IRS Publishes Revised Payroll Tax Exam Procedures

In SBSE-04-0915-0058 on “Procedures for Required Filing Checks and Scope of Employment Tax Examinations” the IRS outlined revised procedures to be followed by agents conducting payroll tax examinations.

The four-page memo contains changes that will be made to the Internal Revenue Manual IRM  Agents are instructed to follow the memorandum in the interim until those changes are placed in the manual.

In the area of “Procedural Changes” the memorandum provides the following changes:

  • The agent is to confirm that the taxpayer complied with the following:
  • Filed all required information returns (Forms 1096, 1099, etc.)
  • The taxpayer properly withheld FICA from all reportable payments
  • The taxpayer has filed all other returns, including non-payroll returns
  • In the area of the scope of an examination, the memorandum provides the following:
  • The agent is determine if the exam has been designated as a limited scope examination
  • For limited scope examinations the agent must still do the following:
  • Interview the taxpayer and tour the business
  • Complete the filing and compliance checks noted above
  • Fully develop the limited scope issue(s)
  • Prepare workpapers to support the proposed adjustment
  • If any of these steps reveal a material non-compliance issue, the agent will use his/her discretion with regard as to whether to recommend to his/her manager that the examination should be expanded.
  • For other examinations the agent will use the information obtained during the pre-audit, interview of taxpayer and review of books and records to determine the scope of the examination
  • Under the title of “Controlling the Employment Tax Returns” the memorandum provides the following:
  • Employment tax returns under exam must generally cover the entire calendar year.  Any subsidiary or related employment tax return(s) must be opened for examination as well
  • If less than all four quarters are brought into the exam, the agent must document why not all four quarters are being examined
  • Exams for a year should generally not be started until after January 31 of the following year
  • Examiners also should not examine any quarter of the current year except in unusual circumstances
  • Examiners should expand the exam into the prior and subsequent years if the issues being looked at are material and recurring or if there other large, unusual and questionable items (LUQ) items foun