4.10.5  Required Filing Checks  (06-01-2010)

  1. Required filing checks are necessary to ensure voluntary compliance. Examiners should determine that taxpayers are in compliance with all federal tax return filing requirements and that all returns reflect the substantially correct tax. Required filing checks are to be documented on Lead Sheet 130–1.1, Multi-Year and Related Returns Lead Sheet, and subsidiary workpapers.  (06-01-2010)
General Guidelines

  1. Required filing checks consist of an analysis of the return information and, when warranted, expansion of the examination to include additional returns.

  2. The analysis and pickup of prior, subsequent, and related returns, when warranted, is a primary responsibility of the examiner in every examination. This analysis is designed to answer three primary questions:

    • Has the taxpayer under audit filed all required returns?

    • Do any of the returns controlled by the taxpayer warrant examination?

    • Do the workpapers sufficiently document that the required filing checks were performed?

  3. Proper required filing checks impact compliance by providing coverage greater than the single tax year under examination. By ensuring that the taxpayer under audit has complied with all filing requirements and identifying potential noncompliance on related returns, the required filing checks increase the overall compliance coverage of every examination.

  4. The inspection of a return is essentially the same as classifying a return for examination potential. No records should be examined as part of this process. The examiner may question the taxpayer concerning items on the return in an attempt to understand how or why they occurred. The inspection of a return is not an examination.


    The examiner should not request information to verify or substantiate items on the return being inspected as this may constitute an examination. However, there are limited circumstances in which records for subsequent or prior years might be requested that would not constitute an examination. This would be limited to situations in which the records requested for the prior or subsequent years are relevant to an issue being considered in the examination of the primary year (e.g. carryovers, carrybacks, verification of asset basis acquired in prior year, etc.)  (06-01-2010)
Filing Verification

  1. Examiners are to verify that all returns within the taxpayer’s sphere of influence have been filed. To decrease taxpayer burden, examiners should use internal sources of information, e.g., Corporate Files On Line (CFOL), and Compliance Data Environment (CDE) to complete required filing checks.

  2. CDE has replaced the Midwest Automated Compliance System (MACS).

  3. 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.  (06-01-2010)

  1. CFOL and CDE 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.

  2. CDE provides a three-year comparative analysis of the return under examination. The examiner should review the three year comparative analysis provided by CDE to assist in determining the audit potential of the prior and/or subsequent year return. The examiner should use their professional judgment to determine if a more detailed analysis is required. This analysis should be retained in the case file.

  3. CFOL provides on-line access to tax accounts, tax returns, and other related information through the Integrated Data Retrieval System (IDRS). CFOL information is transcribed for certain line items on the tax return and accompanying schedules.

  4. If, after analysis of CFOL and CDE information, it is determined that additional return information is needed, the return should be requested from either the taxpayer or the Campus for inspection.


    UNAX WARNING: Access to and inspection of paper and electronic taxpayer records are only allowed when the information is needed to carry out assigned tax administration duties as set forth in the Taxpayer Browsing Protection Act, USC 26, IRC 7213A(a). Specifically, service employees may access taxpayer information only when there is a "need to know" the information for their tax administration duties. Additionally, employees are not allowed to access taxpayer records when their involvement in a tax matter could cause a possible financial conflict of interest, or when they have a personal relationship or an outside business relationship that could raise questions about their impartiality in handling the tax matter. See Document 10281, Safeguarding Taxpayer Records, for additional guidance.  (06-01-2010)
Assessing Audit Potential: Area of Expertise

  1. 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. 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 these returns are not currently under examination, before opening as part of their audit.

  2. 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 using the Specialist Referral System (SRS) or by preparing a manual referral. See IRM, Specialist Referral System (Online Referrals), and IRM, Manual Referrals for guidance on which process must be used. Additionally, see IRM, Examination Information Reports-Form 5346 for guidance regarding use of Form 5346, Examination Information Reports-Form 5346.  (06-01-2010)
Case File Documentation

  1. Examiners are required to document completion of the required filing checks, actions taken, and decisions made on Lead Sheet 130–1.1, Multi-Year and Related Returns Lead Sheet. Documentation in the case file should include; internal documents secured, any analysis performed or workpapers created in making the determination.

  2. If the required filing checks are not completed, the examiner must document the reasons why and the extent of managerial involvement. Documentation may be made on Lead Sheet 130 or Form 9984, Examining Officer's Activity Record.

