4.23.8. Determining Employment Tax Liability

(1) A determination of employment tax liabilities requires finding that there is an employer, an employee, and a payment of wages or compensation. Federal employment taxes consist of five separate employment taxes, items (a) through (e). This subsection will also discuss the income tax on self-employment income, item (f).

1. Federal Insurance Contributions Act (FICA): IRC 3101 through IRC 3128

2. Railroad Retirement Tax Act (RRTA): IRC 3201 through IRC 3233

3. Federal Unemployment Tax Act (FUTA): IRC 3301 through IRC 3311

4. Railroad Unemployment Repayment Tax (RURT): IRC 3321 and IRC 3322

5. Federal Income Tax Withholding (FITW): IRC 3401 through IRC 3406

6. Self-Employment Contributions Act (SECA): IRC 1401 through IRC 1403

(2) The FICA, RRTA, FUTA, RURT, and FITW are imposed by Chapters 21, 22, 23, 23A, and 24, respectively, of Subtitle C - "Employment Taxes." SECA tax is imposed by Chapter 2 of Subtitle A - "Income Taxes" of the IRC, and is not an employment tax.

(3) Subtitle C also includes Chapter 25 of the IRC entitled "General Provisions Relating to Employment Taxes." This chapter includes eleven additional code sections relating to miscellaneous employment tax provisions.

(1) Employment tax provisions are found at Internal Revenue Code (IRC) Subtitle C:

• Chapter 21, Federal Insurance Contributions Act (FICA),

• Chapter 22, Railroad Retirement Tax Act (RRTA),

• Chapter 23, Federal Unemployment Tax Act (FUTA),

• Chapter 23A, Railroad Unemployment Repayment Tax,

• Chapter 24, Collection of Income Tax at Source (FITW), and

• Chapter 25, General Provisions relating to employment taxes and collection of income taxes at source.

(2) The Employment Tax Program is governed by Policy Statements and other internal guidance that apply to all IRS personnel regardless of operating division. The Policy Statements found in IRM 1.2.1, Servicewide Policy Statements, apply to all employment tax issues and examinations. Examiners should review these Policy Statements to properly perform their examination duties.

(3) A website, Search Servicewide Delegation Orders, located at https://irm.web.irs.gov/imd/del/search.aspx provides a searchable list of Servicewide Delegation Orders issued by the Commissioner of the Internal Revenue, or on their behalf by either of the deputy commissioners. Delegation Orders pertaining to each IRS business process can be found in IRM 1.2.2, Servicewide Delegations of Authority.

(4) IRM 4.23 provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting, and payment of employment taxes. IRM 4.23 serves as the foundation for consistent administration of employment taxes by various IRS operating divisions. By providing one source of authority for all operating divisions, the IRS greatly reduces philosophical and procedural inconsistencies.

(1) Director, Specialty Examination Policy is the executive responsible for the procedures and updates addressed in this IRM.

(2) Director, Specialty Examination is the executive responsible for examination operational compliance.

(1) Program Goals: The processes and procedures provided in this IRM are consistent with the objectives or goals that are addressed in IRM 1.1.16.5.3.3, Employment Tax Examination, and IRM 1.1.16.5.5.2.2, Employment Tax Policy.

(2) Program Effectiveness: Program goals are measured with Employment Tax Embedded Quality Performance Reports that monitor whether quality attributes are applied uniformly and consistently.

(3) Annual Review: Program Manager of Employment Tax Policy is responsible for reviewing the information in this IRM annually to ensure accuracy and promote consistent tax administration.

(1) The following table lists Terms and Definitions found in this IRM:

(1) The following table lists commonly used acronyms and their definitions:

(1) The following table lists the primary sources of guidance:

(2) Other helpful information sources include:

• The SBSE Employment Tax Small Business Knowledge Base (main page) is located at https://irsgov.sharepoint.com/sites/ETD-KMT-KB014.

• The Specialist Referral System home page: https://srs.web.irs.gov/.

• A list of SB/SE Employment Tax Policy Analysts, their contact information and program assignments, are found at Employment Tax Policy Contacts .

(3) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the IRC, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3). For additional information about the TBOR see IRC 7803(a)(3). For additional information about TBOR, see Pub 5170, Taxpayer Bill of Rights, www.irs.gov/taxpayer-bill-of-rights or https://irssource.web.irs.gov/SitePages/TaxpayerBillOfRights.aspx.

(4) The Taxpayer Advocate Service (TAS) is an independent organization within the IRS, led by the National Taxpayer Advocate, that helps taxpayers and protects taxpayer rights. TAS offers free help to taxpayers when a tax problem is causing a financial difficulty, when they’ve tried and been unable to resolve their issue with the IRS, or when they believe an IRS system, process, or procedure just isn't working as it should. TAS strives to ensure that every taxpayer is treated fairly and knows and understands their rights under the TBOR. TAS has at least one taxpayer advocate office located in every state, the District of Columbia, and Puerto Rico.

(5) Employment tax examiners should consider the disclosure provisions when preparing agreed and unagreed case reports. For further information, see the Privacy, Government Liaison and Disclosure (PGLD) maintained knowledge base at https://irsgov.sharepoint.com/sites/ETD-KMT-KB003.

(6) Overall responsibility for civil penalty programs is assigned to Office of Servicewide Penalties (OSP). OSP is charged with coordinating policy and procedures concerning the civil penalty program administration, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching penalty effectiveness on compliance trends, and determining appropriate action necessary to promote voluntary compliance. For further understanding of the civil penalty program and penalty relief refer to the Penalties Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB015).

(1) An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it. Such knowledge may be obtained in the course of an examination. In an agreed case, this is when the employer submits one of the Form 2504 series agreements. For an unagreed case, it could be at the conclusion of an Appeals conference or when the taxpayer declines to exercise its right to go to Appeals.

(2) If one of the exceptions listed in IRM 4.23.8.3(7) is not applicable, the submission of one of the Form 2504 series agreements at the close of an examination or Appeals conference (and prior to the issuance of a notice and demand for payment) fulfills the requirements for correcting a return for purposes of the interest-free adjustment provisions of IRC 6205 and the regulations. For errors discovered on or after January 1, 2009, full payment of the tax must be made at the time of the submission of the agreement in order to receive complete interest-free treatment and avoid failure to deposit (FTD) penalties. If the tax adjustment is not paid when the signed agreement is submitted, interest and penalties accrue. It is important that the examiner clearly explain the various penalty and interest-free rules when soliciting an agreement in an agreed case or closing an unagreed case. The interpretation of this paragraph is illustrated by the following examples:

(3) Under the regulations, an adjusted return must be filed to get an interest-free adjustment. If the taxpayer elects to pay the full adjustment amount (taxes and penalties) at any time prior to the closing of the examination but does not agree by submitting a signed Form 2504, the case will be processed as an unagreed case without an interest-free adjustment. If, after the case is closed unagreed, the taxpayer submits a signed Form 2504 or files Form 941-X prior to the due date of the return for the period in which the payment was made, the taxpayer will be entitled to an interest-free adjustment.

(1) In all employment tax cases which involve a restriction on the payment of interest, Form 3198, Special Handling Notice for Examination Case Processing is used to notify the Support and Processing function not to assess interest. . TE/GE employees will prepare RCCMS Form 3198-A, TE/GE Special Handling Checksheet. Note the type of tax, the tax periods, and the section of the IRC or Regulations which authorizes the restriction of interest. Check the appropriate block on Form 3198 or RCCMS Form 3198-A and enter the interest computation date, that is, the date the Form 2504 was date-stamped received. Also, enter this date in Item 11 of Form 5344 or the Individual/Bus (1 of 3) tab of the closing record in RCCMS for TE/GE. Enter transaction code "308" in Item 12 of Form 5344 or the Individual/Bus (1 of 3) tab of the closing record in RCCMS for TE/GE to identify the tax as interest-free. There are no interest-free adjustments for underpaid FUTA taxes. The IRC provisions restricting and prohibiting assessment or payment of interest are listed in Exhibit 4.23.8-2, Code Provisions Restricting and Prohibiting Interest — Employment Taxes. Additional instructions on the preparation of Form 5344 for employment tax closures are provided in IRM 4.23.10.20, Form 5344/Form 5599 - Additional Entries for Completion of Employment Tax Closures, and in IRM 4.4.12, AIMS Procedures and Processing Instructions, Examined Closings, Surveyed Claims, and Partial Assessments.

