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.

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.

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.

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.

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.

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 .

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.

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.

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).

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

If the taxpayer has correctly filed all required returns, the examiner should identify the specific returns in the comments.

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.

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.

If the CFOL information does not provide enough detail, the examiner should inspect the taxpayer’s retained copy or requisition the original return.

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.

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.

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.

An Examination Information Report should also be issued when there are significant balance sheet adjustments. See section 3 of this chapter.

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.

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.

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.

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.

If the research reveals that the return is not under examination, AIMS control must be established.

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.

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

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.

PMFOL is used to determine what related returns have been filed and RTVUE and BRTVU information is used to evaluate audit potential.

A copy of the related return may be requested from the taxpayer if necessary.

The examiner should ask about the taxpayer’s involvement with partnerships, corporations, and related family transactions.

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.

Specific questions regarding information on these related returns should not be asked. This would constitute an examination.

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.

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.

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.

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.

A withholding tax examination is warranted if:

IRM 4.23, Employment Tax, provides information on employment tax procedures and instructions for the preparation of examination reports covering withholding examinations.

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).

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.

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.

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.

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:

Generally, a detailed examination, including penalty consideration, is warranted if:

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:

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.

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.

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.

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.

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.

The Detroit Computing Center currently transcribes, validates, and builds databases for the following forms:

During the course of an examination the examiner will perform minimum requirements with respect to required filing checks for currency transactions.

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:

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.

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:

All examiners should be alert to situations that may be an attempt to circumvent the reporting requirements of IRC Section 6050I.

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.)

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.

Prior to submitting Form 5346, the examiner should consider the following factors:

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).

The examiner will perform the following minimum compliance checks:

The following chart outlines actions to be taken as results of the W–4 Compliance Checks:

*SCCB: Service Center Coordinator Branch

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.

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:

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.

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.

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).

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.