4.23.12. Delinquent Return Procedures

(1) In the interest of reducing multiple contacts with taxpayers, examiners will determine whether the taxpayer is fulfilling all Federal tax obligations during the course of either a compliance check or the examination of an assigned return. This IRM describes procedures for delinquent and substitute for returns.

(1) Internal Revenue Code Subtitle C:

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

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

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

• Chapter 24, Federal income tax withholding (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 Policies and Authorities, 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 Policies and Authorities, 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 responsible for the procedures and updates addressed in this IRM.

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

(3) Chief, Employment Tax Examination, is responsible for ensuring examiners follow the guidance included in this IRM.

(1) Program Goals: The processes and procedures provided in this IRM are consistent with the objectives or goals for Employment Tax - Examination that are addressed in IRM 1.1.16.5.3.3, Employment Tax Examination and for Employment Tax Policy, found in 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 commonly used acronyms and their definitions:

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

(2) Other helpful information sources include:

• The SB/SE Knowledge Management home page for Employment Taxes https://portal.ds.irsnet.gov/sites/vl014/pages/default.aspx.

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

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

• The web site "Exam Guidance Procedures" at: https://portal.ds.irsnet.gov/sites/vl014/lists/exam%20guidance%20procedures/landingview.aspx contains information relating to employment tax case procedures.

(3) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, 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. Its job is to protect taxpayers’ rights by striving to ensure that every taxpayer is treated fairly and knows and understands their rights under the TBOR. TAS offers free help to taxpayers, including when taxpayers face financial difficulties due to an IRS problem, when they are unable to resolve tax problems they have not been able to resolve on their own, or when they need assistance to address an IRS system, process, or procedure that is not functioning as it should. TAS has at least one taxpayer advocate office located in every state, the District of Columbia, and Puerto Rico.

(5) Examiners should consider the disclosure and privacy provisions when preparing agreed and unagreed case reports. For further information, see the Privacy, Government Liaison and Disclosure (PGLD) maintained knowledge base at https://portal.ds.irsnet.gov/sites/vl003/pages/default.aspx.

(1) For delinquent information returns and employee wage statements, refer to:

• IRM 4.23.8.10, Delinquent Forms W-2/W-2c,

• IRM 4.23.8.10.4, Delinquent Forms 1099 Secured by Examiner,

• IRM 4.23.9.13, Penalties for Failure to File Certain Information Returns or Furnish Certain Statements,

• IRM 20.1.7.5, Delinquent Information Return Procedures, and

• Document 13267, Field Procedures for Securing and Processing Information Return Penalties.

(1) The procedures for requesting controls will vary depending on how the case will be worked.

(2) For delinquent returns procedures, the examiner will complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, to establish a non-filer via ERCS and include the following entries:

(3) For Substitute for Return (SFR) procedures, the examiner will complete Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, to establish a non-filer via ERCS and include the following entries:

(4) To secure controls when a taxpayer does not have a valid Employer Identification Number (EIN) for BMF:

• Request that the taxpayer submit Form SS-4, Application for Employer Identification Number, to secure an EIN.

• Establish Non-Master File (NMF) controls using the SSN of the primary owner of the business as follows: "XXXXXXXXX-D". The NMF control provides AIMS/ERCS controls until an EIN is secured and allows the examiner to charge time to the case on ERCS.

• After the EIN is secured, close the NMF control with a Disposal Code (DC) "28" and establish controls using the EIN. Use the option on ERCS to "Change a Non-Master File Return to a Master File Return" (see the ERCS Group Handbook chapter entitled "Correct or Display Records"). This option on ERCS will automatically submit an AM424 to request controls on the master file record and send an AMSOC with Disposal Code "28" to close the non-master file record on AIMS. This option also allows the time reported on the non-master file record and the start date of the non-master file record to automatically move to the master file record that is created.