(2) If the taxpayer agrees with the examination findings for the years under examination and the current year returns reflect similar errors as adjusted in the examination, advise the taxpayer they must correct the current year errors using Forms 941-X (or other corresponding "X" form), for all periods to be adjusted before the end of the current filing period to receive an interest-free adjustment for any underpayments.

(3) If the case is unagreed and a Notice and Demand for payment is issued, interest generally begins to accrue starting on the due date of the return. See IRC 6601.

(1) If an employer deducts less than the correct amount of AdMT, it is nevertheless liable for the correct amount of tax that it was required to withhold, unless and until the employee pays the tax. Under IRC 3102(f)(3), if an employee subsequently pays the tax that the employer failed to deduct, the tax will not be collected from the employer.

(2) An employer is not relieved of its liability for payment of any AdMT required to be withheld unless it can show that the tax has been paid by the employee or that the employee did not owe the tax because the employee filed a joint tax return and did not have total Medicare wages and tips and self-employment income of more than $250,000 or total railroad retirement (RRTA) compensation of more than $250,000. Form 4670 is used to request relief from the employee AdMT withholding obligation with the Form 4669 attachments. These are the same forms used for requesting federal income tax withholding relief.

(3) Penalties or interest adjustments are not abated by these procedures. A partial assessment process is used to ensure the correct assessments are made. See IRM 4.23.8.4.3, Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination, below.

(4) The actual amount of tax credit available for abatement is included on line 12 of Form 4668.

(1) Form 4669 is used by the taxpayer to secure statements from payees that the income tax and/or AdMT on the payments in question has been satisfied. Form 4670 is used to summarize and transmit the Forms 4669 to the Campus.

• In examinations where the taxpayer has not paid the tax and will request an abatement after completion of the examination, (see IRM 4.23.8.4, IRC 3402(d) - Relief for Employer When Employees Have Paid Income Tax on Wages) an extra copy of Form 4668 or Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G, should be provided to the taxpayer. Instruct the taxpayer to mail the copy of the report form along with Forms 4669/4670 to the appropriate Campus. It is not necessary to submit an "X" form, for example, Form 941-X or Form 945-X, (however, the taxpayer may find use of the form helpful for calculation).

• If the taxpayer haspaid the additional employment tax examination assessment after the examination and later wants a refund (for instance, additional payees have been contacted and new Forms 4669 have been secured), the claim would be filed using the appropriate "X" form (for example, Form 941-X or Form 945-X,) with the attached examination report copy of Forms 4668/ 4668-B.

(2) Examiners are authorized to accept and consider any Forms 4669 submitted to the examiner before the examination is closed. A separate Form 4669 must be obtained by the taxpayer from each payee for each year. These forms must be completed correctly by the payee and are attached to the Form 4670 prepared by the taxpayer. These completed forms must have every appropriate line item completed by the payee and accompanied by Form 4670 prepared by the payor. If any information is omitted, Form 4669 is returned to the payor for correction. The Form 4669 is signed by the payee under penalties of perjury.

(1) A Form 4669 may be rejected by the examiner on the basis of incomplete or inaccurate information on the face of the document. Any questionable Form 4669 (for example, possible unreported income, false information, forged signatures) should be referred to Planning and Special Programs (PSP) for appropriate follow-up action. TE/GE employees follow the referral process in IRM 4.70.11.15.3, General Referral Process within the IRS.

(2) Form 4669 may be subsequently reviewed by Campus after completion of the examination to determine if the income was properly reported by the payee. Where a payee is found either to have not filed income tax returns or not included the income in question, appropriate action will be considered. Payees found to have perjured themselves by providing false information, or Forms 4669 found to have forged signatures of the payee, may also be referred to the appropriate function for enforcement action.

(3) The examiner should provide the taxpayer with Forms 4669 and a Form 4670 when the issue is identified in the examination and inform the taxpayer as early as possible in the examination to begin soliciting these forms from the payees. The examiner should allow a reasonable amount of time for the forms to be returned. Subsequent submissions of Form 4669 by the taxpayer after the case is closed from the group will be processed under existing guidelines by the Campus. See IRM 4.23.8.4.2, Forms 4669/ 4670.

(4) The abatement will be based on the lesser of the tax applicable to:

• The amount shown on the Form 4669 that each payee included on the payee’s income tax return, or

• The amount paid to each payee by the taxpayer.

(5) At the close of the examination, the examiner should advise the taxpayer that although the FITW and/or AdMT may be abated under IRC 3402(d) and IRC 3102(f)(3), the taxpayer remains liable for any penalties or interest attributable to the original assessment.

• If penalties are assessed, or interest-free provisions are not granted, the Modified Partial Assessment "Two-Step" report-writing procedures at IRM 4.23.10.15.2, Examination Procedures for IRC 3402(d) and IRC 3102(f)(3) Relief, must be followed. TE/GE employees will follow the process outlined in IRM 4.70.14.2.1.4.6.2, TE/GE- IRC 3402(d) When Penalties are Proposed.

• If the examination does not propose penalties and the interest-free provisions of IRC 6205 are to be allowed, the "Two-Step" process is not to be used. The examiner will compute the tax due on Form 4668 or Form 4668-B based on the net payment adjustment using the accepted amounts from the secured Forms 4669.

(6) In order to avoid duplicate processing of Forms 4669, clearly indicate on each accepted form in bold print "DO NOT PROCESS — ADJUSTMENT CONSIDERED BY EXAMINER ON________(mm/dd/yy)".

(7) Prepare a list of all payees and amounts where adjustment may be applicable and prominently identify those payees where adjustment was granted. This action precludes duplicate abatements if additional Forms 4669 are submitted to Appeals or to the Campus at a later date. This list should identify the payee, the amount paid to each payee, the amount of payment eligible for IRC 3402(d) and IRC 3102(f)(3) consideration, and the Forms 4669 accepted in the examination. In addition, if computed using a quarterly report, the IRC 3402(d) and IRC 3102(f)(3) credits allowed should be identified by quarter on the list, and the total should match the IRC 3402(d) and IRC 3102(f)(3) credit amount listed on the Form 2504/Form 2504-S/Form 2504-T. The list must remain in the case file as a summary sheet of the Forms 4669. Mark in bold print "FORM 4669 – ADJUSTMENTS ALLOWED BY EXAMINATION" on Form 3198 (TE/GE employees will notate RCCMS Form 3198-A).

(8) All completed Forms 4669 secured by SB/SE Employment Tax Examiners will be scanned, if not already in an electronic format, and emailed to Employment Tax – Workload Selection and Delivery (ET-WSD). Scanned documents should be reviewed to confirm they are complete and legible prior to emailing to ET-WSD. Copies of the forms must also be uploaded as a workpaper in Issue Management System (IMS) to the relevant issue Standard Audit Index Number (SAIN). Secure email the completed Forms 4669 and Form 4670 to *SBSE ET WSD Case Closing Packages (sbse.et.wsd.case.closing.packages@irs.gov) with the subject "Forms 4669 – Tax Period(s) 20XX12." TE/GE employees keep secured Forms 4669 and Form 4670 with the case file. For further instructions TE/GE employees refer to IRM 4.70.13.9.5.6.1, Delinquent Forms 1099 Identified in Examination.

