Employers must comply with the Form W-4 requirements in accordance with Reg. 31.3402(f)(2)-1(g). Under IRC 6001 and Reg. 31.6001-5(a), employers are required to keep records of all remuneration paid to employees and make them available for inspection by authorized IRS personnel. Whether they file Forms 940/941 payroll information electronically or by paper, employers are required to send the IRS quarterly copies of all Forms W-4 received during the quarter from employees still employed at the end of the quarter who claim more than 10 withholding allowances, or who claim exempt status and are expected to earn more than $200 per week.

An EP examiner should be alert to possible withholding issues relating to the employer. During an audit of a plan, Forms W-2 are reviewed to verify certain items relating to plan qualification, such as compensation and deferrals. While reviewing the Forms W-2 the examiner may discover a Form W-4 withholding issue, such as employees who have little or no income tax withholding. If needed, request copies of the questionable Forms W-4 to verify whether the employer properly sent the forms to the Service Center as required.

If the examiner determines that the taxpayer submitted questionable Forms W-4 to the Service Center or failed to submit them as required, make copies of the Forms W-4 for those employees who are still employed by the taxpayer and forward them to the W-4 Coordinator at the appropriate Service Center. The following information must be contained on each Form W-4:

Forms W-4 submitted by the examiner to the Service Center's W-4 Coordinator must be legible and complete.

IRC sections 6041 through 6053 provide the reporting requirements for certain information returns that should be inspected. Generally, the regulations require the reporting of items such as payments made in the course of trade or business to another person, payments of dividends, payments of interest, payments of wages, cash receipts in excess of $10,000, etc. Therefore, it is most important that taxpayers timely file these returns as required. See the specific return and instructions to the applicable return for more information on filing requirements. Please note, however, that the package audit requirements for focused examinations can be limited as provided in IRM 4.71.1.13(4).

Examples of information returns that should be inspected include:

The adequacy of taxpayer’s records is a critical factor in determining the scope of the examination. Normally, continue the examination to a point where it is reasonably certain that the information return requirements have been fulfilled. Generally, a detailed examination (including any penalty consideration) is warranted if:

If it is discovered that the entity has not filed returns or forms which are within the audit jurisdiction of EO, GE, or one of the Exam Functional Units (LMSB, SB/SE or W&I), prepare Form 5666 and forward it to EP Classification in accordance with IRM 4.71.6.

To satisfy the package audit requirements in an examination, include in the workpapers sufficient information and/or documentation to explain the audit steps taken and conclusions reached regarding filed returns.

The examiner’s workpapers are the connecting link between the return and the examination report. Workpapers should document the audit trail, and include the following:

Workpapers should be clear, concise, legible, organized, labeled, dated and indexed. The workpapers should be indexed in a manner consistent with the indexing scheme used in Form 5772 (discussed below). Workpaper headings should list the name of the plan, the year(s) under audit, the initials of the examiner and the date the workpapers were prepared. To the extent practical, all workpapers should be completed using RGS .

Supporting workpapers should help document the audit trail and support conclusions. The accuracy of the workpapers should be verified and should come from only reliable sources. Figures should be clear and accurate and all material facts should be detailed. Examples of supporting workpapers include:

Workpapers are used to:

Workpapers also provide a basis for review, for purposes such as:

Workpapers demonstrate the quality of the audit. To insure that the issues were properly addressed and that the appropriate provisions of the law were applied to support the conclusions reached in the examination, workpapers should include references, where applicable, to:

During the Appeals process, conferences are usually held without the examiner being present to explain and substantiate the findings. The workpapers are the proper place for recording all that the examiner knows about the issue(s).

The basic workpapers for preparing EP examination cases are listed below. These forms are part of the examination case file.

Forms 5772 and 5773 are intended to simplify and standardize examination workpapers. These forms are designed as working tools for pre-examination planning and use during the examination. Their purpose is to provide an orderly presentation of workpaper material, using an indexing system. Their use makes it unnecessary to repeat workpaper information elsewhere in the file. See below for instructions on completing these forms.

