4.10.5. Required Filing Checks

(1) This IRM provides the responsibilities that examiners should understand and apply in the performance of required filing checks.

(1) The Director, Examination Headquarters, is the executive responsible for providing policy and guidance for Field, Speciality, and Campus examination operations and ensuring consistent application of policy, procedures and tax law to effect tax administration while protecting taxpayers’ rights. See IRM 1.1.16.5.5, Examination Headquarters, for additional information.

(2) The Director, Examination Field and Campus Policy, reports to the Director, Examination Headquarters, and is responsible for the delivery of policy and guidance that impacts the field examination process. See IRM 1.1.16.5.5.1, Examination Field and Campus Policy, for additional information.

(3) Field Examination General Processes, which is under the Director, Examination Field and Campus Policy, is the group responsible for providing policy and procedural guidance on standard examination processes to field employees. See IRM 1.1.16.5.5.1.1, Field Examination General Processes, for additional information.

(4) All examiners must perform their professional responsibilities in a way that supports the IRS Mission. This requires examiners to provide top quality service and to apply the law with integrity and fairness to all.

(5) Examiners and their managers and clerical support staff should thoroughly acquaint themselves with the procedures and information contained in this IRM.

(1) Periodic program reviews are conducted to:

• Assess the effectiveness of specific programs within Examination or across the organization,

• Determine if procedures are being followed,

• Validate policies and procedures, and

• Identify and share best/proven practices.

(1) The following table lists acronyms and their definitions used throughout this IRM.

(1) The following table lists commonly used terms and their definitions used throughout this IRM.

(1) The Required Filing Checks Knowledge Management page contains a variety of job aids.

(2) The IRMs in Part 4, Chapter 10 (see table below) contain many of the procedures and guidelines examiners will use related to required filing checks.

(3) In addition to the list in the table above, there are other relevant IRMs examiners will use, including, but not limited to:

• IRM 4.4, AIMS Procedures and Processing Instructions

• IRM 4.12.1, Nonfiled Returns

• IRM 4.23, Employment Tax

• IRM 4.24, Excise Tax

• IRM 4.25, Estate and Gift Tax

• IRM 4.26, Bank Secrecy Act

• IRM 4.46, LB&I Examination Process

• IRM 25.6, Statute of Limitations

(1) Examiners must verify that all returns within the taxpayer’s sphere of influence are filed. To decrease taxpayer burden, examiners should use internal sources of information (see IRM 4.10.5.2.2, Internal Sources of Information) to complete required filing checks. Returns include, but are not limited to:

• Prior and subsequent year returns.

• Related income tax returns.

• Information returns (e.g., Form 1099, Form 926, Form 1095-B, etc.).

• Employment tax returns.

• Gift tax returns.

• Excise tax returns.

• Pension plan returns.

(1) Internal sources can be used to determine the taxpayer’s compliance with filing requirements. Refer to the Internal Sources of Information website article, for additional information. Examples of internal sources of information include:

• Compliance Data Environment (CDE). See IRM 4.103.1, CDE Application and Procedures.

• Corporate Files On Line (CFOL). See IRM 3.13.5.101, Overview Corporate Files On-Line (CFOL) Command Codes.

• Integrated Data Retrieval System (IDRS). See IRM 2.3.1, Section Titles and Command Codes for IDRS Terminal Responses.

  Note: Additional IDRS commands are listed in IRM Exhibit 4.10.4-2, Internal Sources of Information.

• Modernized e-File (MeF). See IRM 21.2.1.22, Modernized e-File (MeF/TRDB).

• yK1. See the yK1 Link Analysis Tool website article.

• CDW Knowledge Graph Environment (CKGE). See the CDW Knowledge Graph Environment (CKGE) website.

• Case Built File (CBF) Information (LB&I only). See IRM 4.46.3.2.4(1)(c), Planning - Return Assignment.

(2) After analysis of internal sources of information, if additional return information is needed, the return should be requested from either the taxpayer or the Campus for inspection.

(1) Examiners are responsible for assessing the audit potential of all returns within their area of expertise. Area of expertise is the area of tax in which examiners have been formally trained. If it is determined that additional returns require audit, examiners are responsible for expanding the audit to include those returns, unless otherwise instructed by management. Discussions with management must be documented. See IRM 4.10.5.2.4, Case File Documentation. Examiners should verify that returns are not currently under examination before opening them as part of their audit.