(9) For instructions on report writing, processing, and Form 5344 completion for IRC 3402(d) examination abatements, see:

• IRM 4.23.10.15.2, Examination Procedures for IRC 3402(d) and IRC 3102(f)(3) Relief,

• IRM 4.23.10.15.3, Examination Report Forms for IRC 3402(d) and IRC 3102(f)(3) Abatements, and

• IRM 4.23.10.17, General Procedures for Adjusting the Employee Share of FICA/RRTA Taxes Including Additional Medicare Tax (AdMT) for Form 1040.

(1) If Forms 1099-NEC, Nonemployee Compensation were timely filed with respect to workers who were reclassified as employees, IRC 3509(a) generally applies:

1. FITW is computed at the rate of 1.5 percent with no abatement available under IRC 3402(d).

2. The employer's liability for FICA is computed at the rate of 20 percent of the employee's share, plus the entire employer's share.

3. Relief under IRC 6521 does not apply.

IRC 3509(a) Example:		Percentage
Employer share of FICA		7.65%
20% of Employee share of FICA (.20 * 7.65%)		1.53%
Total FICA		9.18%
FITW = 1.50% of wages		1.50%
Total IRC 3509(a) Percentage		10.68%

Reminder: If the wages paid exceed the social security wage base, this rate will need to be separated between the rate for social security tax and Medicare tax.

Note: An employer is responsible for withholding 0.9 percent AdMT from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. There is no employer share of AdMT. Under IRC 3509(a), 20 percent of the AdMT rate of 0.9 percent equals 0.18 percent of wages subject to AdMT (that is, wages that exceed $200,000).

(2) If required Forms 1099-NEC were not filed as required, IRC 3509(b) applies:

1. The FITW rate becomes 3 percent with no abatement available under IRC 3402(d).

2. The FICA liability is the employer's share plus 40 percent of the employee's share. Relief under IRC 6521 does not apply.

   Note: If the employer’s failure to file Forms 1099-NEC was due to reasonable cause and not willful neglect, the higher rates of IRC 3509(b) do not apply and the lower rates of 3509(a) are applied. See IRC 3509(b)(1). This application may include the failure to file Forms 1099-NEC for a corporate officer or in the case of employees being treated as partners.

IRC 3509(b) Example:		Percentage
Employer share of FICA		7.65%
40% of employee share of FICA (.40 * 7.65%)		3.06%
Total social FICA		10.71%
FITW = 3.0% of wages		3.00%
Total IRC 3509(b) Percentage		13.71%

Reminder: If the wages paid exceed the social security wage base, this rate will need to be separated between the rate for social security tax and Medicare tax.

Note: An employer is responsible for withholding 0.9 percent AdMT from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. There is no employer share of AdMT. Under IRC 3509(b), 40 percent of the AdMT rate of 0.9 percent equals 0.36 percent of wages subject to AdMT (that is, wages that exceed $200,000).

(3) Penalties:

1. For substitute for return (SFR) cases, the failure to file penalty (FTF) under IRC 6651(a)(1) and the failure to pay penalty (FTP) under IRC 6651(a)(2) are applicable if there is no reasonable cause for the employer’s failure to treat the workers as employees and to file any employment tax returns. See IRM 20.1.2, Failure to File/Failure to Pay Penalties, of the Penalty Handbook for further instructions. See also IRM 4.8.10.5.3.3, Amount of Underpayment and Penalties for Reclassified Workers - Table 3 and Table 4.

2. The FTD penalty under IRC 6656 will apply to delinquent employment taxes unless there is reasonable cause. See IRM 20.1.4, Failure to Deposit Penalty, for further instructions. However, the deposit penalty does not apply to FICA and income taxes which should have been, but were not, withheld from compensation paid to employees.

   Note: Treas. Reg. 31.6302(c)–1 states the taxes required to be deposited are those which were withheld, together with any employer tax imposed by FICA. Typically, in a reclassification situation, no taxes were actually withheld from the workers, so the deposit penalty is computed only on the employer's share of FICA. See Rev. Rul. 75–191,1975–1 C.B. 376.

3. If a taxpayer has not filed a return, the accuracy-related penalty does not apply as a substitute for return is not considered a return for this purpose.

4. If reasonable cause relief is available, a determination as to whether reasonable cause exists must be based on a careful consideration of the facts and circumstances of each case prior to the assertion of a penalty. Employment tax examiners should consider any reason a taxpayer provides in conjunction with the guidelines, principles, and evaluating factors. See IRM 20.1.1.3, Criteria for Relief From Penalties, as well as the applicable IRC section and Treasury Regulations relating to the specific penalty.

   Note: Refer to IRM 20.1.1.3.3.2.1, First Time Abate (FTA), for all eligibility criteria for penalty relief under the FTA administrative waiver. If eligibility criteria are met FTA provides administrative relief from FTF (IRC 6651(a)(1), IRC 6698(a)(1), and IRC 6699(a)(1)); FTP (IRC 6651(a)(2) and IRC 6651(a)(3)); and/or FTD (IRC 6656).

(1) Consideration of the provisions of IRC 3509 is mandatory for all determinations involving worker reclassification assessments. This includes cases involving the reclassification of corporate officers.

(2) A taxpayer cannot waive IRC 3509 when its conditions are met. However, the lower rates of IRC 3509(a) and IRC 3509(b) do not apply:

1. In cases of the employer's intentional disregard of the requirement to deduct and withhold employment taxes (IRC 3509(c)),

2. In cases where the employer deducts income tax from the wages of an employee but does not deduct FICA tax (IRC 3509(d)(2)), or

3. In cases of certain statutory employees for FICA tax purposes (IRC 3509(d)(3)).

(3) In agreed and unagreed cases, the provisions of IRC 3509 will be applied to all quarterly returns required to be filed for any completed calendar year under examination. If different rates under IRC section 3509 are applied to the same employer, the case file/workpapers should be documented to explain the reasoning for using the different rates. If the employer's failure to file Forms 1099-NEC was due to reasonable cause and not willful neglect, apply the rates of IRC 3509(a) rather than the higher rates of 3509(b).

(4) If all assessments in an examination are made using IRC 3509 rates, in addition to the required entries for Item 15 of Form 5344 (or the Individual/Bus (1 of 3) tab of the closing record in RCCMS for TE/GE), also enter reference code "079" with an adjustment amount of "0". Inputting reference code "079" with an amount of zero causes the literal "3509" to print on the transcript account. This notifies Collection that the Trust Fund Recovery Penalty is not applicable, as the assessment was made using IRC 3509 rates and there are no employee withholding taxes subject to penalty. See IRM 4.4.12, AIMS Procedures and Processing Handbook - Examined Closings, Surveyed Claims, and Partial Assessments, and various updated job aids for instructions on the completion of Form 5344.

(1) The employee's liability for FICA tax under IRC 3101 is not affected by IRC 3509. The employer is not entitled to recover from the employee any part of the tax assessed under IRC 3509. Treas. Reg. 31.3102–1(d) provides that an employee is responsible for the employee's share of FICA until it is collected from them by the employer. Since IRC 3509 bars the employer from collecting the tax from the employee, the employee remains liable for the FICA tax on their individual Form 1040 return. See Rev. Rul. 86-111, 1986-2 C.B. 176.

(2) The employee may file a claim for refund of any self-employment tax which is attributable to the reclassification. Notice 989, Commonly Asked Questions When IRS Determines Your Work Status is "Employee", provides instructions to the reclassified worker on how to file a claim for refund.

(3) The amount of SECA tax refund is offset by the amount of the employee's share of the tax imposed on the employee under IRC 3101 as a result of the application of Treas. Reg. 31.3102–1(d). The reclassified worker can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to compute the amount of FICA taxes due. It should be used as an attachment to Form 1040 or 1040X. Ultimate liability is on the employee until collected from either the employee or the employer. See Rev. Rul. 86–111.