  3. Examiners must provide a written narrative if:

    • Adjustment(s) are proposed in the initial year;

    • Large, unusual, or questionable items identified in the prior or subsequent years; or

    • The presence of large, unusual, or questionable items (including related transactions) on the related returns, and the audit is not expanded.  (06-01-2010)
Closing Prior, Subsequent and Related Return Cases

  1. Tax years are closed using the original return or an electronic print, such as TXMOD, IMFOL/BMFOL, RTVUE/BRTVU, CDE, TRDBV, or TRPRT. A copy of a return is not required to close a prior, subsequent, or related tax return. If a copy of a return has been secured it must be properly identified as such and retained in the appropriate section of the case file. See IRM 4.4.1, IRM Exhibit 4.4.1-1, Reference Guide, for closing instructions.

  2. Original returns are required in certain cases being closed to appeals. Cases requiring the original return be enclosed in the case file are identified in IRM, Situations Requiring an Original Return.

  3. For examiners using Form 4318Examination Workpapers Index, the copy of a tax return should be filed in Section 600, Miscellaneous. For examiners using Form 4700, Examination Workpapers, the copy of the return should be filed behind Form 4700.  (06-01-2010)
Returns Not Filed

  1. If examiners find that a required return has not been filed, they should solicit the delinquent return, except when fraud or willful failure to file is indicated. Non-filers must be brought current in their filing requirements following the guidelines in Policy Statement 5-133 (P-5-133), Delinquent returns—enforcement of filing requirements. Refer to IRM

  2. 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. The examiner should discuss the indicators of fraud with the group manager. If it is agreed that the case has fraud potential, the examiner will contact the Fraud Technical Advisor (FTA) for that geographical area. See IRM 25.1.2, Recognizing and Developing Fraud, and IRM 25.1.7, Failure to File.

  3. All secured delinquent returns are to be reviewed for audit potential. If the return is outside the examiner’s area of expertise, the return should be referred to the appropriate function.

  4. If the examiner determines that there is no filing requirement, this should be noted in the case file.

  5. 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. If the return is not in the examiner’s area of expertise, Form 5346, Examination Information Report, should be prepared and submitted to the examiner's group manager for approval.

  6. Refer to IRM 4.12.1, Nonfiled Returns Handbook, for substitute for return (SFR), delinquent return, and referral procedures.

  7. Documentation of the examiner's actions and conclusions should be made on Lead Sheet 130, subsidiary workpapers, or on Form 9984.

  8. Examiners should refer to IRM, Examination Information Reports-Form 5346, for further guidance.  (06-01-2010)
Non-filers: Related Cases and Spin-Offs

  1. During examinations of non-filers, determine if related returns (corporate, partnership, employment tax, and excise tax returns) are filed as required. If not, secure the delinquent returns. See IRM 4.12.1 for additional procedures.

  2. In addition, be alert for spin-off cases (relatives, employees, employers, subcontractors, and even return preparers and representatives) who have not filed returns.

    1. If the non-filer is involved in a family business, determine if family members engaged in the operation or ownership of the business have filed returns.

    2. If the non-filer is involved in a partnership, determine if partnership returns have been filed and if key partners have filed returns. For the purpose of this section key partners are those partners that can control or influence the operation of the business.

    3. If the non-filer has employees and/or subcontractors, determine if required information returns have been filed (i.e. Form W-2 or Form 1099).

    4. For delinquent corporate returns, determine if key shareholders have filed returns. For the purpose of this section key shareholders are those shareholders that can control or influence the operation of the business.

  3. Managerial approval is required prior to opening an examination on any related or spin-off case. If an examination appears warranted and is not initiated, e.g. taxpayer resides outside of the Area, etc., Form 5346, is to be prepared and submitted to Planning and Special Programs (PSP).

  4. If Form 5346 is prepared due to contact from an informant and he/she intends to claim a reward, the informant should be requested to file Form 211, Application for Award for Original Information. See IRM, Request for Reward for Information Provided.  (06-01-2010)
No Examination Warranted

  1. The taxpayer will be notified if the inspection of the returns does not result in an expansion of the audit. The taxpayer should be told that an inspection of returns does not constitute an audit since no books and records were examined.