Form 5772 is used for all EP examinations. It may be used for pre-examination planning and as the first page of the workpapers. Form 5772 contains a list of procedural and technical reminders. Review the list as part of the planning process, and check the appropriate boxes to indicate those items considered during the examination.

On a full-scope audit, all applicable items must be addressed. Remember that full-scope examinations will be conducted only on certain special projects, training cases or with the group manager's written approval.

If the examiner is performing a focused examination or an OCEP, the issues being addressed will be annotated on the Form 5772.

Examination steps and information reviewed for each examined issue will be clearly documented on Form 5773 (or equivalent) along with the conclusion reached.

When multiple year examinations result in both change and no change years, enter the appropriate disposal code number for each year examined.

Form 5773 (or equivalent as described in paragraph 6) is used for the following purposes:

"Pre-audit Comments" section. During pre-examination planning, enter the items that should be verified, together with applicable comments in the "Pre-audit Comments" section.

Examination issues listed on the Return Classification Record should be verified. If the condition code was raised in error, based on the facts found during the audit, the workpapers should be so noted. For example, if the condition code resulted from a transcription error or due to the taxpayer’s misunderstanding of the information requested on the return, this should be noted in the workpapers.

"Workpapers Index" section. Index items by capital letters, which correspond to Form 5772.

"Examination Procedures and Conclusions" section. Enter the audit steps taken (or why no audit testing was done) and the conclusions reached in the "Examination Procedures and Conclusions" section.

Often, the information contained in the Form 5773 is duplicative of the content already present in the supporting examination workpapers. For this reason, the use of Form 5773 is optional, provided that the following conditions set forth are satisfied. Essentially, the examination workpapers should contain the same content as required on the Form 5773, as follows:

ERISA 103(a)(3)(A) and 29 CFR 2520.103-1(b) require certain plans to have an independent qualified public accountant issue an opinion on the plan’s financial statements. These financial statements and the opinion should be reviewed during the audit.

In addition to the plan workpapers, the examiner, when verifying the IRC 404 deduction, may request the Tax Reconciliation Workpapers prepared for the employer’s income tax return, to verify or substantiate the deductions taken (i.e. whether deductions for plan contributions are taken on the pension line or cost of goods sold, etc.).

Tax Reconciliation Workpapers, unlike Audit Workpapers, may be requested at the beginning of an examination. There is a need for these workpapers since they include information tying the Form 5500 information to the Plan’s financial statements and other analyses necessary to complete the return. Ordinarily, tax reconciliation workpapers are prepared and provided by the taxpayer. However, if these workpapers are unavailable from the taxpayer, access may be sought from the accountant.

In unusual circumstances, you may obtain access to the Audit Workpapers. However, keep in mind that the taxpayer’s records are the primary source of factual data to support the return. Accountant’s Audit Workpapers should normally be used only when such factual data cannot be obtained from the taxpayer’s records and then only as a collateral source for factual data, access to which should be requested with discretion and not as a matter of standard examining procedure.

The unusual circumstances discussed above exist under the following conditions:

In any case where the unusual circumstances in (5) exist, furnish a basis for requesting Audit Workpapers, limit the request only to the portion of the workpapers believed to be material and relevant to the examination. Whether an item is considered to be "material" is based on the examiners judgment and an evaluation of the facts and circumstances in the case. However, materiality does not depend entirely on amount. The concept involves qualitative as well as quantitative judgments.
For Example: The significance of an item or its impact on tax liability could be one of the factors to be considered in making a judgment regarding materiality.

Alternatively, it may be more productive to raise potentially significant issues based on the information provided to date and request any additional clarifying information. The examiner may want to consider using language such as, "Based on the information provided to date, it appears the following issue(s) may exist..., please provide any additional relevant information that may help to clarify this matter within xx days." If adequate clarifying information is not provided, then consider proceeding with the issue as identified.