(4) Expenses that the reclassified worker claimed on Schedule C, Profit or Loss From Business (Sole Proprietorship), are eliminated by the worker's reclassification, but may be deductible for certain employees on Form 2106, Employee Business Expenses. Due to the suspension of miscellaneous itemized deductions subject to the 2 percent floor under IRC 67(a), only Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and/or employees with impairment-related work expenses, may file Form 2106. The employee's adjustments to income for self-employed health insurance, self-employed SEP, SIMPLE, and qualified plans, and one-half of the self-employment tax, are also eliminated.

(5) The disallowance of business expenses for a reclassified worker will potentially increase taxable income and federal income tax.

(6) Any additional federal income tax will offset the SECA tax refund.

(7) If the period of limitations for the SECA tax or FICA tax is expired, IRC 6521 mitigates this by allowing the refund/payment.

(1) The IRS is responsible for enforcement of the filing of tax returns as well as collection of taxes under the Railroad Retirement Tax Act (RRTA). See Chapter 22, "Railroad Retirement Tax Act", of the IRC.

(2) Under the Railroad Retirement Act (RRA), creditable compensation and retirement-survivor benefits are based on a two-tier structure: Tier 1 and Tier 2. Railroad retirement taxes under the RRTA are also computed using the tier structure. Tier 1 is the railroad retirement equivalent of social security wages and benefit amounts. Tier 2 resembles private pensions.

(3) Instead of paying FICA, railroad employers and employees pay RRTA taxes. These taxes are collected and deposited throughout the year but are not reported quarterly on Form 941. They are reported annually on Form CT-1, Employer's Annual Railroad Retirement Tax Return. Railroad employee representatives file Form CT-2, Employee Representative's Quarterly Railroad Tax Return, to pay Tier 1 and Tier 2 taxes as provided in IRC 3211 and IRC 3213 on compensation received for services performed as an employee representative. FITW is not reported on the Form CT-1 or Form CT-2. Railroads are required to report FITW on the quarterly Form 941.

(4) The IRS is responsible for assessing and collecting FICA, FUTA, and RRTA taxes. However, it is not responsible for Railroad Unemployment Insurance Act (RUIA) taxes. A railroad employer is subject only to RUIA and not FUTA for railroad employees. If an employer audit results in a conversion from FICA tax to RRTA tax and FUTA tax returns have been filed up to that point, the examiner may only correct the FUTA liabilities. It is the railroad employer's responsibility to reconcile both unemployment accounts and correct the RUIA.

(5) There are times when the employer status as a railroad may be unclear. The employer, employees, or others may ask either the Railroad Retirement Board (RRB) or the IRS to determine its status as a railroad. The RRB issues a Board Coverage Determination (BCD) to outline this opinion. The IRS may also render an opinion on the status of an employer as a railroad. The Office of the Associate Chief Counsel - Employee Benefits, Exempt Organizations, and Employment Tax (EEE) may rule on the employer status as a railroad in a Private Letter Ruling (PLR). In addition, the Office of the Associate Chief Counsel (EEE) had previously issued informal opinions to the appropriate campus function indicating if it concurred with RRB BCD opinions, so that the appropriate filing requirements could be entered. However, beginning in 2009, this task was transferred to the Campus function to make the independent determination regarding the taxpayer's filing requirements based on the information provided by the RRB. In most cases, the Office of Associate Chief Counsel had concurred with RRB's determination regarding railroad status based on the information provided. The Campus function will consult with the Office of Division Counsel (TEGEDC) in any unclear cases.

(6) IRC 6103(l)(1)(C) authorizes disclosure of returns and return information concerning RRTA to the RRB for administering the RRA. If the adjustment is for RRTA, Campus Compliance Services, Centralized Case Processing (CCP), will forward copies of all RRTA tax audit results, assessments, or abatements to the RRB Chief Financial Officer. Only RRTA information is permitted to be disclosed to the RRB. Contact your local IRS disclosure office if you need to disclose additional information.

(7) If a taxpayer erroneously pays RRTA tax when it should have paid FICA tax, or vice versa, the erroneous payment of the one tax is credited against the other. See IRC 3503. Treas. Reg. 31.3503-1 and the regulations under IRC 6205, IRC 6402, and IRC 6413 provide the proper procedures for correcting these errors. Note that Treas. Reg. 31.3503-1 has not been updated to refer to Form 941-X instead of Form 843. See Treas. Reg. 31.3503-1.

(8) If an employer erroneously paid FICA taxes with respect to the remuneration of employees for services which are held to be covered under the Railroad Retirement Tax Act, RRTA returns must be filed for each return period involved. The taxable compensation paid to all employees involved and the employer tax and employee tax applicable must be reported on such returns. The correct original Form CT-1 and/or Form CT-2, adjusted Form CT-1X, amended Form CT-2, or an employment tax report must be prepared. In addition, credit must be claimed for the amount of FICA tax (both the employer and the employee portions) erroneously paid for corresponding return periods, and all of the wages erroneously reported for the employees on FICA returns must be corrected on an accompanying Form 941-X for each period. See Treas. Reg. 31.6205-1(b)(2)(ii) and the Instructions for Form 941-X. In addition, the employer will be required to file Form W–2c, Corrected Wage and Tax Statement, in order for the Social Security Administration (SSA) to correct the employee's earnings record.

1. Treas. Reg. 31.3503–1 requires the employer to file a claim for the FICA tax in accordance with Treas. Reg. 31.6402(a)-2. Though the regulation states the claim should be filed on Form 843, Form 941-X should be used instead. If the employer fails to file a claim or files a protective claim for FICA tax, then the examiner should recommend the assessment of the full amount of RRTA tax to avoid statute problems.

2. Only the net RRTA tax liability will be assessed after the credit for FICA tax has been applied. The delinquency penalty provisions do not apply as long as the taxpayer mistakenly and in good faith paid FICA taxes on the remuneration involved. For the same reason, and in order to avoid double taxation, it has been the practice of the IRS to grant relief in such cases by permitting the crediting of one tax against another when the period of limitations on refunds or credits has expired with respect to any erroneously or mistakenly paid taxes. The rates under RRTA are higher than under FICA. Therefore, no net refund is generally involved in this transaction.

3. If Form 940 returns have been filed for years that are the subject of conversion from FICA tax to RRTA tax, see IRM 4.23.8.7.3 below.

(9) If an employer erroneously paid RRTA taxes with respect to the compensation of employees for services which are held to be covered under the FICA, FICA tax returns must be filed for each return period involved. The wages paid to all the employees involved and the applicable tax must be reported on the appropriate return, either an original Form 941 and/or Form 941-X. In addition, credit must be claimed for RRTA employer and employee taxes erroneously paid for the corresponding return periods using Form CT-1X. See Treas. Reg. 31.6205-1(b)(2)(iii) and the instructions for Form CT-1X. To the extent the credit for RRTA tax exceeds the liability for FICA tax, the excess will be refunded to the extent that refund is not barred by the statutory period of limitations on refunding of tax. See IRC 3503 and Treas. Reg. 31.3503-1 and 31.6402(a)-2. To the extent the underpayment of FICA tax exceeds the credit for RRTA tax, the net FICA tax will be assessed.

(1) If the examination of multiple periods results in an over-assessment for any period, the examiner will follow these procedures:

1. Verify that the error causing the over-assessment was not corrected in a subsequent period.

2. If the error was properly corrected by the employer in another quarter, verify this fact and make comments in the workpapers or the examination report.

3. If the error was not corrected, inform the taxpayer of the option to make an adjustment or file a claim for refund using Form 941-X.

4. If the employer elects to file a claim, secure the claim and determine the amount allowable. The secured claim may be on Form 941-X or may be an informal claim. Procedures for the examination of claims should be followed in these cases. See IRM 4.23.13, Employment Tax - Adjusted Returns, Abatements and Claims. The amount of claim allowable will be reflected on Form 4668. An explanation of adjustment will be prepared to inform the employer of the amount of the claim allowed. The explanation may be in the other information of Form 4666 or prepared on Form 886-A.

