part4-22
- 4.2.6.1
Employee Tax Compliance - 4.2.6.2
Examination of Employee Returns - 4.2.6.3
New Employee Examinations - 4.2.6.4
Audit Reconsiderations - 4.2.6.5
Closing an Employee Examination - 4.2.6.6
Survey of Employee Returns - 4.2.6.7
Employee Interview Procedures
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As the administrators of our nations tax system, our dedication to
the highest standards of ethical behavior and conduct promotes the public
trust in our honesty, fairness and efficiency. Therefore, IRS employees are
expected to fully comply with all tax laws by accurately reporting and timely
filing their federal, state, and local tax returns and fully paying their
taxes when due. This includes paying the proper amount of tax (e.g. estimated
tax payments and withholding) as income is earned during the tax year. RRA
98 section 1203(b)(8) and (b)(9) provide for the removal of IRS employees
who willfully fail to file any return of tax required under the Internal Revenue
Code of 1986 on or before the date prescribed therefore, or who willfully
understate federal tax liability respectively. To this end, the IRS has established
a comprehensive employee tax compliance program. Employees accounts will
be subjected to examination, underreporter, and annual delinquency check procedures. -
Each area has an employee tax compliance coordinator. The employee tax
compliance coordinator is located in the area Planning and Special Procedure
(PSP) office.
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) IRS Policy Statement P-4-9, IRM 1.2.1.4.7,
provides that standard IRS procedures relating to examinations, proposed changes,
appeal rights, etc., will apply to IRS employees to the same extent that they
apply to all other taxpayers. -
Examination of employee returns are generally in five categories:
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New employee examinations,
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Regularly classified employee examinations,
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Executive selections,
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Treasury mandate audits, and
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Special projects to address identified employee compliance problems.
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Examiners should review Form 5546 (C), Examination Return Charge-Out
Sheet, on every case file to determine if it reflects the words ”
Employee Return.”
Prior to January 2006, the hand written word “employee”
will be on the Form 5546 (C). After January 2006,
the typed words “Employee Return”
will be on the Form
5546 (C). This designation can be found about one third of the way down from
the top of the Form 5546 (C). -
The examiner should also check for a project and/or a tracking code.
The following project and/or tracking codes apply to employee audits:-
0206 – Executive selections project code
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0207 – Treasury mandates project code
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0389 – New employees project code
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0913 – Employee audit transferred from campus project code
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7569 – Employee audits tracking code
Note:
A tracking code is used to track an employee examination that originated
in a source code other than source code 46. An employee audit tracking code
takes priority over all other tracking codes. Therefore, it is critical that
the employee audit tracking code be input on ERCS. If the group cannot update
the employee audit tracking code, they should request the update be made by
their employee tax compliance coordinator. The group cannot update a case
to an employee tracking code if a tracking code is currently present.
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When special projects are initiated to address identified employee noncompliance,
they may be assigned a unique project and or tracking code. -
If a return has not been pre-identified as an employee case and it is
found to be an employee return after further inspection/examination, the examiner
should notify their supervisor and their employee tax compliance coordinator
as soon as possible. The employee tax compliance coordinator will discuss
with the examiners manager if the examiner may proceed with the case or if
it should be reassigned. The word “employee”
should be
written at the top of the Form 5546 (C). The employee
tax compliance coordinator will input the employee tracking code 7569. The
examiner will document their actions on Form 9984, Examining Officers Activity
Record, and Form 9984-D, Office Examiner Forecast and Activity Record for
field and office examination respectively. -
Conversely, if a return has been pre-identified as an employee audit
and the employee is no longer employed with the Service, the words ”
employee return”
should be crossed through on the Form 5546 (C) with
a notation on Form 5546 (C) that the employee is no longer with the Service.
The examiner should notify their group manager and the employee tax compliance
coordinator of the change. See IRM 4.2.6.2.11.
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Examiners must ensure impartiality and independence when examining an
employee return. If the examiner has any reason to believe that his/her impartiality
and independence may be questioned, they should discuss the matter with their
immediate supervisor for reassignment consideration. -
The impartial and independent character of examinations of Internal
Revenue Service employees and officials must be ensured. See IRM 4.1.4.2.10,
Employee Audits, for guidelines on assignment of employee returns for examination.
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Employee audits are high priority cases and should
be assigned within 10 business days of arrival into the group.
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When an examiner is assigned an employee return for examination and
the employee is located in another post-of-duty, the examiner is authorized
to travel to the employees business, residence, or other location where the
books and records are maintained. All travel costs will be borne by the examining
area.
