4.2.6. Examination of Employee Returns

(1) This IRM provides procedures on the examination of employee returns and information regarding the employee’s responsibility for timely filing, accurately reporting, and paying of all taxes.

(1) The following provide the authority for topics referenced within this IRM:

• IRS Restructuring and Reform Act of 1998 (RRA) sections 1203(b)(8) and 1203(b)(9),

• 5 CFR 3101.106(b)(2), and

• IRM 1.2.1.5.7, Policy Statement 4-9, Highest integrity expected.

(1) The Director, Examination Headquarters, is the executive responsible for providing policy and guidance for SB/SE Examination employees 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 examination process. See IRM 1.1.16.5.5.1, Examination Field and Campus Policy, for additional information.

(3) Field Examination General Processes (FEGP), 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 employees are responsible for timely filing, accurately reporting, and paying all taxes.

(5) Income tax examiners and their managers should thoroughly acquaint themselves with the information contained in this IRM, as well as other resources, such as those listed in IRM 4.2.6.1.5, Related Resources, below.

(1) The following table lists and defines acronyms commonly used throughout this IRM:

(1) The following IRMs provide additional information:

• IRM 1.2.1.5.7, Policy Statement 4-9, Highest Integrity Expected

• IRM 1.2.2.5.31, Delegation Order 4-40 (formerly DO-244, Rev. 1), IRS Employee Returns Selected for Examination

• IRM 4.1.1.6.7, Employee Audits

• IRM 4.8.4, Mandatory Review

• IRM 4.10.2, Pre-Contact Responsibilities

• IRM 4.10.5, Required Filing Checks

• IRM 4.13, Audit Reconsideration

• IRM 25.1, Fraud Handbook

(2) Helpful information can be found on the following website:

• Employee Audits

• Baltimore Technical Services

(1) Examiners should review Form 5546, Examination Return Charge-Out Sheet, on every case file to determine if it reflects the words "Employee Return." This designation can be found about one third of the way down from the top of the form. If Form 5546 is not in the case file, the examiner should secure and review IMFOLI to check for an IRS employee indicator. See Exhibit 2.3.51-12, Command Code IMFOL Output Display — Index, for codes and additional information.

(2) The examiner should also check for a project and/or tracking code. The following project and tracking codes apply to employee audits:

• Project code 0206 – Executive selections

• Project code 0207 – Treasury mandates

• Project code 0389 – New employees

• Project code 0913 – Employee audit transferred from campus

• Project code 1030 – Criminal Investigation (CI) pre-hires

• Tracking code 7569 – Employee audits

  Note: Tracking code 7569 is generally used to track an employee audit that originated in a source code (SC) other than SC 46, Employee Returns (generally SC 46 is used for the primary tax year for an employee audit; SC 40 is used for prior and subsequent tax year(s); and SC 50 is used for related returns). An example of other possible source codes are DIF (SC 20), Compliance Initiative Project (CIP) (SC 62), NRP (SC 80), etc.

(3) When special projects are initiated to address identified employee noncompliance, they may be assigned a unique project and or tracking code.

(4) If a return has not been pre-identified as an employee return and it is found to be an employee return after further inspection/examination, the examiner must notify their group manager as soon as possible. The group manager will determine whether the examiner may proceed with examining the return or whether it should be reassigned. The words "employee return" should be written at the top of the Form 5546 or the IMFOLI (when no Form 5546 is in the case file). The examiner must document actions taken on Form 9984, Examining Officer's Activity Record or Case History in RGS (see IRM 4.10.15.7.3, Case History, for additional guidance).

(5) Conversely, if a return has been pre-identified as an employee audit and the individual is no longer employed with IRS, follow the procedures in IRM 4.2.6.3.10.

(1) Examiners must ensure impartiality and independence when examining an employee return. If examiners have any reason to believe that their impartiality and independence may be questioned, they should discuss the matter with their immediate supervisor for reassignment consideration.

(2) The impartial and independent character of examinations of IRS employees and officials must be ensured. See IRM 4.1.1.6.7, Employee Audits, for guidelines on assignment of employee returns for examination.

(1) Employee audits are high priority cases and should be assigned within 10 business days of arrival into the group.

(1) When an examiner is assigned an employee return for examination and the employee is located in another post-of-duty, the examiner is authorized to travel to the employee's business, residence, or other location where the books and records are maintained. All travel costs will be borne by the examining area.

(1) An examination of an employee generally should be worked as a normal examination. The employee under examination should not be given preferential treatment or be held to a higher standard than any other taxpayer under examination.