5. If the employer does not agree with the over-assessment, prepare the report to show that the taxpayer does not wish the adjustment to be made.

(1) If, during any return period, an employer:

1. Collects from an employee more than the correct amount of AdMT withholding (IRC 3102),

2. Repays the amount of the over-collection to the employee, and

3. Obtains a written receipt showing the date and the amount of the repayment before the return for such period is filed with the IRS and before the end of the calendar year in which the over-collection was made,

(2) If, in any return period in a calendar year, an employer collects from any employee more than the correct amount of AdMT under IRC 3102 and the employer pays the over-collection to the IRS, and if the employer discovers the error within the calendar year in which the wages were paid, the employer may correct the error. The employer must repay or reimburse its employees in the amount of the over-collection prior to the end of the calendar year in which the wages were paid. See Treas. Reg. 31.6413(a)-1(a)(2). The employer may correct the overpayment through an interest-free adjustment by filing an adjusted return (for example, Form 941-X). See Treas. Reg. 31.6413(a)-2(b )(2). Form W–2 or Form W-2c shall be prepared so as to adequately reflect the adjustments.

(1) Any overpayment of AdMT withholding paid to the United States Treasury during the return periods of one calendar year is not adjustable if the error is discovered in a subsequent year, or if the employer does not repay or reimburse its employees in the amount of the over-collection before the end of the calendar year in which the wages were paid, unless it is attributable to an administrative error. An administrative error is any error that does not change the amount of AdMT that was withheld. Only transposition or basic math errors, such as addition, subtraction, and multiplication computations, in which the amount reported does not agree with the amount withheld from an employee’s wages, are administrative errors. In addition, the employer may not claim a refund or credit of the overpayment on a Form 941-X unless the amount of such overpayment was not withheld from an employee's wages.

(2) If an examiner discovers an overpayment in a prior calendar year and no adjustment was made and no claim filed, the examiner will allow the overpayment for refund only to the extent the overpayment was an administrative error and not deducted or withheld from an employee's wages.

(3) If an adjustment was made on a return for a period in one calendar year to correct an overpayment on a return for a period in another calendar year, where the overpayment was not actually withheld the examiner will:

1. Adjust the return on which the adjustment was made by increasing the AdMT withholding reported by the amount of the adjustment, and

2. Include the overpayment on the examiner's report for the period in which the overpayment was made.

(1) In accordance with IRC 3401(d)(1) and the holding of the Supreme Court in Otte v. U.S., 419 U.S. 43 (1974), 1975-1 C.B. 329, a trustee in bankruptcy is an employer for purposes of income tax withholding and withholding the employee’s share of FICA. This is because the trustee in bankruptcy has control of the payment of wages.

(2) As the payer, the trustee is obligated to prepare and file Form 941 and to prepare, file, and distribute the related Form W–2 for each wage claimant. Furthermore, Otte has been extended to provide that the person having control of the payment is also an employer for purposes of the employer’s share of FICA and FUTA. See Lane Processing Trust v. United States, 25 F.3d 662 (8th Cir. 1994), and re Armadillo Corp., 410 F. Supp. 407 (D. Col. 1976), aff’d, 561 F.2d 1382 (10th Cir. 1977). Withholding and employment taxes incurred by the bankruptcy estate are entitled to be paid as administrative expenses under Bankruptcy Code section 503(b)(1)(B).

(1) Title XII of the Social Security Act provides for advances to states which are in need of supplementary funds for the payment of unemployment compensation benefits. If the advances are not repaid in full within the specified period, employers in affected states will have their credit against the FUTA tax reduced as provided by IRC 3302(c)(2). The amount collected because of the reduced credit is applied against the outstanding balances of the respective state(s).

(2) The IRS certifies actual collection data to the Financial Management Service (FMS) and the Department of Labor (DOL). The FUTA state credit reduction amount is derived from information on Form 940.

(3) After the close of each taxable year, the IRS receives certifications made by the Secretary of Labor to the Secretary of the Treasury relating to the approval of state unemployment compensation laws and with respect to additional credit allowance, in accordance with IRC 3303(b)(1) and IRC 3304(c). Announcement of such certifications is published annually in the Internal Revenue Bulletin.

(4) For the purpose of the additional credit allowance and in accordance with Treas. Reg. 31.3302(b)–2, the IRS receives, at the close of each taxable year, a letter of certification from each state disclosing the highest rate of contributions applied under the state law in the calendar year. Unless the IRS advises to the contrary, area offices will assume that the highest rate of contributions applied in a calendar year under the law of any state was not lower than 5.4 percent. If, in the case of any state, notification is received that the highest rate applied under the state law was lower than 5.4 percent, the amount of the additional credit computed with respect to such state will be reduced accordingly.

(1) In the case of an insolvent taxpayer or where the estate of any deceased debtor, in the hands of executors or administrators, is insufficient to pay all the debts due from the deceased, the taxpayer's right to pay the state and take credit against the federal tax has been discontinued. Accordingly, once priority attaches under 31 USC 3713, payments of the assets in the custody of the fiduciary into a state unemployment fund cannot serve to reduce FUTA tax liability.

(2) If doubt exists in any case regarding the allowance of credit under the FUTA credit provisions, the advice of the TEGEDC area counsel attorneys should be requested.

(1) Railroads are not covered under the FUTA. Instead they have their own unemployment compensation system referred to as the RUIA. Although the IRS is responsible for FUTA, FICA and RRTA, it is not responsible for RUIA. RUIA filings, taxes, collections, and benefits are controlled solely by the U.S. RRB. A railroad employer is always subject to RUIA and never to FUTA for railroad employees.

(2) If an employer erroneously paid FUTA tax with respect to the remuneration of employees for services which are covered under the RUIA, the examiner will notify the employer that they are entitled to a refund of FUTA and recommend the over-assessment of the FUTA tax. As the IRS does not have jurisdiction over RUIA taxes, FUTA payments cannot be transferred to RUIA. The employer needs to work with the RRB to pay RUIA separately.

(1) If during an examination it is determined an overpayment of FUTA tax was reported, prepare an examination report showing the over-assessment.

(2) If a refund of FUTA tax is based on credit allowable for contributions paid under the unemployment compensation laws of a state, no interest is allowable on the refund. In those cases, indicate on Form 3198 or RCCMS 3198-A. (Refer to IRC 6413(d)).

(1) In order to correctly process cases with an adjusted Form 940 examiners must provide the appropriate Case Processing Support unit with the following information:

1. Total tax adjustment and the state code being adjusted,

2. Wage adjustment and the state code being adjusted,

3. Total corrected Form 940 wages, and

4. Credit reduction wages, credit reduction amount and the state code(s) for the state(s) subject to credit reduction (if applicable).

(2) When a FUTA examination results in a change of wages (increase or decrease), report the change in Item 15 of Form 5344 (or the Individual/Bus (1 of 3) tab of the closing record in RCCMS for TE/GE) by inserting a three character reference code and the rounded dollar amount of the change in wages. (This will equal Line 2 of Form 4667, Examination Changes – Federal Unemployment Tax Examination Closing Record). The reference code will be a "W" followed by the state abbreviation sanctioned by the United States Postal Service, (for example, "WCA" for California or "WIN" for Indiana). If adjustments are made to more than one state, the wage adjustment amount(s) attributed to each state will be entered.

(3) When a FUTA examination results in a change in tax (increase or decrease), report in Item 15 of Form 5344 (or the Individual/Bus (1 of 3) tab of the closing record in RCCMS for TE/GE) by inserting a three character reference code and the rounded dollar amount of the tax change. (This will equal Line 8 of Form 4667). The reference code will be a "T" followed by the state abbreviation as described in (2) above, for example, "TUT" for Utah. If adjustments are made to more than one state, the tax adjustment amount(s) attributed to each state will be entered.