Note: If a foreign entity is involved, see IRM 21.7.13.3.2.7, Foreign Entities - Definitions and Instructions, for procedures unique to these entities.

(5) If the taxpayer refuses to request their own EIN, contact the campus Entity Control Section to obtain the assignment of a permanent EIN using procedures outlined in IRM 21.7.13.3.8, Receiving EIN Applications From Field Compliance.

(6) Once the EIN is secured, follow the procedures for establishing controls using either (2) or (3) above.

• SFR controls cannot be requested on a temporary or invalid EIN.

• The case cannot be forwarded to Centralized Case Processing (CCP) for closing unless an EIN has been secured.

(1) Examiners securing delinquent returns will advise the taxpayer that all taxes, penalties, and interest are immediately due.

(2) The processing of a secured delinquent return will vary depending on what exam controls, delinquent or SFR controls, were used when establishing the tax period . The type of controls used will determine how to proceed with working and closing the exam.

(3) If the examiner secures a delinquent return from the taxpayer after establishing controls using the Delinquent Return procedures outlined in IRM 4.23.12.4.1(2), refer to IRM 4.4.9.4, Delinquent Return Secured - No TC 150 Posted, for initial processing instructions for the delinquent return. Once the steps contained in IRM 4.4.9.4, through IRM 4.4.9.4.12.2, Assessment Statute Expiration Date (ASED), are completed, mail the delinquent return, Form 13133, Expedite Processing Cycle, and Form 3210, Document Transmittal, to Submission Processing at the appropriate campus listed in Exhibit 4.23.12-1, Delinquent Return Campus Mailing Addresses.

• If additional adjustments are necessary or the case cannot be closed within seven days, process the delinquent return as noted above in IRM 4.23.12.4.1(2) and continue to work on audit development. Wait until the delinquent return has posted (TC 150) before submitting the case for final closure.

(4) If a valid delinquent return is secured after establishing SFR TC 150 is posted to master file (IRM 4.23.12.4.1(3)), the examiner must decide if the return submitted is substantially correct or if additional adjustments will be necessary to properly reflect wages.

(5) Upon receipt of a delinquent return after a SFR TC 150 has been established:

1. Prepare Form 3177, Notice of Action for Entry on Master File, for each delinquent return. Enter an "X" in the box marked other and write "TC-971 AC-282 – Return Received Date MM/DD/YYYY" to update the Master File. Refer to IRM 4.4.9.6.1, TC 971 Action Code (AC) 282.

2. Fax the Form 3177 to the Centralized Case Processing office at the number provided: https://portal.ds.irsnet.gov/sites/vl051/Lists/ExamCentralizedCaseProcessingCCP/DispItemForm.aspx?ID=8. 

   Note: The Form 3177 will result in updates to Master File to show that exam secured a delinquent return and updated the statute to 3 years from the date received.

   Note: For additional information, see IRM 4.4.9.6, Delinquent Return Received After SFR TC 150 Posted at Master File and following.

(6) If the return is substantially correct and the case can be closed within seven days of receipt see IRM 4.23.12.4.2.1, Return is Substantially Correct.

(7) If a valid delinquent return is secured after establishing SFR controls and the case cannot be closed within seven days of receipt of the signed return, or if it is determined that the submitted return is not substantially correct process the delinquent return as a partial assessment within seven days of receipt. See IRM 4.23.10.15, Partially Agreed Cases, for partial assessment procedures.

1. Fully develop any additional issues identified. Prepare and issue a report via normal procedures reflecting appropriate adjustments or no-changes.

   Note: Because the delinquent return was processed as a partial agreement, the audit report will only include adjustments made to the amounts shown on the delinquent return.

2. Close the case using the appropriate disposal code.

3. Examiners will document in the comment section of the Form 3198, Special Handling Notice for Examination Case Processing, that the delinquent return was considered during the exam.

(1) IRC 6020(b) procedures ONLY apply when case files involving non-filed returns are closed without receipt of a signed return from the taxpayer. This is true no matter what type of controls (delinquent and/or SFR) were originally established.