(2) Normal pre-contact responsibilities apply to an employee audit. The examiner should use current risk-based decision tools in any decision to adjust the scope of the examination. See IRM 4.10.2, Pre-Contact Responsibilities.

(3) Normal required filing checks apply to an employee audit. See IRM 4.10.5, Required Filing Checks.

(4) Employee audits are very sensitive and require certain modifications to the examination process. The following modifications must be made:

1. The examiner should use the normal and appropriate initial appointment letter to begin the examination. See IRM 4.2.6.5 for employee interview procedures.

2. The examiner should also include Form 8111, Employee Notification Regarding Union Representation, with the initial contact letter provided to bargaining unit employees and attempt to secure a signed copy before the initial interview takes place. The Form 8111 is used to secure the employee's acknowledgement that they have been advised of their right to union representation during the interview pursuant to 5 USC 7114(a)(2)(B). If the employee does not provide a signed Form 8111, the examiner will notate "Discussed and Solicited a Signed Form 8111 — Employee Did Not Provide Signed Form 8111" on Form 8111 and proceed with the interview. See IRM 4.2.6.5(2)(a) for additional information.

3. Employee tax examinations are to be kept in an orange file folder at all times. See IRM 4.1.5.2.6, Use of Colored Folders.

(5) The employee audit website is located at Employee Audits.

(1) The return of an employee’s spouse who has filed separately should be inspected as part of the required filing checks to determine if it should be examined. A copy, RTVUE, or CDE print of the spouse’s return must be included with the employee’s return if it is not examined. See IRM 4.8.4.2.3.3, Key Points for Reviews.

(2) If the spouse’s return is examined, each Form 3198, Special Handling Notice for Examination Case Processing, should be cross referenced with the taxpayer identification number (TIN) of the related return.

(1) If facts are disclosed during the examination that indicate an employee may have engaged in any activity in violation of the rules of employee conduct, the examiner should refer to Document 12011, Internal Revenue Service Ethics Handbook, and consult with their manager.

(1) Current civil and criminal fraud procedures will be followed, where applicable. See IRM 25.1, Fraud Handbook. Certain fraud enforcement advisors (FEA) have been designated to assist with employee examinations. The FEA should be identified in the packet that accompanied the case file. If no information is available, contact the manager of FEA Group 5 or the area's employee audit coordinator.

(2) If a joint investigation is initiated with Criminal Investigation on an employee audit, the examiner should immediately contact the Field Examination General Processes analyst at: Employee Audits Contacts.

(1) Labor employee relations (LR/ER) specialists will occasionally request an update on the audit status. Their request should be directed as follows:

1. If the case was recently closed from the group and sent for mandatory review, the LR/ER specialist should contact the Baltimore Technical Services (TS) group manager.

2. If the case is assigned to an examination group, the LR/ER specialist should contact the group manager.

(1) If an individual under examination is no longer employed with the IRS, the examiner must take the following actions:

1. Notify the group manager and area employee audit coordinator of the resignation and document this activity on the Form 9984, Examining Officer's Activity Record or Case History in RGS (see IRM 4.10.15.7.3, Case History, for additional guidance).

   Note: The employee audit coordinator will have the IRS Employee Indicator on command code AMDISA changed from E to C so the case can close.

   See IRS Employee Code - AIMS in Exhibit 4.4.1-1, Reference Guide.

2. Discuss the scope of the examination with the group manager. Based on the facts and circumstances of the case, the examination scope may need to be concluded, limited, or continued as planned. See IRM 4.10.2, Pre-Contact Responsibilities.

3. Remove the employee audit project code and/or tracking code, if present, because the case is no longer subject to mandatory review, by completing Form 5348 and providing it to the area AIMS analyst. The case is no longer subject to mandatory review.

4. Check the "Other Instructions" box under the Special Features section of the Form 3198 and notate the case is no longer an employee audit.

5. For employee audits excluded from paperless electronic closure, remove the case from the orange folder.

6. Cross through the words "employee return" on the Form 5546 or on IMFOLI (when no Form 5546 is in the case file) and note the individual is no longer employed with IRS.

(2) If the case is still in Status 10 (i.e., the case has not been started), the group manager and if applicable, the examiner should decide whether to retain the case and work it or survey it using survey procedures. See IRM 1.4.40.4.6.3.2, Survey Before Assignment, or IRM 4.10.2.5.2, Procedures for Surveying Returns After Assignment, for the applicable guidance.