(4) Use the top two lines for wage and tax increases. Enter the code on the left and the dollar amounts on the right of Item 15. Enter decreases on the bottom two lines in the same manner.

(1) If, during any return period, an employer collects from an employee more than the correct amount of FITW and repays the amount of the over-collection to the employee and obtains a written receipt showing the date and the amount of the repayment before the return for such period is filed with the IRS and before the end of the calendar year in which the over collection was made, the employer will not report on any return or pay to the IRS the amount of the over-collection.

(2) If, in any return period in a calendar year, an employer collects from any employee more than the correct amount of FITW under IRC 3402 and the employer pays the over-collection to the IRS, and if the employer discovers the error within the calendar year in which the wages were paid, the employer may correct the error. The employer must repay or reimburse its employees in the amount of the over-collection prior to the end of the calendar year in which the wages were paid. See Treas. Reg. 31.6413(a)-1(b)(2). The employer may correct the overpayment through an interest-free adjustment by filing an adjusted return (for example, Form 941-X). See Treas. Reg. 31.6413(a)-2(c)(2). Form W–2 or Form W-2c, Corrected Wage and Tax Statement, will be prepared so as to adequately reflect the adjustments.

(1) Any overpayment of income tax withholding paid to the United States Treasury during the return periods of one calendar year is not adjustable if the error is discovered in a subsequent year, or if the employer does not repay or reimburse its employees in the amount of the over-collection before the end of the calendar year in which the wages were paid, unless it is attributable to an administrative error. An administrative error is any error that does not change the amount of income tax that was actually deducted and withheld. Only transposition or basic math errors, such as addition, subtraction, and multiplication computations, in which the amount reported does not agree with the amount actually deducted and withheld from an employee’s wages, are administrative errors. In addition, the employer may not claim a refund or credit of the overpayment on a Form 941-X unless the amount of such overpayment was not withheld from an employee's wages.

(2) If an examiner discovers an overpayment in a prior calendar year and no adjustment was made and no claim filed, the examiner will allow the overpayment for refund only to the extent the overpayment was an administrative error and not deducted or withheld from an employee's wages.

(3) If an adjustment was made on a return for a period in one calendar year to correct an overpayment on a return for a period in another calendar year, where the overpayment was not actually withheld the examiner will:

1. Adjust the return on which the adjustment was made by increasing the FITW reported by the amount of the adjustment, and

2. Include the overpayment on the examiner's report for the period in which the overpayment was made.

(1) In certain circumstances, IRC 6521 can mitigate the effects of an expired period of limitations in the case of FICA and SECA taxes. IRC 6521 does not provide a mechanism to assess FICA or SECA taxes but instead provides limited mitigation of the expiration of the assessment statute of limitations for FICA or SECA taxes when a taxpayer's employment status has been corrected and either self-employment income is incorrectly treated as wages and FICA taxes are paid, or wages are incorrectly treated as self-employment income and SECA taxes are paid. IRC 6521 mitigates these types of errors by providing a reduction or offset of the amount erroneously paid by the amount due, or of the amount actually due by the amount erroneously paid, despite the expiration of the limitations period as to one of the taxes. Refer to Rev. Rul. 78–127, 1978–1 C.B. 436, when dealing with mitigation issues under IRC 6521.

(2) Examiners are advised to take a conservative approach and protect the FICA tax statute rather than rely on mitigation rules. See IRM 25.6.22.6.10.1, Employment Taxes – Employee Share of FICA.

(1) Employers will be advised to prepare Form W–2 or Form W–2c, whichever is applicable, to report the amount of wage adjustments for each individual who was affected by the employment tax examination. Since no income taxes were withheld from the employee's wages as a result of the examination, no income taxes should be reported on delinquent Form W–2 or Form W-2c statements in Box 2.

(2) When the employee FICA is paid by the employer, the employee receives credit for the employee FICA tax and the employer is instructed under regulations under IRC 6205 how to collect the employee FICA tax from the employee. Corrections should be made by the employer to the corrected wages on Form W-2 and/or Form W-2c in box 1, Wages, tips other compensation, box 3, Social security wages, and box 5, Medicare wages and tips. Additional employee FICA tax paid by the employer should be reported in box 4, Social security tax withheld, and box 6, Medicare tax withheld, as applicable.

(3) Examiners will solicit Form W–2 or Form W-2c, and Form W–3 or Form W-3c, from the employer at the completion of an agreed employment tax examination. The employer should be given a reasonable time to prepare the wage statements. Penalties for Failure to File and Failure to Furnish must be considered even if the documents are secured. The case workpapers must be noted if reasonable cause penalty relief exists. See IRM 4.23.9.13.2, Wage and Tax Statements, for penalty information. See (8) below if employer is to submit the forms after the examination.

(4) If there are no reasons for a waiver of the penalties, the penalties must be proposed and processed at the same time as the employment tax examination. See IRM 4.23.8.12, Information Return Penalty Case File, for instructions.

(5) If the taxpayer does not provide the examiner with Form W-2 or Form W-2c and Form W-3 or Form W-3c at the conclusion of an agreed case, the examiner must include on Form 4668 the number of employees who should receive wage statements, the date to file and furnish the wage statements, and the address of where to send the wage statements.

(6) When Forms W-2/W-2c are secured:

1. Reconcile the FICA wages on Form W–3/W–3c to the FICA wages on Form 4668.

2. Resolve any discrepancies with the employer.

3. Annotate "Wage Statements Secured By Examiner" in the Form 4668 block regarding the filing of Forms W–2/W–2c and in the other instructions section of Form 3198 or RCCMS 3198-A.

4. Annotate in red "Delinquent Returns - Secured by Examination — Penalty Considered" across the bottom of Form W–3/W-3c. This will alert the SSA that the area office has taken appropriate action concerning the assertion of penalties under IRC 6721 and IRC 6722.

5. A copy of the Form W-3/W-3C and Forms W-2/W-2c must be uploaded to IMS and named using standard naming conventions. See IRM 4.23.4.5.5, File Naming Convention.

6. If the employer has not already done so, send the original paper Forms W-2/W-3 and W-2c/W-3c sent to SSA's Wilkes-Barre Data Operations Center (WBDOC) at the addresses listed on Form W-3 or Form W-3c with a Form 3210.

7. An employer filing Forms W-2/W-3 or W-2c/W-3c electronically must provide confirmation that SSA has received the electronic submission. The confirmation receipt should be included in the workpapers as sufficient filing substantiation.

   Reminder: Prior to January 1, 2024, if the employer is expected to file 250 or more Forms W-2 or Forms W-2c during a calendar year they are required to file them electronically. On or after January 1, 2024, the electronic filing threshold was reduced from 250 Forms W-2 to 10 informational returns. See IRM 4.23.8.11, Delinquent Forms W–2/W–2c, for additional information.

(7) Secured Forms W-2 due to conversion of independent contractor to employee:

1. Annotate "Reclassification - Employee Status" on Form 3198 or RCCMS 3198-A and on top of Form 4668. This will assist CCP in identifying for SSA any Forms W–2 that are subsequently filed by the employer.

2. Advise the employer to take prompt action in notifying their employees so that the workers will have the opportunity to file a claim for refund if they did pay self-employment tax on the same wages.

3. Provide the employer with an example of a letter they would issue which explains to the workers why they are receiving the wage statement and Notice 989. See IRM 4.23.10.8.1, Non-CSP Procedures. See IRM 4.23.10-10, Filing Instructions for Reclassified Workers, for an example of a letter that the employer could issue to employees.