  2. The examiner should document this notification in the case file on Lead Sheet 130 or on Form 9984.  (06-01-2010)
Prior and Subsequent Year Returns

  1. The taxpayer's prior and subsequent year returns are required to be inspected for audit potential and to verify that filing requirements have been met. The returns are to be evaluated for issues related to the year under examination and for any large, unusual, and/or questionable items.

  2. The analysis of the prior and subsequent year returns for the taxpayer under audit includes determining:

    1. Whether the taxpayer had a filing requirement and whether the returns were in fact filed.

    2. Whether the same pattern of noncompliance as identified on the return under examination is present on the prior and/or subsequent year return; e.g., high entertainment expenses, suspended passive activity losses, or net operating loss deductions.

    3. Whether large, unusual, and questionable (LUQ) items such as income, expense, or credit items, have audit potential independent of the return under examination.

    4. Whether or not the examination should be expanded to include additional years or returns.  (06-01-2010)
Pre-contact Analysis

  1. As part of the pre-contact analysis, the examiner should research CFOL/IDRS and /or CDE to obtain prior and subsequent years’ tax return information to confirm filing and evaluate audit potential.

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

  3. Examiners must comment on all years open within the normal 3 year statute of limitations, including prior year returns that are "out of cycle."  (06-01-2010)
Mandatory Comments/Required Documentation

  1. Examiners are required to document the inspection and analysis of the prior and subsequent year returns on Lead Sheet 130-1.1, Multi-Year and Related Returns Lead Sheet. Examiner's conclusions regarding the audit potential of the prior and subsequent year returns are required.

  2. In cases where adjustments are made to the primary return, or large, unusual, or questionable items are identified on the prior/subsequent year returns, and the examination is not being expanded to include those returns, the examiner must document why those years were not examined.

  3. The documentation in the case file should include internal documents secured, any analysis performed or workpapers created in making the determination regarding the examination scope. The workpapers should document why the scope was expanded or not expanded to include the prior and/or subsequent years.


    Documentation should include a print out of IMFOLI/BMFOLI for the TP as verification of filings.  (06-01-2010)
Examination Information Reports

  1. When an examiner develops an issue or receives information of sufficient compliance value to warrant enforcement action concerning a return not yet filed, or to be filed by another taxpayer, Form 5346 will be prepared and submitted to the examiner’s group manager for approval. See IRM for additional information.


    An examiner audited the taxpayer’s 2008 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 2009 tax return had not been filed, the examiner should prepare Form 5346 to reflect the changes made to the net operating loss carry forward.  (06-01-2010)
Inspected Returns Examined

  1. If the examiner decides that examination of an inspected return(s) is warranted, the return(s) will be examined concurrently with the assigned return. Generally, the examiner should follow the 26/27 months examination cycle time guidelines. See IRM, Examination Cycles.

  2. The examiner must verify the AIMS status to determine if the return is currently under examination or has been selected for examination. If the research reveals that the return is not under examination, AIMS control must be established.

  3. The examiner will inform the taxpayer of the decision to examine the return.

  4. The examiner may use the appropriate initial contact, appointment confirmation letter, or draft a one time use letter to notify the taxpayer of the additional years placed under examination.

  5. If the requested return is under examination in another area, the Group Manager will contact the local area PSP to coordinate the transfer of the return(s) to one examiner.

  6. 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.

  7. If indicators of fraud are identified, the examiner should follow the procedures prescribed in IRM 25.1.2.

  8. See IRM (field) and IRM (office) regarding appointment letters and audit confirmation letters. Also, when warranted a one time use letter can be drafted with managerial approval to notify the taxpayer of the audit. See IRM regarding requirement for managerial approval on non-standardized letters.  (06-01-2010)
Related Returns

  1. Related returns are returns that have a relationship to the return under audit. Returns are considered related if:

    1. Adjustments made to one return require corresponding adjustments to the other return, to ensure consistent treatment. Refer to IRC 1313(c) and IRC 267; or

    2. Returns are for entities over which the taxpayer has control and which can be manipulated to divert funds or camouflage financial transactions. Refer to IRC 267(b).