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An examination of an employee generally should be worked as a normal
examination. The employee under examination should not be given preferential
treatment nor should they be held to a higher standard than any other taxpayer
under examination. -
Normal pre-contact responsibilities apply to an employee audit. The
examiner should use current risk based decision tools in any decision to adjust
the scope of the examination. See IRM 4.10.2, Pre-Contact Responsibilities. -
Employee audits are very sensitive and require certain modifications
to the examination process. The following modifications must be made:-
The examiner should use the normal and appropriate initial appointment
letter to begin the examination. The examiner should attach the Employee Information
Sheet. Forms used for employee audits are locate on the EDP – Employee Audit website. See IRM 4.2.6.7 for employee interview procedures. -
The examiner should include Form 8111, Employee Notification Regarding
Union Representation, with the initial contact letter and attempt to secure
a signed copy before the initial interview takes place. -
Employee tax examinations are to be kept in an orange file folder at all
times.
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The return of an employee’s spouse who has filed separately should
be inspected as part of the required filing checks to determine if it should
be examined. A copy, RTVUE, or MAC print of the spouse’s return must
be included with the employee’s return if it is not examined. See IRM
4.8.4.2.4.3, Key Points for Reviews. -
If the spouse’s return is examined, each Form 3198, Special Handling
Notice for Examination Case Processing, should be cross referenced with the
TIN of the related return.
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When facts are disclosed during the examination that indicate that an
official or employee is, or has been, engaged in any activity in violation
of the Rules of Employee Conduct, the examiner should refer to Document 12011, Plain Talk About Conduct and Ethics Handbook.
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Current civil and criminal fraud procedures will be followed, where
applicable. Certain Fraud Technical Advisors (FTA) have been designated to
assist with employee examinations. The FTA should be identified in the packet
that accompanied the case file. If no information is available contact your
local FTA or the employee tax compliance coordinator. -
If a joint examination is initiated with Criminal Investigation on an
employee audit, Form 2677, Request for Account History and Tax Audit, should
be immediately sent to National Background Investigation
Center.
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Labor/Employee Relations (LR/ER) specialists will occasionally request
clarification of audit status, results, and/or adjustments. Their request
should be directed as follows:-
If the case was recently closed from the group and sent for mandatory
review, the LR/ER specialist should contact Technical Services for the area
in which the case closed. -
If the case is assigned to an examination group, the LR/ER specialist
should contact the group manager.
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If the employee under examination resigns, the examiner should take
the following actions:-
Notify their employee tax compliance coordinator of the resignation and
document this activity on the Form 9984 or Form 9984-D for field and office
examination respectively. -
The examiner should discuss the scope of the examination with their group
manager. Based on the facts and circumstances of the case, the examination
scope may need to be concluded, limited or continued as planned. See IRM 4.10.2,
Pre-Contact Responsibilities. -
If the employee resigns before notification of the examination is made,
the status of the cases changes from one of high priority to that of an informational
referral case. The group manager should decide whether to retain the case
and work it into inventory or to survey it using normal survey procedures.
See IRM 4.2.6.6 below for additional detail.
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New employees in certain positions, and those with less than one year
of continuous IRS employment in those same positions, must undergo employee
tax return reviews and/or examinations. See IRM 4.1.4.2.10.6, New Employee
Examinations. -
The employee tax compliance coordinator establishes controls on employee
examinations, builds the case file, and requests the original return(s). -
The package sent to the group should contain the following items:
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Return(s) (original, copy or RTVUE);
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MACS print(s);
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Form 2677, Request for Account History & Tax Audit;
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CFOL reports of account history for the open years and Information Return
Processing (IRP) transcripts; and
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Employee returns will be examined in the same manner as all individual
income tax returns which include conducting minimum income probes and required
filing checks. -
If the primary reason for the examination of a new employee’s
return is consideration for employment and the individual is no longer employed
by the Service, or is no longer being considered for employment, the examiner
must discuss the scope of this case with their group manager. See IRM 4.2.6.2.11.
The examiner should notify the employee tax compliance coordinator of the
change in the employees employment status. -
At the completion of an employee examination, the examiner completes
items 14 through 16 and 18 through 20 of Form 2677. Form 2677 should remain
in the case file and be place on top of Form 4318, Examination Workpapers
Index, or Form 4700, Examination Workpaper. -
Forms and letters frequently used for employee audits can be found on
the EDP -Employee Audit website under employee
audits.
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An employee under examination may avail themselves to both the formal
and informal claims procedures. An informal claim is known as an ”
Audit Reconsideration.” -
Employee audit reconsideration cases that are selected will be sent
to the appropriate area PSP office for assignment and control. The case should
be returned to the group and examiner that originally worked the case. Employee
audit reconsideration cases are high priority cases. They are given the same
priority status as employee audit cases. -
The purpose of the audit reconsideration is to examine information that
was not previously considered. The examiner should review IRM 4.13.4.3, Area
Office (AO) Examination Group Procedures, for guidance and procedures for
examining and closing an audit reconsideration.