(2) For returns outside the examiner’s area of expertise, examiners should verify filing and discuss with their manager to determine audit potential. If audit potential exists, examiners should ensure these issues are examined by a specialist or with specialist assistance. Returns may be referred to a specialist using the Specialist Referral System (SRS) or by preparing a manual referral. See IRM 4.10.2.7.5.1, Specialist Referral System (SRS) - Online Referrals, and IRM 4.10.2.7.5.2, Referrals Made Outside of SRS, for guidance on which process must be used. Additionally, see IRM 4.10.5.14, Form 5346, Examination Information Report, for guidance regarding use of Form 5346.

(1) Examiners are required to document the facts, procedures, audit techniques used, management involvement, and conclusions reached in the completion of the required filing checks. This documentation must include:

• Actions taken to verify that all required returns (e.g., prior and subsequent, related, information, etc.) were filed including the internal sources of information (e.g., IMFOLI/BMFOLI, etc.) reviewed for each return.

  Note: Secured internal documents do not need to be included in the case file; however, the sources of information (e.g., IMFOLI/BMFOLI, etc.) reviewed and the conclusion of the review must be documented in the case file.

• Analysis completed (e.g., comparative analysis, related transactions, etc.) to evaluate audit potential of prior, subsequent and related returns.

• A narrative reflecting the conclusion reached as to whether or not to expand the examination to the prior, subsequent and related returns.

(2) Examiners’ written narrative must include an explanation if the audit is not expanded when:

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

• Large, unusual, or questionable items are identified in the prior, subsequent or related returns (including related transactions), or

• Delinquent return is not secured and a substitute for return (SFR) is not filed for a specific reason identified in IRM 4.12.1, Nonfiled Returns.

  Note: See IRM 4.12.1.10.6, No Return Secured - Refund Years; IRM 4.12.1.10.7, No Return Secured - No Filing Requirement/Little or No Tax Due; IRM 4.12.1.10.8, No Return Secured - Year(s) Outside Enforcement Period.

(3) Documentation of required filing checks is made as follows:

1. SB/SE field examiners must use the mandatory administrative Lead Sheet 200, Multi-Year and Related Returns. Any supporting workpapers must be indexed to Lead Sheet 200. See IRM 4.10.9.6.1, Administrative Lead Sheets, and IRM 4.10.9.7, Workpapers.

2. SB/SE employment tax examiners should refer to IRM 4.23.4.2.2, Workpaper Preparation: General, and IRM 4.23.4.3, Guide for Examiners Using ETLS - Employment Tax Lead Sheets, for documentation requirements and use of the Multi-Year and Related Returns Lead Sheet - Employment Tax.

3. SB/SE estate and gift tax examiners use the return specific Mandatory Case Examination Lead Sheet to document required filing checks. See IRM 4.25.1.2.4, Required Filing Checks, for documentation requirements.

4. SB/SE excise tax examiners should refer to IRM 4.24.25.5.8, B200-1 - Required Filing Checks Prior/Subsequent Period Returns, Related Excise Tax Returns, Filing Verification, for required check sheets.

5. LB&I examiners should refer to IRM Exhibit 4.46.3-5, Compliance Checks Tool, and use the Standard Audit Index Numbering (SAIN) 713 mandatory compliance checks workpaper (IRM 4.46.6, Workpapers and Reports Resources). If an examiner waives a specific compliance check, the workpapers should document the reasoning and analysis used to support the conclusion reached.

(4) Examiners must exercise caution when documenting consideration of related (e.g., shareholders, partners, etc.) and spin-off cases (e.g., relatives, employees, employers, subcontractors, return preparer penalty cases (see also IRM 4.10.9.7.10, Documenting Return Preparer Penalty Consideration)). The examiner should document what IDRS research was completed, but should not include the results of the research of the spin-off case in the taxpayer’s case file since the information about the spin-off case should not be available to the taxpayer.

(1) Tax years are closed using the original return or an electronic print, such as TXMOD, IMFOL/BMFOL, RTVUE/BRTVU, CDE, TRDBV, TRPRT, or LIN (LB&I Imaging Network–LB&I only). A copy of a return is not required to close a prior, subsequent, or related tax return. If a copy of a return has been secured and examined, it must be properly identified as such and retained in the case file.

(2) Original returns are generally required in certain cases (e.g., fraud, delinquent returns, and jeopardy assessments) closed to Appeals. See IRM 8.20.5.4.1.1, Non-Docketed Case Types Requiring an Original Return, for exceptions to requiring original returns.