  2. The analysis of related returns includes:

    1. Identifying related returns within the taxpayer's sphere of influence and whether returns were filed;

    2. Determining whether transactions between related parties were correctly accounted for on both returns. For example, alimony versus child support, loans from a corporation to a shareholder or dividends, and character and limitation of K-1 items from flow through entities (e.g. partnerships, S- Corporation, etc.); and

    3. Evaluating large, unusual, and questionable items, such as income, expense, or credit items, for audit potential, independent of the entity under audit.  (06-01-2010)
Analysis of Related Returns

  1. CFOL/IDRS information must be obtained on all known related returns that were filed. An evaluation of all information available is to be made and, if needed, a copy of the return may be requested from the taxpayer on Form 4564, Information Document Request.

  2. CFOL command codes RTVUE and BRTVU can be used to evaluate the audit potential of related returns. BMFOLU provides W-2 and W-3 information filed by an employer. PMFOL provides summaries of the type and number of 1099’s filed and total remuneration paid.

  3. The yK1 Link Analysis Tool provides a graphic visualization of flow-through relationships created by partnerships, LLC’s, Trusts, Sub-chapter S corporations, and corporations. The tool uses K-1 data to visually depict ownership relationships and income/loss flows between payers and payees. Generally up to three consecutive years of tax information is available. Examiners may request research through their group manager using Form 13680, Small Business/Self Employed YK1 Link Analysis Research Request. It is important to realize that not all K-1 data is transcribed so the actual income/loss information available is limited. DISCLOSURE WARNING: Do not share Link Analysis output with the taxpayer or the taxpayer’s representative. Since the output contains tax return information of other taxpayers, it cannot be disclosed pursuant to IRC 6103, IRC 7213, IRC 7213A, and IRC 7431.

  4. Examiners can also use an external asset locator/people locator service tool to determine related businesses, asset ownership, and real estate. Visit the SPDER ReferenceNet research web site to determine the current electronic asset locator/people locator tools available. See IRM, Locating the Taxpayer, for steps to take to locate a taxpayer.  (06-01-2010)

  1. The examiner should ask about the taxpayer’s involvement with partnerships, LLCs, trusts, corporations, and related family transactions. All related returns should be identified and a determination made that all required returns have been filed. Delinquent return procedures should be followed for any non-filed returns.

  2. Examiners should also probe for possible participation in domestic and offshore abusive tax schemes and listed transactions. If a listed transaction surfaces during an examination, the examiner should contact the Technical Advisor/Issue Specialist. For additional information see IRM

  3. If an examiner identifies a new or unique abusive promotion or transaction during an examination, the case will be discussed with the Group Manager and an Abusive Trust and Technical Issues (ATTI) Technical Advisor should be consulted. See IRM

  4. If the examiner identifies indicators of fraud, the issue should be discussed with the group manager. See IRM 25.1.2 for additional procedures concerning fraud development.  (06-01-2010)
Examination Issues

  1. When examining books and records of the primary return, examiners should consider the effect of items on related returns. Correct reporting of flow-through items should be observed, whipsaw issues checked, and proper reporting of related transactions verified.

  2. If the examiner determines there is audit potential, the audit should be expanded to include the related return(s).

  3. If an Examination Information Report, Form 5346, is warranted, see IRM above.  (06-01-2010)
Mandatory Comments / Required Documentation

  1. Examiners are required to document the inspection and analysis of related returns on Lead Sheet 130-1.1.

  2. The documentation in the case file should include internal documents secured and any analysis performed or workpapers created in making the determination as to whether or not to expand the examination to include the related returns.


    Documentation should include a print out of IMFOLI/BMFOLI for the related entities as verification of filings.

  3. In cases where adjustments are made to the primary return, or large, unusual, or questionable items (including related transactions) are identified on related returns, and the examination is not being expanded to include those returns, the examiner must document why those years were not examined.  (06-01-2010)
Employment Taxes and Other Withholding Taxes

  1. Employment tax returns of a business taxpayer are to be considered for examination at the same time the income tax return is examined, as required by Policy Statement P–4–4, IRM, Income Tax Examination Will Include Consideration of Taxpayer's Liability for Employment Tax.

  2. Employment taxes include taxes such as FICA, RRTA, FWT, and FUTA, as well as back-up withholding, withholding on income paid to foreign persons, and withholding on gambling winnings.