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All employee audits are mandatory review, thus the “employee
audit”
box in the “Forward to Technical Services”
section
of Form 3198 must always be checked regardless of the type of closure (this
includes surveys). -
In the case of a joint return, identify the name and SSN of the IRS
employee on Form 3198 by checking the “other”
block in
the “Forward to Technical Services”
section. -
Technical Services will close the case to the appropriate CCP. CCP will
scan the required documents and forward them to the requester. In the case
of a joint return, the examiner must identify on the Form 3198 the name of
the IRS employee and their SSN. This information should be recorded in the “Forward to Technical Services”
block adjacent to the “Employee Audit”
box. -
Once the case is closed from Technical Services, Centralized Case Processing
(CCP) will forward the required employee audit information in the case file
to the requesting official such as Labor//Employee Relations, TIGTA, National
Background Investigations Center. -
In the case of a joint return, identify the name and SSN of the IRS
employee on Form 3198 by checking the “other”
block in
the “Forward to Technical Services”
section.
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Survey procedures are applicable only to new employee examinations and
regularly classified returns. Treasury mandates (TIGTA referrals) and executive
selections cases cannot be surveyed. -
Once an IRS employees return has been selected for examination and
assigned to a group, it can only be surveyed with the written approval of
the Chief, Compliance Division, in the Campuses; and the territory manager,
or equivalent position in area offices. This survey action must include a
description of any documents and/or other information used to draw this conclusion.
See Delegation Order 244, IRS Employees’ Returns Selected for Examination,
IRM 1.2.43.37. -
When an examiner believes that an examination of an employees return
would result in no material change in tax liability, he/she may apply survey
after assignment procedures. The examiner will prepare a Form 1900, Income
Tax Survey After Assignment, stating the reasons for the survey action. If
the examiners group manager concurs, he/she will approve the case and forward
it to the appropriate second level official for his/her consideration and
final approval on Form 1900. -
If the group manager surveys before assignment an employees return,
the group manager should follow the survey after assignment procedures as
outlined in the preceding paragraph. The group manager should forward the
case file to their territory manager for approval and then to PSP. -
Check the “Employee Audit”
box on Form 3198, in
the “Forward to Technical Service”
section, when closing
the case.
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The initial interview in an employee tax audit has increased significance,
as the outcome of the examination may initiate a conduct investigation. The
examiner’s interview questions should adequately probe the employee’s
role in preparation of the return, participation in any business, investments,
income producing activities and the employee’s role in identifying expenses
or adjustments to income. -
The examiner’s initial interview of an employee may be considered
an investigatory interview and the employee may elect to have union representation.-
The examiner should provide the employee with a copy of Form 8111 with
the initial contact letter, discuss the form at the initial interview and
attempt to secure a signed copy. The interview should not be delayed in order
to secure a signed copy of Form 8111. Oral notification and documentation
in the case file that the employee was advised of their right to union representation
is sufficient. -
The examination should not be unreasonably delayed to secure union representation.
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An IRS employee is barred from appearing on behalf of any taxpayer as
a representative before any federal, state, or local governmental agency,
in an action involving a tax matter except on written authorization of the
Commissioner of Internal Revenue Service. A union representative may be present
and represent the employee in a conduct issue (5 C.F.R. section 3101.106,
Additional rules for Internal Revenue Service employees, subsection (b)(2)).
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Employee Attendance at the Audit: IRC section 7521(c) generally prohibits
the agency from requiring a taxpayer to accompany the taxpayers recognized
representative to an audit in the absence of an administrative summons. IRC
section 7521(d) states, however, that “[t]his section shall
not apply to … investigations relating to the integrity of any officer or
employee of the Internal Revenue Service.”
Inasmuch as an audit of an
employee relates to the integrity of the employee and may result in a disciplinary
or adverse action against the employee, the employees recognized representative
may not attend the audit in lieu of the employee, although
the recognized representative may accompany the employee to the audit.Note:
A recognized representative is any attorney, certified public accountant,
enrolled agent, enrolled actuary, or any other person permitted to represent
that taxpayer before the Internal Revenue Service who is not disbarred or
suspended from practice before the Internal Revenue Service and who has a
written power of attorney executed by the taxpayer. -
An employee will be granted administrative leave to attend a tax audit
or a discussion of the employee’s own tax affairs. -
An employee will not be granted administrative
leave to prepare for an examination.