(1) If examiners find that a return within the taxpayer’s sphere of influence has not been filed, they should solicit the delinquent return, except when fraud or willful failure to file is indicated. Nonfilers must be brought current in their filing requirements following the guidelines in Policy Statement 5-133, Delinquent returns—enforcement of filing requirements. Refer to IRM 1.2.1.6.18, Policy Statement 5-133.

(2) Examiners should be alert to nonfiled related (e.g., shareholders, partners, etc.) and spin-off returns (e.g., relatives, employees, employers, subcontractors, return preparers/ representatives, etc.). Examples include:

• If the taxpayer is involved in a family business, determine if family members engaged in the operation or ownership of the business have filed returns.

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

• If the taxpayer has employees and/or subcontractors (e.g., return preparer, lawyer, etc.), determine if required information returns have been filed (e.g., Form W-2 or Form 1099) and if not, verify whether the employees and/or subcontractors have filed. See IRM 4.10.5.6, Information Returns, for information on verifying non-employee payments.

• If the taxpayer is a corporation, determine if key shareholders have filed returns. For the purpose of this section, key shareholders are those shareholders that can control or influence the operation of the business.

(3) All secured delinquent returns must be reviewed for audit potential. If the return is outside the examiner’s area of expertise, examiners should discuss the return with their manager to determine audit potential. If audit potential exists, examiners should ensure the issues are examined by a specialist, worked with specialist assistance, or referred to the appropriate function.

(4) If the taxpayer is uncooperative and does not provide the examiner with the delinquent return(s), examiners must consider SFR procedures, with managerial approval. Refer to IRM 4.10.5.4, Related and Spin-Off Returns, for additional information on these returns and to IRM 4.4.9, Delinquent and Substitute for Return Processing, for substitute for return (SFR) and delinquent return procedures. Also see IRM 4.12.1, Nonfiled Returns, for SFR, delinquent return, and refund return procedures.

(5) Managerial approval is required prior to opening an examination on any related or spin-off case. If an examination appears warranted and is not initiated (e.g., taxpayer resides outside of the examiner’s area, return is outside examiner’s area of expertise, etc.), an information report is appropriate. Form 5346 should be prepared, submitted to the group manager for approval, and if approved, forwarded to Planning and Special Programs (PSP). See IRM 4.10.5.14, Form 5346, Examination Information Report, for further guidance.

(6) Examiners must document their actions and conclusions. If the examiner determines that there is no filing requirement, this must be documented in the case file. See IRM 4.10.5.2.4, Case File Documentation.

(7) See IRM 4.12.1, Nonfiled Returns, for additional guidance.

(1) Examiners must complete a comparative analysis using prior and subsequent years to evaluate the audit potential of the year under examination as well as years where the statute of limitations has not expired. The comparative analysis aids in identifying:

• Large, unusual, and questionable (LUQ) items (e.g., income, expense, or credit items)

• A pattern of noncompliance (e.g., high car and truck expenses, passive activity losses, or potential IRC 183 issue)

• Missing schedules (e.g., Schedule E missing in a subsequent year and no sale of rental property reported)

• Inconsistencies between different years (e.g., cost of goods sold is a higher percentage of gross income than in other years)

(2) Examiners should use their professional judgement to determine which technique, or combination of techniques, provides a complete analysis and aids in evaluating the returns. Examiners can:

• Review a CDE print, if available.

  Note: A CDE print alone is generally not adequate for a comparative analysis if the print does not cover the prior and subsequent years as well as all years where the statute of limitations has not expired or if the return contains material non-transcribed items (e.g., Schedule E, Schedule C "Other Expenses", etc.).

• Review transcripts and other internal sources of information (e.g., RTVUE, BRTVU, TRDBV, MeF).

  Note: See IRM 4.10.5.2.2, Internal Sources of Information, and the Internal Sources of Information website article, for information on the research tools available.

• Request and review tax returns (e.g., taxpayer’s retained copies or requisitioned original returns).

  Note: Examiners should only request returns from the taxpayer if internal sources of information do not provide enough detail and should only requisition an original return from files if the taxpayer does not provide a copy of it when asked.

(3) When completing the analysis, examiners must document actions taken and conclusions reached, whether the analysis is completed by reviewing or preparing documents. When additional tax years are filed, the returns need to be evaluated for audit potential. Examiners should use their professional judgement to determine if the additional years need to be added to the comparative analysis.

• The actions taken must include what items were evaluated and should address any line items that significantly changed between years.