(2) When signed returns are not received by the conclusion of the examination, the examiner must certify in accordance with IRC 6020(b) that the adjustments are to be treated as the return filed by the taxpayer for purposes of determining the Failure to Pay (FTP) penalty. See IRM 20.1.2.3.10, Substitute for Return—IRC 6651(g).

(3) In SFR cases where a valid delinquent return is NOT submitted during the examination, the examiner must follow the IRC 6020(b) Certification Procedures outlined below:

1. Prepare one Form 13496-A, IRC Section 6020(b) Certification for Employment Tax Returns, for each examined tax period where a signed return has not been submitted. Each quarterly Form 941 (and/or yearly Form 940, Form 943, Form 944, Form 945) constitutes a separate tax period.

   Example:

   Example #1
   If there are three years of employment taxes for which SFRs for Forms 940 and Forms 941 must be prepared, fifteen Forms 13496-A must be prepared (twelve Forms 941 and three Forms 940).
   On each Form 13496-A, fill in the information requested in the top four boxes.
   On each Form 13496-A, check the box for the appropriate form (Form 4667 or Form 4668) that supports that SFR. For example, if an SFR is being prepared for a Form 940, the box for Form 4667 will be checked.
   Each Form 13496-A must be signed and dated. The date must be on or after the date of the 30-day letter or agreed report.

2. Behind each Form 13496-A, place one copy of either Form 4667 or Form 4668 (whichever applicable) covering each examined tax period for which a Form 13496-A has been prepared. This becomes the SFR package.

   Example:

   Example #2
   The SFR package for a one-year exam that includes four Forms 941 and one Form 940 would look like this (listed top to bottom):
   Form 13496 – A, for Form 941 20XX03
   Form 13496 – A, for Form 941 20XX06
   Form 13496 – A, for Form 941 20XX09
   Form 13496 – A, for Form 941 20XX12
   Form 13496 – A, for Form 940 20XX12
   Form 4668 covering the four Forms 941 quarters
   Form 4667 covering the one Form 940

3. Staple, clip, or rubber-band the SFR package together.

4. The entire SFR package will be placed on top of the remaining workpapers and documents.

(4) It is no longer necessary to include a copy of the Form 886-A, Explanation of Items, when using the Form 13496-A, nor is it necessary to make multiple copies of the supporting Forms 4667 and Forms 4668.

(5) Form(s) 5344 and attachments used by Centralized Case Processing (CCP) are no longer part of the SFR package. They are, however, still completed for use in final closing and will be the first document(s) behind the SFR package in the file.

(6) IRC 6020(b) procedures apply to all types of closures, in other words agreed, unagreed, or appealed.

(7) IRC 6020(b) procedures will never apply when a valid return is received from the taxpayer. This applies even if SFR procedures have already been initiated or if the valid return does not fully report tax due.

(8) The SFR is treated as a return filed by the taxpayer under IRC 6651(g) for purposes of determining the amount of the failure to pay penalty under IRC 6651(a)(2) or IRC 6651(a)(3). See IRM 4.23.9.10, Assertion of Failure to Pay Penalty, and IRM 4.23.9.11, Penalty for Failure to Make Timely Deposits, for procedures on failure to pay and failure to deposit penalties.

(9) Normal appeal procedures apply to all unagreed SFR cases.

(10) If the taxpayer executes a waiver the signature on the Form 2504 does not constitute a return under IRC 6020(a) and therefore does not commence the running of the assessment statute of limitations. See Rev. Rul. 2005-59. A waiver consists of the following:

• Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment Tax Adjustments Not Subject to IRC 7436),

• Form 2504–T, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment (Employment Tax Adjustments Subject to IRC 7436), or

• Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment Tax Adjustments Not Subject to IRC 7436; Worker Classification or Section 530 Issued Not Addressed in this Exam),