  3. Also included is the tax required to be withheld by the buyer or other transferee (withholding agent) when a U.S. real property interest is disposed by a foreign person. Refer to IRC 1445.  (06-01-2010)
Pre-contact Analysis

  1. The examiner should inspect CFOL/IDRS information for each employment tax return filed up to and including the last quarter for which an employment tax return was due. BMFOLI identifies returns filed by the taxpayer and BRTVU, BMFOLR, BMFOLT, or TXMOD provides return information for the Form 94X series of returns. BMFOLU provides W-2 and W-3 information filed by an employer.  (06-01-2010)
Examination of Employment Tax Returns

  1. An employment tax examination is warranted if:

    1. Available information indicates that the employment tax liabilities have not been correctly reported,

    2. Delinquent returns are secured and indicate audit potential, or

    3. The potential additional liability or the resulting improvement in voluntary compliance will justify the expenditure of time required to make necessary verification and adjustment.

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

  3. If a payer willfully fails to collect or pay over withholding taxes, the examiner will refer the case to Collection for consideration of the Trust Fund Recovery Penalty under IRC 6672 against the payer's responsible officer(s). Referral procedures can be found in IRM See also IRM 20.1, Penalty Handbook.

  4. If an examination is warranted, it should be done concurrently with the income tax examination. See IRM Exhibit 4.10.5–1, Pro Forma Employment Tax Check Sheet.

  5. If the employment tax examination is outside the examiner's area of expertise, the examiner should refer the case to an Employment Tax Specialist using the Specialist Referral System. See IRM,Referrals for Specialists. The referral should be made as early in the income tax examination process as possible to reduce taxpayer burden.  (06-01-2010)
Worker Classification Issues

  1. If an employment tax examination is initiated by the examiner and there are significant payments to independent contractors, examiners are 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. However, prior to beginning an audit involving worker classification, examiners are required to give taxpayers written notice of relief available under section 530 of the Revenue Act of 1978. This is best accomplished by providing Publication 1976, Do you Qualify for Relief under Section 530? (formerly titled Independent Contractor or Employee?), and discussing it with the taxpayer or their representative. If the examiner determines that the taxpayer qualifies for section 530 relief, the employment tax examination is to terminate with respect to the worker classification issue. The examiner is deemed not to have made a determination as to the status of that class of worker.

  2. In addition to section 530 considerations, there are other very specific procedures to follow in worker classification examinations. Examiners should review IRM 4.23Employment Tax and become familiar with these or refer the case to an Employment Tax Specialist as described in IRM above.

  3. If an employment tax examination is not initiated by the examiner, the examiner should refrain from asking detailed questions regarding the classification of a worker. These questions suggest that the examiner is conducting an examination on worker classification and could establish section 530 relief for future consideration. This does not preclude the examiner from asking general questions regarding deductions for contract labor, including the reason the contractor was engaged and the work he/she performed. However, if general questions lead the examiner to believe a worker has been mis-classified, then an employment tax examination should be initiated before asking additional questions.  (06-01-2010)
Withholding Compliance Program

  1. The Withholding Compliance Program has replaced the Questionable W-4 Program. See IRM The mission of the Withholding Compliance Program is to ensure that taxpayers who have serious under-withholding problems are brought into compliance with federal income tax withholding requirements. This process is based on W-2's filed and is the responsibility of the Withholding Compliance Unit.  (06-01-2010)
Information Returns

  1. Internal Revenue Code sections 6041 through 6053 and Title 31, United States Code, require that taxpayers report various types of payments to both the Service and the recipients of the payments. These payments include such items as rent, salaries, wages and income paid in the course of a trade or business, and payments such as dividends, interest, and royalties made to another person.

  2. The term "information return" means any statement, return, form or schedule as described in Treas. Reg. 301.6721-1(g).

  3. When payors file information returns, these documents become important leads in identifying income for both taxpayers and the IRS. The Information Returns Program (IRP) matches information returns to individual tax returns to determine compliance. Therefore, it is important that taxpayers (payors) timely file these returns. Command code IRPTRR can be used to order a hardcopy payer transcript.

  4. When examining individual or partnership returns, consider them not only as potential payors who may be required to file forms 1099, but as potential payees for whom another payor may not be in compliance with filing required forms 1099.

  5. A PMF indicator, "1099 Filer" , will appear on Form 5546(C), Examination Return Charge-Out Sheet, if the taxpayer is listed on the PMF. The case file may include a PMF transcript.  (06-01-2010)
Minimum Requirements

  1. To ensure the timely and correct filing of information returns, examiners must 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:

    1. During the pre-planning stages of the examination, the examiner should determine the potential filing requirements for forms 1099. See Pub 1220, Specifications for Filing Form 1098, 1099, 5498, and W-2G Electronically, for a list of payments requiring the issuance of information returns. Certain line items of the income tax return are often indicative of an information return filing requirement.