• Examiners may document the analysis completed on the CDE print or transcript (e.g. check marks, circling numbers, conclusion reached, etc.) or may prepare an additional supporting workpaper (e.g., Excel workbook).

  Reminder: Several workbook templates are available in Report Generation Software (RGS) to assist examiners.

  Note: For business returns, also see IRM 4.10.4.3.3.8, Business Ratio Analyses (Individual Business Returns), and IRM 4.10.4.3.4.8, Business Ratio Analyses (Corporations and Other Business Returns).

• All analyses must be retained in the case file.

• Examiners must comment on prior and subsequent years. See IRM 4.10.5.2.4, Case File Documentation, for additional information.

(1) If the examination of a prior or subsequent year return(s) is warranted, the return(s) will be audited concurrently with the assigned return. Examiners must consider the 26/27 month examination cycle before picking up prior or subsequent year returns for audit. See IRM 4.10.2.2.2, 26/27 Month Examination Cycle.

(2) Examiners must use IDRS (e.g., command codes IMFOL/BMFOL, TXMOD, AMDISA, etc.) to determine if the return is currently under examination or has been selected for audit. If the research reveals the return is:

1. Not under examination, AIMS control must be established using Form 5345-D, Examination Request - ERCS (Examination Returns Control System) Users. See IRM 4.4.16.2, Preparation and Use of Form 5345-B or Form 5345-D. The Form 5345-D must be included in the case file. If the case file is split, a copy of the Form 5345-D should be in the primary case file and the original included with the year of the request.

2. Under examination, examiners must discuss the case with the group manager. If it is determined that the case should be transferred, refer to IRM 4.11.29, Transfer of Returns Open for Examination, and IRM 4.10.2.12, Transfers of Returns Prior to the Initial Appointment.

(3) Examiners must notify the taxpayer orally or in writing of the decision to audit the returns. For written notification, use Letter 5968, Prior or Subsequent Year Pickup. When expanding the examination, examiners determine the scope of the examination (IRM 4.10.2.7.1.2(4), Determining the Scope of an Examination–Current, Prior and Subsequent Years) and must document their actions and conclusions (IRM 4.10.5.2.4, Case File Documentation).

(4) If indicators of fraud are identified, examiners should follow the procedures in IRM 25.1.2, Recognizing and Developing Fraud.

(5) If an issue concerning a return not yet due to be filed is identified, Form 5346 must be prepared, submitted to the group manager for approval, and if approved, forwarded to PSP. See IRM 4.10.5.14, Form 5346, Examination Information Report, for additional information.

(1) To identify and analyze related and spin-off returns and obtain information about them, examiners:

1. Can use internal sources of information to obtain information for known related and spin-off returns that were filed. See IRM 4.10.5.2.2, Internal Sources of Information, and the Internal Sources of Information website article and use command codes TRDBV, RTVUE, or BRTVU and the yK1 Link Analysis Tool.

2. Can use external asset locator/people locator tools to determine related businesses, asset ownership, and real estate. Visit the SPDER ReferenceNet research website to determine the current electronic asset locator/people locator tools available (e.g., Accurint).

3. Should ask about the taxpayer’s involvement with partnerships, limited liability companies (LLCs), trusts, corporations, and related family transactions.

4. Must determine whether transactions between related parties are correctly accounted for on all impacted returns. Correct reporting of flow-through items should be observed, whipsaw issues checked, and proper reporting of related transactions verified. For example, alimony versus child support, loans or dividends from a corporation to a shareholder, and character and limitation of K-1 items from flow-through entities (e.g., partnerships, S-Corporation, etc.).

5. Must evaluate large, unusual, and questionable items, such as income, expense, or credit items, for audit potential, independent of the entity under examination.

6. Should determine, from a classification perspective, whether the return warrants examination.

7. Should ask questions to probe for possible participation in domestic and offshore abusive tax schemes and listed transactions. If a listed transaction surfaces during an audit, examiners should contact the Technical Advisor/Issue Specialist. For additional information see IRM 4.32.1.4.3, Coordination of Listed Transactions.

(2) Examiners should discuss the related or spin-off return with the group manager if:

1. A new or unique abusive promotion or transaction is identified during an audit. An Abusive Transaction Advisor should be included in the discussion. See IRM 4.34.1.2, Identification of Emerging Issues.

2. Indicators of fraud are identified. See IRM 25.1.2, Recognizing and Developing Fraud, for additional procedures concerning fraud development.