Any questions about access to records should be directed to Area Counsel.

IRC 7491(a)(1) shifts the burden of proof in a court proceeding from the taxpayer to the Service if the taxpayer produces credible evidence regarding the factual issues relevant to determining tax liability and also satisfies the following criteria.

For the shift to apply, the taxpayer has the burden of proving that it:

IRC 6201(d) became effective in 1996 and applies without regard to IRC 7491. If the taxpayer meets the conditions of IRC 6201(d), the Service has the burden of producing information to support income items reported on the information return.

IRC 6201(d) requires that the Service produce reasonable and probative information in any court proceeding regarding a deficiency based on an information return if the taxpayer:

Full cooperation includes timely compliance with requests for information including access to witnesses and documents within the control of the taxpayer. If the taxpayer does not raise a "reasonable dispute" , the Service will not be required to produce any information beyond the information return.

The examiner should take the following actions when a taxpayer disputes receipt of income reported on an information return or disputes the accuracy of the information return:

Examiners should be cognizant of the shifting of the burden of proof to the IRS pursuant to IRC 7491.. However, even before these burden of proof provisions were enacted, a well developed case was expected to contain:

If the examination ultimately reaches litigation, and it becomes necessary to determine whether the examiner's requests for information were made and were reasonable, the determination will depend upon the facts and circumstances as documented in the case file.

Examiners will provide clear and complete documentation in Form 5464, Case Chronology Record. Documentation on Form 5464 will include:

Since the administrative record in declaratory judgment cases (which includes proposed revocation/non-qualification) consists only of the documentation that was submitted in writing and exchanged between the parties, all discussions and conferences must be formally recorded. If the examiner wants pertinent portions of the Case Chronology Record or similar documentation included in the administrative record, it must be sent to the taxpayer/POA in letter format. The pertinent portions should include, but are not limited to, any discussions with the taxpayer or representative that are relevant to the audit scope, affirmation of tax liability or the qualified status of the plan.

Examiners should utilize workpapers and reports to support adjustments and document the extent of taxpayer cooperation. This includes making complete copies of documents submitted by the taxpayer in appropriate cases.

These documents should be used to:

IRC 7491(b) places the burden of proof on the Service in any court proceeding when the Service reconstructs any item of the taxpayers income using solely statistical information on unrelated taxpayers. This is true whether the taxpayer does or does not cooperate and provides evidence or otherwise meets the requirements of IRC 7491(a).

IRC 7491(c) states that the Service now has the burden of production in a court proceeding when the issue is a(n):

In any court proceeding, the IRS must first present evidence that imposition of the amount is appropriate. Only then must the taxpayer assume the burden of persuasion to raise appropriate defenses, such as reasonable cause, to the imposition of the penalty.

"Penalties" include all penalties assessed under the Code.

"Addition to Tax" is any amount computed by reference to the amount of tax.

"Additional Amount" refers to an amount that can be assessed by the Service that is not an addition to tax or penalty.

The Service must first present evidence that a penalty, addition to tax, or additional amount is appropriately applied to the taxpayer. It is then the taxpayer’s responsibility to present evidence of reasonable cause, substantial authority, or other similar defense in showing that the amount should not be asserted. See IRM 20.1, Penalty Manual .

Examiners should treat a penalty issue as any other issue by including the following information in the case file:

If the Form 5500 was processed using an incorrect EIN, Plan Number or Tax Period, it is first necessary to delete the AIMS account that was established using incorrect information.

Prepare Form 4442 to correct the incorrect EIN, Plan Number, or Plan Year in the entity record.

When the corrections have been made to the entity module, prepare Form 5597 to establish the corrected Form 5500 on AIMS.

Secure an AMDISA print for the case file to verify that the corrected Form 5500 is established on AIMS.

Form 2363 should be completed to correct the plan name or address.