    2. The examiner can use command code PMFOL to research the filed information returns. Sometimes the examiner will not be able to tie the amounts on the PMFOL transcript to a line item on the tax return because some payments made to the payees may be under the threshold amounts for reporting, fragmented between several deductions on the tax return, cash versus accrual, or fiscal year versus calendar year deduction.

    3. The examiner should question the taxpayer regarding their internal procedures for information reporting and verify all reporting requirements have been met.

  2. Various Forms 1099 may need to be filed. For each Form's filing requirements refer to the Form instructions. Listed below are some Forms 1099 required to be filed by business entities:

    1. Form 1099-A, Acquisition or Abandonment of Secured Property;

    2. Form 1099-B, Proceeds From Broker and Barter Exchange Transactions;

    3. Form 1099-C, Cancellation of Debt;

    4. Form 1099-DIV, Dividends and Distributions;

    5. Form 1099-G, Certain Government Payments (State & local tax refunds, unemployment compensation, etc.);

    6. Form 1099-INT, Interest Income;

    7. Form 1099-MISC, Miscellaneous Income (payments of $600 or more and direct sales of $5000 or more of consumer goods for resale);

    8. Form 1099-Q, Payments from Qualified Education Programs;

    9. Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc; and

    10. Form 1099-S, Proceeds from Real Estate Transactions.

  3. Examiners should document on Lead Sheet 130 or elsewhere in the case file as appropriate the steps taken to verify full compliance and the conclusions reached  (06-01-2010)
Information Return Penalties

  1. IRC 6721, IRC 6722, and IRC 6723 provide civil penalties for persons who fail:

    1. To file correct information returns,

    2. Furnish correct payee statements, or

    3. Otherwise fail to comply with other information reporting requirements respectively.

  2. IRC 6724 section contains the definitions and provisions for wavier of information return penalties based on reasonable cause.

  3. Examiners are required to consider the penalties during an examination if it is found that the taxpayer failed to file, filed late, or filed incorrectly. The resulting improvement in voluntary compliance (payor or payee) will justify the expenditure of time required to pursue the penalties and/or to secure copies of the incorrect or delinquent information returns.

  4. See IRM, Examination, for the procedures to follow when securing information returns and/or the assessment of information return penalties. Information return penalties are not subject to notice of deficiency procedures. All cases are forwarded to Centralized Case Processing at closing for assessment of the penalties.  (06-01-2010)
Backup Withholding

  1. IRC 3406, Backup Withholding, requires payers to withhold income tax on reportable payments of interest, dividends, and other payments, including payments reported on Form 1099-MISC, Miscellaneous Income, under certain conditions.

  2. Generally, an examiner will only encounter backup withholding when either:

    1. The Secretary notifies the payor that the TIN furnished by the payee is incorrect.

    2. The payee fails to furnish a TIN to the payor in the manner required.

  3. When an examiner discovers a violation of the backup withholding requirements during an income tax examination, the manager will be advised and a backup withholding examination or a referral to an employment tax specialist will be considered.

  4. Additional information on backup withholding is available in IRM, IRC 3406, Backup Withholding, and procedures for backup withholding can be found in IRM  (06-01-2010)
Information Returns and Forms Involving Foreign Entities

  1. An information return may be required to be filed in certain situations involving foreign entities. Some of the situations requiring the filing of an information return or form by a U.S. person are as follows:

    1. U.S. person who is treated as an owner of any portion of a foreign trust must ensure that the foreign trust files the information return.

    2. U.S. person creates a foreign trust or transfers any money or property, directly or indirectly, to a foreign trust.

    3. U.S. person receives a distribution, directly or indirectly, from a foreign trust.

    4. U.S. person who receives certain large gifts from foreign persons.

    5. U.S. person who controls a foreign corporation or who owns 10% or more of the voting stock of a foreign corporation that is a Controlled Foreign Corporation (CFC) for an uninterrupted period of 30 days or more and owns that stock on the last day of the foreign corporation's tax year.