3. The return involves a tax-exempt entity engaging in what appears to be a prohibited tax shelter transaction (i.e., listed transaction, confidential transaction, or transaction with contractual protection). If applicable, the manager should ensure the return is referred to TE/GE on Form 5666, TE/GE Referral Information Report. See IRM 4.32.3.8.1.3, Information Sharing, for information on how to prepare the referral.

(1) If a related or spin-off return has audit potential, the examination should be expanded to include the return(s) and the related or spin-off taxpayer should be notified of the audit. See IRM 4.10.2.8, Initial Contact: Overview. AIMS control must be established using Form 5345-D, Examination Request - ERCS (Examination Returns Control System) Users. See IRM 4.4.16.2, Preparation and Use of Form 5345-B or Form 5345-D. The Form 5345-D must be included in the case file of the related or spin-off return.

(2) If a return has a filing requirement and has not been filed, see IRM 4.10.5.2.6, Returns Not Filed.

(3) If a material issue concerning a return not yet due to be filed is identified,Form 5346 should be prepared, submitted to the group manager for approval, and if approved, forwarded to PSP. See IRM 4.10.5.14, Form 5346, Examination Information Report, for additional information.

(1) Examiners should inspect internal sources of information for each employment tax return filed up to and including the last quarter for which an employment tax return was due. See IRM 4.10.5.2.2, Internal Sources of Information, and use the following command codes:

• INOLE—provides filing requirements

• BMFOLI—provides history of filing and nonfiling

• BMFOLU—provides a summary of W-2s filed

• IRPTRI—provides detail of each W-2 or 1099-MISC filed

• BMFOLE—shows if the taxpayer has marked any returns as "final"

• BRTVU, BMFOLR, BMFOLT, and TXMOD—provide return information for the Form 94X series of returns

(1) Employment tax examinations should be conducted concurrently with the income tax audit. See Exhibit 4.10.5-1, Pro Forma Employment Tax Check Sheet.

(2) An employment tax audit is warranted if:

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

2. Delinquent returns are secured (IRM 4.23.12, Delinquent Return Procedures, and IRM 4.12.1, Nonfiled Returns).

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

(3) IRM 4.23, Employment Tax, provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting and payment of employment taxes. It provides guidance and procedures for employment tax issues and is the primary source of authority for the administration of employment tax audits. See also the Employment Tax Knowledge Base for the Employment Tax Examiner’s Report application and user guide.

(4) If the employment tax audit is outside the examiner's area of expertise, the examiner should refer the case to an Employment Tax Specialist using the SRS. See IRM 4.10.2.7.5, Referrals for Specialists. The referral should be made as early as possible in the income tax examination process to reduce taxpayer burden and ensure that the employment tax audit is conducted concurrently with the income tax examination.

(1) If an employment tax audit is not initiated, the examiner should refrain from asking questions regarding the classification of a worker. These questions suggest that the examiner is conducting an audit on worker classification and could establish a safe haven available under section 530. See IRM 4.23.5.3, Section 530 of the Revenue Act of 1978. This does not preclude the examiner from asking general questions regarding deductions for contract labor, including the reason the contractor was engaged and the work performed. However, if general questions lead the examiner to believe a worker has been misclassified, then an employment tax audit should be initiated before asking additional questions.

(2) If an employment tax audit involving worker classification is initiated by the examiner, the first step is to determine if the taxpayer qualifies for section 530 relief (Section 530 does not apply to issues other than worker classification). See IRM 4.23.5.3.1, Section 530 Relief. Pub 1976, Do You Qualify for Relief under Section 530?, must be provided to the taxpayer before initiating any worker classification examination.

1. If the taxpayer qualifies for relief, the examiner should terminate the employment tax audit with respect to the worker classification issue. However, it is important to remember that even if an employer is entitled to relief under section 530, workers determined to be employees are employees for other purposes of the Code. See IRM 4.23.5.3.4, Effect of Section 530 on Workers.

   Example: The examiner must determine if the taxpayer has 50 full-time or full-time equivalent employees where the taxpayer would be an applicable large employer (ALE) under the Affordable Care Act (ACA). See IRM 4.10.5.13, Health Coverage Information Returns, for more information on the ACA.

2. If the taxpayer does not qualify for relief, the examiner must accurately determine the status of the worker as either an independent contractor or employee. See IRM 4.23.5.4, Independent Contractor or Employee.