(8) In some circumstances, the examiner may permit the employer to delay the submission of the forms. For example, where it is determined that reasonable cause exists, the examiner may allow the employer an extension of time to prepare the Form W–2 or Form W–2c. However, the employer must file Form W–2c by the last day of January following the calendar year in which the employer agrees to the employment tax assessment. For example, for an agreed examination completed in September 2024, the Form W–2c is to be filed by the last day of January, 2025. The employer will be instructed to file Forms W-2 or Forms W-2c directly with SSA. The instructions included with Form 4668 (see IRM 4.23.8.11, Delinquent Forms W–2/W–2c) will provide the taxpayer with how and when to properly submit the forms. The employer must furnish the forms to employees by the last day of January of the calendar year following the assessment. Other Business Operating Divisions (BODs) should consult their respective procedures.

(1) When Form(s) W-2/W-2c are not obtained from the employer at the conclusion of an agreed case, the examiner must provide instructions on Form 4668 to the taxpayer on where and when to send the completed forms. See IRM 4.23.8.11.1 (5) and (8).

(2) The examiner must prepare a "tickler file." This file will be a single Adobe (.pdf) file and will include:

• Full audit report for all applicable tax periods (Forms 2504, 4668, etc.),

• Form(s) 886-A, Explanation of Items, and

• List of employees whose wages are to be reported on the Forms W-2/W-2c. If an Excel file is available, the Excel file should be emailed to ET-WSD.

(3) The examiner will email this file to ET-WSD at *SBSE ET WSD Case Closing Packages (sbse.et.wsd.case.closing.packages@irs.gov) for monitoring with the subject Tickler File – Tax Periods 20XX03-20XX12. The examiner should review the tickler file prior to emailing to ET-WSD to confirm that all scanned documents are complete and legible. A copy of the file must be uploaded as a workpaper in IMS to the relevant issue SAIN.

(4) If an employer fails to file Forms W-2/W-2c by January 31 of the subsequent year, ET-WSD will determine if the case warrants penalty development by an examiner. If so, ET-WSD will control the case as a penalty case file and assign to the appropriate group.

(5) Efforts will be made to secure the Forms W–2/W-3 and Form W-2c/W-3 c even if penalties are asserted. If the Failure to File Penalty and the Failure to Furnish Penalty have already been assessed and the taxpayer still refuses to file the forms, the Willful Failure to File Penalty under IRC 7203 should be considered. The taxpayer's appeal rights are post-assessment.

(1) When the examiner recommends assessment of penalties for failure to file and failure to furnish Form W–2 on an employment tax case involving reclassification of workers to employee status and the case is unagreed, the appropriate Information Return Penalty Package will be prepared. When neither Forms 1099-MISC (for periods prior to 1/1/2020), or Forms 1099-NEC (for periods after 12/31/2019) nor Forms W–2 were filed, the following special procedures must be followed:

1. Prepare two forms Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and two forms Form 3645, Computation of Penalty for Failure to File Information Returns or Furnish Statements. The first set of documents should reflect Form W–2 penalty assessments and the second should reflect the Form 1099 penalty assessments (a copy of Form 3645 should not be provided to the taxpayer).

2. Both sets of documents must be uploaded to the appropriate issue SAIN in IMS and named using standard naming conventions found in IRM 4.23.4.5.5, File Naming Convention. The first set (Form W-2 penalty) is named with a descriptive phrase beginning "PRIMARY POSITION." The second set (Form 1099 penalty) is named with a descriptive phrase beginning "ALTERNATE POSITION."

   Note: For paper case file assembly, staple the first set (Form W–2 penalty) to the inside front cover and the second set (Form 1099 penalty) to the inside back cover. On the first set, attach a slip of paper indicating "PRIMARY EXAMINER POSITION;" on the second set, attach a slip of paper indicating "ALTERNATE EXAMINER POSITION."

3. On Form 4318–ET or penalty lead sheet, prepare two explanations; title the first explanation "PRIMARY EXAMINER POSITION" and the second "ALTERNATE EXAMINER POSITION." The Form 4318-ET or penalty lead sheet must be uploaded to the appropriate technical issue SAIN in IMS and named using standard naming conventions.

   Note: For paper case file assembly, prepare and attach Form 3210, Document Transmittal, to the front of Form 4318–ET or the penalty lead sheet.

4. Enter in the Special Instructions section of Form 3198 or in the "other" section of RCCMS 3198-A "Suspend assessment of information return penalties until the taxpayer's request for appeal period has expired."

   Note: If an Appeals conference is not requested, the civil penalty recommendation shown in the penalty package as the "PRIMARY EXAMINER POSITION" will be processed. If an Appeals Conference is requested, the civil penalty package with the examination case file will be closed to Appeals by Technical Services, where a final penalty determination will be made

5. Associate the penalty file with the examination case file. In IMS, the penalty case can be added as an additional return within the same IMS case as the Form 941 returns.

(1) The examiner should secure any delinquent Forms 1099 that were required to be filed during the audit years.

(2) Date stamp correspondence, envelope, transmittals, and any attached return(s) received. An acceptable "IRS Received Date" stamp must only be stamped on the face of the document in an area that does not cover taxpayer entries. Refer to IRM 3.10.72.6, IRS Received Date, for procedures on IRS received date stamping and postmark date stamping.

(3) Prepare Form 1096, Annual Summary and Transmittal of U.S. Information Returns, if it is not furnished with the Forms 1099. Write "Delinquent Returns - Secured by Examination - Penalty Considered" in red ink in the space at the bottom of the Form 1096. Enter "E" (Exam) in the first box under "For Official Use Only." This will alert the Campus that the area office has taken the appropriate action concerning assertion of penalties under IRC 6721 and IRC 6722.

(4) If there is more than one type of information return, prepare a separate transmittal Form 1096 for each type of information return.

(5) Send Form 1096 and Forms 1099 to the appropriate Campus as indicated in IRM 20.1.7.5.1, Field Examination Delinquent Information Return Procedures, via Form 3210. A copy of the Form 1096 and Forms 1099 must be uploaded to IMS and named using standard naming conventions. See IRM 4.23.4.5.5, File Naming Convention.

(6) For paper case file assembly, attach copies of the forms, including transmittals, to the workpapers.

(7) Evaluate and address whether backup withholding applies when Forms 1099 were required but not filed or furnished and the taxpayer did not have the payee’s TIN at the time of making a reportable payment.

(8) Prepare Form 5346 for recipients of Form 1099 that appear to have high income tax potential for possible income tax under-reporting. Email the Form 5346 with Form 3210 to ET-WSD at *SBSE ET WSD Referrals (sbse.et.wsd.referral@irs.gov).

(1) The examiner must complete the following actions:

1. Check the "Other" block and add "Assess Civil Penalty as Indicated on Form 8278 & Form 3645" on Form 3198 and RCCMS 3198-A.

2. Ensure all forms, letters, documents, supporting workpapers, or other transmittals are uploaded to the appropriate issue SAIN in IMS and named using standard naming conventions. See IRM 4.23.4.5.5, File Naming Convention.

(2) The examiner must confirm that Form 4318-ET or the penalty lead sheet:

• Documents the actions completed.

• Includes an explanation of why the taxpayer did not file the forms in a timely manner. Any defense by the taxpayer should be in writing and signed under penalties of perjury.

• Explains whether the failure was due to reasonable cause.

(3) For secured paper Forms 1096/1099, Forms W–2/W–3 or Forms W-2c/W-3c the examiner will:

1. Upload copies of the forms including the transmittals to the appropriate issue SAIN in IMS and name the documents using standard naming conventions.

2. Send the original paper Form 1096 and Forms 1099 to the appropriate campus (as indicated in IRM 20.1.7.5.1, Field Examination Delinquent Information Return Procedures) and original paper Forms W-2/W-3 and Forms W-2c/W-3c to the SSA according to IRM 4.23.8.11, Delinquent Form W-2/W-2c.

3. Include transcripts or a copy of the tax return(s) under audit for the year(s) of the delinquent information returns in the case file. Generally, these will be Form 941.