Forward the completed Form 2363 to the EP AIMS Coordinator for processing at:

Prepare Form 5772 and Form 5773 to document audit procedures and findings. Update Form 5772 with the examination results.

Retain in the file as part of the workpapers all important information applicable to the examination, including amendments secured, supporting documentation, correspondence with the taxpayer/POA, etc.

Generate a closing letter addressed to the taxpayer and POA (if applicable) covering all Form 5500 years examined.

Always attach Form 3198-A to the front of the case file and indicate the appropriate handling instructions. See IRM 4.71.1-10 for an example of a completed Form 3198-A for an agreed Form 5500 examination.

Always prepare Form 6212-B on all examined cases.

Prepare Form 6533 for all EP examinations of plans that are subject to PBGC.

Prepare Form 5595 to update the case to status code 53. Form 5595 will be placed in the case file for manager approval. The case will be updated to status 53 by the group prior to closing the case to ESS.

Prepare Form 5650 in accordance with IRM 4.71.1.20.2.

If the employer, plan sponsor or plan administrator desires a determination letter on amendments secured during an examination, establish an application through the Cincinnati Centralized EP Determination Site and a determination letter will be issued simultaneously with the examination report/letter.

The following line items on Form 5650, EP Examined Closing Record, should be completed as noted:

The disposal code indicates the examination's outcome. Refer to Document (Doc.) 6476, Employee Plans Systems Codes, for a list of disposal codes and for the disposal code reporting priority.

Carefully select the correct disposal code to ensure that—

If more than one disposal code may apply, use the priority order specified in Doc. 6476 under the heading "Disposal Code Priority" .

Select an issue code that best relates to the AIMS disposal code. Issue codes are listed in Document 6476, Employee Plans Systems Codes.

The issue code must be carefully selected because it is used in conjunction with the AIMS disposal code to validate the accuracy of our system for selecting returns having examination potential, and in reporting the accomplishments of the examination program. The issue code must be entered in the first two positions of Item 610 of Form 5650. If the case is closed no-change, issue code 37 (no issues) should be used. Up to three issue codes may be entered. However, multiple issue codes may be entered only if each subsequent issue code relates to a disposal code other than disposal code 02. If only one issue code is entered, the other positions must be zero-filed.

See IRM 4.71.12, Case File Assembly Guidelines, for guidance.

Treas. Reg. §301.7605-1(e)(2)(i) provides that a request by a taxpayer to transfer an examination to a different location will generally be granted under the following circumstances:

Treas. Reg. §301.7605-1(e)(2)(ii) states that a request by a taxpayer to transfer the place of examination for field examinations will generally be granted under the following circumstances:

Treas. Reg. §301.7605-1(e) provides that the examiner will consider written requests by representatives to change the place the Service has set for an examination. For case transfer purposes, " representative" means a person that the taxpayer has properly designated by executing Form 2848, Power of Attorney and Declaration of Representation. The written statement must include the following:

The location of the place of business of a taxpayer’s representative will generally not be considered in determining the place for an examination. However, if the factors outlined in Treas. Reg. §301.7605-1(e)(2) are met, the examiner (with group manager concurrence) has the discretion to transfer the place of examination to the representative’s office.

to change the location of the examination, the representative must indicate that he/she is in possession of the records to be examined and will make them available in an expedient manner.

In addition to a written request by the taxpayer or representative (as specified above), the following requirements must be present:

When a transfer request is received from the taxpayer/representative, the examiner (with concurrence from the group manager) will determine if the request is allowable based on the criteria listed in IRM 4.71.1.21.1 above.

If the case is to be transferred, the case will immediately be prepared for transfer.

If the case is being transferred to another Area:

If the case is being transferred to another group within the same Area:

The group manager receiving the case will determine whether the case will be examined or surveyed.

The receiving group will contact the taxpayer (or taxpayer's representative) within 30 days of receipt of the case.