worked by LMSB examiners. It is designed to:

LMSB examiners will create:

for each issue in IMS. Refer to the IMS website at: http://lmsb.irs.gov/hq/bsp/ims_agent_home.asp .

LMSB Examiners will use:

Pre-examination analysis should include Forms 13327, 13744 and Form 9984, Examining Officer's Activity Record.

LMSB examiners will establish their cases in the Issue Management System (IMS) to:

Refer to the IMS website at http://lmsb.irs.gov/hq/bsp/ims_agent_home.asp

LMSB no longer uses Form 4318-A. Instead, Form 4764-A and Form 4764-B are the examination workpaper cover sheets. They are used for pre-employment tax examination planning and as the first page and index to the audit workpapers. These forms also summarize the audit results. The use of Forms 4764-A and Forms 4764-B are required on LMSB employment tax cases.

For further guidance, examiners should refer to IRM 4.10.9, Workpapers and IRM 4.46, LMSB Guide for Quality Examinations.