(3) In addition to section 530 considerations, there are other very specific procedures to follow in worker classification issues. Examiners should review IRM 4.23, Employment Tax, and Worker Classification Resources on the Employment Tax Knowledge Base to become familiar with these procedures or refer the case to an Employment Tax Specialist as described in IRM 4.10.5.5.2(4), Examination of Employment Tax Returns, if warranted.

(1) To ensure the timely and correct filing of information returns, examiners must ascertain that all information returns required to be filed by the taxpayer are filed for all open periods. Generally that includes the prior and all subsequent periods, as well as the period under audit.

(2) At a minimum, examiners must:

1. Determine the potential filing requirements for information returns. SeePub 1220, Specifications for Electronic Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, for a list of payments requiring the issuance of information returns. Certain line items of the income tax return are often indicative of an information return filing requirement.

   Reminder: Expenses on the income tax return under audit must be reviewed for information return filing requirements and the findings documented even if the expenses are not audited. If the taxpayer complied with the 1099 filing requirements in the year under audit, and review of the prior and subsequent income tax returns does not identify additional expense items requiring issuance of a Form 1099, an in-depth analysis to determine potential filing requirements is not necessary for the prior and subsequent years.

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

3. Question the taxpayer regarding their internal procedures for information reporting.

4. Verify all reporting requirements have been met.

(3) Various Forms 1099 may be required to be filed. For each form's filing requirements, refer to the form instructions. Listed below are some Forms 1099 required to be filed by businesses:

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

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

3. Form 1099-C, Cancellation of Debt

4. Form 1099-DIV, Dividends and Distributions

5. Form 1099-G, Certain Government Payments

6. Form 1099-INT, Interest Income

7. Form 1099-K, Payment Card and Third Party Network Transactions

8. Form 1099-MISC, Miscellaneous Income

9. Form 1099-NEC, Nonemployee Compensation

10. Form 1099-Q, Payments from Qualified Education Programs (Under Section 529 and 530)

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

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

(4) For incomplete and nonfiled Forms 1099, consider the applicability of backup withholding. Refer to IRM 4.10.5.6.3, Backup Withholding.

(5) Examiners must document their actions and conclusions. See IRM 4.10.5.2.4, Case File Documentation.

(1) IRC 6721, IRC 6722, and IRC 6723 provide civil penalties for persons who fail to:

1. File correct information returns (IRC 6721),

2. Furnish correct payee statements (IRC 6722), or

3. Comply with other information reporting requirements (IRC 6723).

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

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

(4) See IRM 20.1.7.5.1, Field Examination Delinquent Information Return Procedures, for the procedures to follow when securing information returns and/or the assessment of information return penalties. See Employment Tax Knowledge Base on the employment tax website for the Information Returns Penalty Reporting Writing Program. Information return penalties are not subject to notice of deficiency procedures. All cases are forwarded to Centralized Case Processing at closing for assessment of the penalties.

(1) IRC 3406, generally requires payers to withhold income tax on reportable payments of interest, dividends, and other payments, including payments reported on Form 1099-MISC and Form 1099-NEC under any of the following conditions:

1. The payee fails to furnish a TIN to the payer in the manner required.

2. The Secretary notifies the payer that the TIN furnished by the payee is incorrect.

3. There has been a notified payee under-reporting described in IRC 3406(c).

4. There has been a payee certification failure described in IRC 3406(d).

(2) Before backup withholding is addressed, the examiner must first determine whether or not a worker is an employee. See IRM 4.10.5.5.3, Worker Classification Issues. If the worker is an employee, backup withholding is not applicable and if asserted, could establish a safe haven.

(3) When a backup withholding issue exists, examiners will discuss the case with the group manager to determine whether a backup withholding or worker classification audit is warranted or if a referral to an employment tax specialist should be considered.

(4) When Form 1099 has not been filed by the taxpayer for a properly classified independent contractor, examiners should consider whether a condition requiring backup withholding exists along with the Form 1099 penalty case.

(5) Additional information and procedures on backup withholding are available in IRM 4.23.8.13, IRC 3406–Backup Withholding. Also see Backup Withholding on the Employment Tax Knowledge Base.

(1) Financial Crimes Enforcement Network (FinCEN) information is useful in identifying cash activity that may not be accurately reported on the income tax return. In addition, it may lead examiners to discover sources of unreported income, often derived from criminal activity. See IRM 4.26.4.5.3, Examiner Uses of FinCEN Query, for additional information.

(2) To request information, examiners use Form 10509, FinCEN Query (FCQ) Request, and submit the form to the Exam FinCEN Super Users listed on the website.