4. Prepare Form 5346 for recipients of Form W-2/W- 2c and/or Form 1099 that appear to have high income tax potential for possible income tax under-reporting. Email the Form 5346 with Form 3210 to ET-WSD at *SBSE ET WSD Referrals (sbse.et.wsd.referral@irs.gov). A copy of Form 5346 will be retained with the workpapers in the penalty case file.

(1) In addition to the instructions found in IRM 4.23.8.12.1, Information Return Penalty Case File Assembly, and IRM 20.1.7, Penalty Handbook – Information Return Penalties, the following actions must be completed for paper case files.

(2) The examiner will staple Form 3198 or RCCMS 3198-A to the front of the folder.

(3) The examiner will include the following in the inside of the folder:

• Form 8278 (for internal use only)

• Form 3645

• Form 4318–ET or penalty lead sheet and supporting workpapers

(1) When taxpayers file Forms 1099, the IRS reviews them for:

• Missing TINs

• Obviously incorrect TINs

• Mismatched names and TINs

• Unassigned TINs

(2) If there are errors, the IRS will notify the payor of these errors by sending notification CP2100. See Rev. Proc. 93-37, 1993-2 C.B. 477. The CP2100 notifies a payor that they may be responsible for backup withholding, and is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs.

• Small filer: Paper CP2100A Notice, less than 50 error documents

• Mid-size filer: Paper CP2100 Notice, 50 to 249 error documents

• Large filer: CD or DVD data file CP2100, over 250 error documents

(3) The CP2100 includes instructions to the payor to provide a "B" Notice to each payee whose Name/TIN combination and account number in the payor’s records matches the combination that IRS identified as incorrect.

(4) The "B" Notice informs the payee that the Name/TIN combination furnished to the payor does not match IRS or SSA records and describes the steps the payee must take to stop or prevent backup withholding. If this is the only notification of a Name/TIN mismatch received by the payor with respect to the account during the past three years, the "B" Notice, referred to as a "first B Notice," instructs the payee to provide a signed Form W-9, Request for Taxpayer Identification Number and Certification, (or acceptable substitution) to the payor to stop or prevent backup withholding.

(5) The payee should return the Form W-9 (or acceptable substitution) within 15 business days, or within 30 business days of the date of the CP2100 Notice. Once the Form W-9 (or acceptable substitution) is received, the payor should compare and update his records, if necessary, and backup withholding is not required.

(6) If the payee does not provide the Form W-9 (or acceptable substitution) within 30 business days, the payor must begin backup withholding by the 30th business day after the date of the CP2100 Notice.

(7) If the payor receives a second notice with respect to an account within three years from the date of the first CP2100 Notice with respect to that account, Treas. Reg. 31.3406(d)-5(g) requires the payor to send the payee another "B" Notice, referred to as a "second B Notice." In response to a "second B Notice," a copy of a social security card will serve as validation from the SSA of a name and SSN combination. Letter 147-C, EIN Previously Assigned, issued by the IRS, serves as validation for a Business Master File (BMF) taxpayer as validation of the name and TIN. Under Treas. Reg. 31.3406(d)-5(g)(1)(i), a TIN certified on a Form W-9 is not sufficient to stop or prevent backup withholding for a second notice.

(8) Payors may rely upon a social security card as being correct if:

• The name and SSN combination appearing on the card differ from the name and SSN combination appearing on the "second B Notice," or

• The social security card is dated no earlier than six months prior to the date of the "second B Notice."

(9) If a payee does not have a social security card, a new or replacement card must be obtained from the SSA. See Rev. Proc. 2014-43, 2014-32 I.R.B. 273.

(10) For additional information on notice procedures, see:

• Pub 1281, Backup Withholding on Missing and Incorrect Name/TINs (including Instructions for Reading Tape cartridges and CD/DVD Formats), and

• Pub 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs (including instructions for reading CD/DVDs and Magnetic Media).

(1) A backup withholding examination consists of the determination of a taxpayer’s compliance with the CP2100 process and an analysis of whether information returns were properly filed and completed. Although the failure to file Forms 1099 does not trigger backup withholding, a payor who did not file required Forms 1099 often did not secure the payees’ TINs. Failure to secure payees’ TINs subject the payor to backup withholding.

(2) Backup withholding examinations require an in-depth review of a taxpayer's accounts payable and vendor master files to determine whether the payor solicited the payees TIN and, if so, the date(s) that the payor first solicited and received the payee's TIN. These dates determine the beginning date when backup withholding is required.

(3) In addition to the analysis of accounts and disbursements to uncover substantial payments made to individuals and entities for which no Forms 1099 were issued, additional potential issues exist where the TIN is either incorrect, (that is blank or less than nine digits) or the TIN does not match the name of the payee. This may be identified through the backup withholding notice process. See IRM 4.23.8.14.1, Overview of Backup Withholding Notices.

(4) The examiner should request a payer master file transcript (CC PMFOL) for a summary of the payor's information returns by year, type, and dollar amount. A PMFOLB shows the number of Forms 1099 filed with missing, unassigned, and mismatched TINs as well as the years that payor received a CP2100 Notice.

(5) Before determining whether a payor is subject to backup withholding, examiners must first consider whether a potential worker classification issue exists with regard to the payees. If the payees are determined to be employees, backup withholding is not applicable even if the payor would have been subject to backup withholding based on failing to secure the payees’ TINs. Failure to consider the worker classification issue first may provide the payor with a prior audit safe haven under section 530 for subsequent year.

(6) After the examiner has determined the payor has received a CP2100 Notice based on review of the PMFOLB transcript, the examiner may request a recreate of the CP2100 Notice. For more information on requesting a recreate of the CP 2100 Notice see IRM 4.23.8.14.2.1, Examiners Requesting Recreates of CP2100 and CP2100A.

(7) All references to employment tax procedures for the withholding of income tax on wages, except for special rules related to IRC 3509 rates or CSP, apply to backup withholding. Consequently, payors are liable for the payment of any backup withholding required to be deducted and withheld under IRC 3406.

(8) The report writing instructions for examinations of backup withholding are contained in IRM 4.23.10.10.9.1, Form 4668-B and IRM 4.23.10-4, Form 4668-B, Report of Examination of Withheld Federal Income Tax:

1. Use Form 4668-B

2. The applicable tax rate is 24 percent effective 2018.

3. If the examination involves other employment taxes in addition to backup withholding, a Form 4668 will be prepared to reflect the other results of the examination.

(9) If notices or billings are generated from the campus regarding backup withholding compliance measures, campus' review of any records regarding these actions does not constitute the examination of any federal tax return.

(10) The backup withholding assessment under IRC 3406 is subject to the abatement provisions of IRC 3402(d). Examiners are authorized to accept and consider any Form 4669 submitted before the case is closed from the group. A separate form must be obtained from each payee for each year and is signed under the penalties of perjury. These completed forms must have every line item completed (Part 1 by the payor and Part 2 by the payee), and be accompanied by Form 4670 prepared by the payor. If any information is omitted from a Form 4669, it must be returned to the payor for correction, as it is the responsibility of the payor to obtain properly completed forms from payees. Follow IRM 4.23.8.4.3, Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination.

(11) If the examination is closed but the tax has not been paid, advise the taxpayer to submit the completed Forms 4669 and Form 4670 to the campus where the Form 945 is filed, along with a copy of the Form 4668-B from the examination, for consideration of the IRC 3402(d) abatement.

(12) If the examination is closed and the tax paid, advise the taxpayer to submit a Form 945-X, Adjusted ANNUAL Return of Withheld Federal Income Tax or Claim for Refund, attaching the completed Forms 4669 and Form 4670, along with a copy of the Form 4668-B from the examination, for consideration of the claim under IRC 3402(d).

(13) Additional information on backup withholding is found in:

• Treas. Reg. 31.3406

• Training Course 34103-002, Technical Basic Employment Tax Training

• ITM course 53472, SBE-SP-ET Backup Withholding