    6. U.S. corporation that is at least 25% "foreign-owned."

    7. A foreign corporation is engaged in a U.S. trade or business.

    8. U.S. person transfers property to a foreign corporation.

    9. U.S. person who controls a foreign partnership or who owns 10% or more of a controlled foreign partnership.

  2. See IRM 4.60.6, International Referral Criteria and Procedures, for additional information.

  3. IRC 7701(a)(30) defines a United States person to include a citizen or resident of the United States, a domestic partnership, a domestic corporation, and certain estates and trusts.

  4. IRM 20.1.9, Penalty Handbook, International Penalties, gives specific information regarding the types of penalties, code specific information, assertion requirements, statutes of limitations, and whether the penalties are subject to deficiency procedures.  (06-01-2010)
Report of Foreign Bank and Financial Accounts (FBAR)

  1. Examiners should be aware that each United States person who has a financial interest in or signature or other authority over any financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).


    FBAR is not a Title 26, Internal Revenue Code, requirement. However, examiners should verify the responses to the questions about foreign financial accounts and foreign trusts that appear on Form 1040, Schedule B, Part III. Examiners must use the Currency and Banking Retrieval System (CBRS) to verify the filing of an FBAR. If a required FBAR has not been filed, examiners must obtain a "related statute memorandum" before an FBAR case can be started or before the taxpayer can be asked about FBAR filings.

  2. Very specific procedures are required when a FBAR examination is warranted. The examiner should consult IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR), and IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures, for guidance in working FBAR cases. Also, the examiner may need to request assistance from Fraud BSA.  (06-01-2010)
Forms 8300 Report of Cash Payments Over $10,000 Received in a Trade or Business and Currency Transaction Reports (CTR’s)

  1. IRC 6050I was enacted to assist the IRS in discovering unreported income from legal and illegal sources by identifying taxpayers with large cash income. This law requires any person engaged in a trade or business, who, in the course of a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions) to file a Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, information return with respect to such transaction(s) at such time.

  2. Financial institutions, including casinos, must also report each receipt, and each withdrawal, exchange of currency or other payment or transfer which involves a transaction in currency of more than $10,000. However, financial institutions do not report this on Form 8300. They are required to file a Currency Transaction Report (FinCEN Form 104 37683N, Form 4789 is no longer used). These Currency Transaction Reports are required by Title 31, Bank Secrecy Act, rather than Title 26, Internal Revenue Code, and are not included in the required filing checks.

  3. Title 31 inquiries should not be made during a Title 26 activity. Thus, for example, an examiner conducting an income tax examination of a financial institution should not inquire as to the financial institution’s Title 31 responsibilities. Additional detailed information can be found in the following IRM chapters devoted to Form 8300 and information reports:

    1. IRM 4.26.10, Form 8300 History and Law;

    2. IRM 4.26.11, BSA Examiner Responsibilities for Form 8300/6050I Examinations; and

    3. IRM 4.26.12, Examination Techniques for Form 8300 Industries.  (06-01-2010)
Minimum Requirements

  1. Form 8300 is part of the required filing checks. If a trade or business regularly engages in transactions over $10,000 and significant violations are found, a Form 5346 should be prepared and sent to BSA Workload Identification, Selection, Delivery and Monitoring (WISDM) for consideration for a Form 8300 compliance review.

  2. Examiners should also consider preparing a Form 5346 on the "recipient" or the "identified persons" for large, unusual, or questionable cash transactions identified during an examination of a trade or business.  (06-01-2010)
CBRS Use in Income Tax Examinations

  1. Currency and Banking Retrieval system (CBRS) information is useful in identifying cash activity that may not be accurately reported on the income tax return. In addition, it may lead the examiner to discover sources of unreported income, often derived from criminal activity.

  2. Examiners should refer to the CBRS User’s Guide for guidance in interpreting CBRS prints. See IRM, CBRS User's Guide.  (06-01-2010)
Excise Tax Returns

  1. Excise taxes are taxes imposed on the sale or use of various items (IRC section 4041 through IRC 5881). Excise taxes administered by the IRS include fuel taxes, environmental taxes, communication taxes, air transportation taxes, manufacturer taxes, retail sales taxes, ship passenger taxes, foreign insurance taxes, and taxes on obligations not in registered form. Excise taxes imposed on alcohol, tobacco, and firearms are not administered by the IRS. Some of these taxes are dedicated to trust funds that pay for related capital improvements such as highways and airports. Excise taxes are independent of income taxes except for certain income tax credits.

  2. It is important to consider the applicable excise tax requirements for different market segments. Publication 510, Excise Taxes, can provide useful information on excise taxes.

  3. Excise Taxes are reported on the forms listed below:

    • Form 11-C, Occupational Tax and Registration Return for Wagering;

    • Form 720, Quarterly Federal Excise Tax Return;

    • Form 720X, Amended Quarterly Federal Excise Tax Returns;

    • ;

    • Form 730, Monthly Tax Return for Wagers;

    • Form 2290, Heavy Highway Vehicle Use Tax Return;

    • Form 6197, Gas Guzzler Tax;

    • Form 8849, Claim for Refund of Excise Taxes;

    • Form 6627, Environmental Taxes; and

    • Form 8876, Excise Tax on Structured Settlement Factoring Transactions.

  4. For an overview of excise taxes reported on Form 2290, Form 11-C, and Form 730, see IRM, Overview of Excise Taxes Reported on Form 2290, 11-C, and Form 730. For detailed information on Form 720 see IRM, Overview of Excise Taxes Reported on Form 720.

  5. Examiners should verify that required excise tax returns have been filed. If audit potential is noted, a referral to an excise tax specialist should be considered using the Specialist Referral System.

  6. Certain excise tax related credits may be filed on the entities’ income tax return. These tax credits are filed on Form 4136, Credit for Federal Tax Paid on Fuel; Form 8864, Biodiesel and Renewable Diesel Fuels Credit, or Form 6478, Credit for Alcohol Used as Fuel, as attachments to the income tax return. Contact an excise tax specialist for assistance with working questionable claims filed on these forms.

  7. Examiners should be aware that entities involved in certain excise tax activities are required to be registered with the IRS. Registration of such entities is administered by the Excise Tax program. See IRM 4.24.2.  (06-01-2010)
Pensions Plan Returns

  1. Employers who have provided a pension plan for their employees are required to file an appropriate information return, Form 5500, Annual Return/Report of Employee Benefit Plan. Examiners will review the pension plan return to determine whether a referral of the plan to Employee Plans in the Tax Exempt and Government Entities (TE/GE) function is required.

  2. Form 4632-A, Employee Plans Referral Checksheet, should be used when reviewing the pension plan 5500 series returns. Instructions are found on the back of the form. Contact TE/GE for assistance, as needed. Examiners should not attempt to ascertain the correctness of the information reported on Form 5500. Examiners must complete Form 4632-A for all plans. Any plan which does meet the requirements on Form 4632-A is a mandatory referral.

  3. Form 4632, Employee Plans Referral, will be used to make a referral to TE/GE Employee Plans Classification Unit. A copy of the Form 5500 series return, and a copy of the latest IRS determination letter should accompany the referral.

    Reminder: Case referrals to TE/GE are based upon the responses to the questions on Form 4362-A using Form 4632. If an examiner needs assistance from TEGE, the examiner should submit a request for specialist assistance through the Specialist Referral System.

Exhibit 4.10.5-1 
Pro Forma Employment Tax Checksheet

Answer yes or no to each question.
1. _____ Are employment tax returns (Forms 940, 941, 943, 945, and/or 945) filed?
2. _____ Have employment tax returns been reconciled to deductions per the tax return where applicable?
3. _____ Are W–2s and 1099s issued where applicable?
4. _____ Are 1120-S corporate officers paid wages?
5. _____ Are deductions taken for payments to "Outside
Labor," "Commissions," "Consultants." "Sub-Contractors" or "Casual Labor?"
6. _____ Are bonuses, prizes, or awards given?
7. _____ Are fringe benefits given to employees?
8. _____ Are employees provided with company vehicles
and/or monthly allowances with no requirement to
submit a travel voucher?
9. _____ Are recurring payments made to individuals not
considered employees?
10. _____ Are any individuals rendering personal services
considered non-employees?
11. _____ Were any audits conducted by the State Workforce Agencies?
12. _____ Are non-cash payments made? (e.g. an apartment
manager living in an apartment, in exchange for
13. _____ Are corporate officers performing services for
more than one corporation?
15. _____ Are there employee reimburse/accountable plan issues?
  If any of the questions from 1–3 are answered "no" , or
  If any of the questions from 4–13 are answered "yes" ,
  An employment tax issue may be present and the examiner
should gather additional information to determine if an
examination is warranted.

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