IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 19. Liability Determination

Section 4. CAWR Reconciliation Balancing (Cont. 1)

4.19.4  CAWR Reconciliation Balancing (Cont. 1)

4.19.4.3 
Replies

4.19.4.3.13  (05-10-2005)
Replies With PAL Indicator Present

  1. When working the reply take into consideration the reason the PAL indicator is present, as it may resolve or help to resolve the discrepancy.

    IF THEN
    The CAWR case has a PAL indicator (identified after screening) and the taxpayer replies resolving the discrepancy.

    Note:

    Take into consideration the reason the PAL indicator is present

    Note:

    This indicator is used by Automated Under Reporters (IMF)

    		 1. Prepare automated Form 6209 to adjust the appropriate amounts.
    2. Prepare Form 6494 or send copies of Forms W-3/ W-2 and/or Forms W-3c/W-2c to SSA (if appropriate).
    3. Send a 2057C closing letter on CAP.
    4. Close the case on CAP using the appropriate status/closing code.
    5. Input a TC 290 for .00 using BS 55 to the last available return (quarter) posted for the appropriate tax year.
    The CAWR case has a PAL indicator (identified after screening) the reply does not resolve the discrepancy. 1. Input the appropriate adjustment amount on the CAP detail screen with the correct tax module (quarter) changes.
    2. Send a 2057C closing letter on CAP explaining why the reply was insufficient. When we receive information resolving the discrepancy we will reconsider the adjustment to your account.
    3. Close the case on Cap with the appropriate status/closing code.
    4. Input TC 290 adjustments using BS 55 with the appropriate Reference Numbers (RN)
    5. Input TC 180 using Penalty Reason Code (PRC) 003/011 in the first position for 10% of the tax amount owed to the last available return (quarter) posted for the appropriate tax year.
    6. Monitor the case for the additional 5% Tier TC 180 with CC ACTON.

     

4.19.4.3.14  (05-10-2005)
Replies Received For Delete Cases

  1. A delete case is one which has been brought into balance at Enterprise Computing Center-Martinsburg (ECC-MTB) through various updates to the module.

    IF THEN
    A response is received and the taxpayer identifies an issue unrelated to previous correspondence 1. Correspond with the taxpayer and resolve the account according to the taxpayer's intent. 2. Otherwise, send the taxpayer a letter thanking them for their response explaining subsequent information balanced his/her account. No further information will be necessary.
    The reply is received and the case has been "deleted" on Master File. (CAP shows closing status code 11) 1. Reopen the case on Cap.
    2. Send a 2057C letter on CAP explaining IRS received additional information balancing your account. No further information will be necessary.
    3. Close the case on CAP using the appropriate status/closing code.
    4. Input a TC 290 for .00 using BS 55 to the last available return (quarter) posted for the appropriate tax year. (Unless the taxpayer is asking for the adjustment to be made to his/her account).

     

4.19.4.3.15  (05-10-2005)
Replies Indicating Sole Proprietorship

  1. A Sole Proprietorship is a business operated by the owner and as such has wage reporting requirements similar to a single member Limited Liability Corporation (LLC). The owner of a Sole Proprietorship and the single member LLCs must include all income and expenses on the owner's tax return.

    Note:

    The Sole Proprietor, who withdraws income from the business and reports total income and loss on Form 1040, acquires income from the business in the form of gains, not wages.

     

    Reminder:

    A Schedule C taxpayer (Sole Proprietor/LLC) does not give (or file) Form W-2 or file a Form 941 when the owner is the only worker.

     

  2. The wages a Sole Proprietor pays to their employees should match the Schedule C wages, the Forms W-2, and the Form 941 wages.

  3. The owner is the only one authorized to sign the tax returns unless there is an authorized POA or RAA on file. With respect to income tax returns on forms in the 1040 series, a POA entitles someone other than the owner to sign the return only under certain circumstances. See "Authority to Sign Your Return" section of Form 2848 instructions.

  4. See also IRM 21.7.13.5.4.2, Assigning Employer Identification Numbers, for more information on these types of taxpayers.

    IF THEN
    The Sole Proprietor has employees The taxpayer should show wages on Schedule C.

    Note:

    Although they are not the Sole Proprietor's wages, they are wages paid to their employees.
    If the Sole Proprietor has employees, they must file: 1. Form 941 and Forms W-2 for the employees.

    Note:

    Research CC EINAD and CC NAMEE to determine if the Sole Proprietor/LLC had a previous EIN.


    2. Send a 2057C closing letter on CAP.
    3. Close the case on CAP using the appropriate status/closing code.
    4. Input a TC 290 for .00 with BS 55 to the last available return (quarter) posted for the appropriate tax year.

     

4.19.4.3.15.1  (05-10-2005)
Decedents — Sole Proprietorship Responses

  1. FOR SSA-CAWR ONLY: If there is an indication in the response that the sole proprietor is deceased, send a letter advising of the importance of sending the Forms W-2 so that the employees may receive proper credit for the taxes already paid. Include the following in the Open Paragraph:

    Please provide the name and address of the Executor or Administrator of the decedent's estate, and the documentation for the appointment.

    1. Suspend the case for 30 days.

    2. If there is no reply at the end of 30 days, follow the procedures below for additional information and procedures to be used regarding this situation.

     

     

  2. If an IRS-CAWR response indicates that a sole proprietor is deceased, research must be done to determine the estate's representative.

    IF THEN
    For IRS-CAWR only: If the response indicates a sole proprietor is deceased, 1. Research must be done to determine the estate's representative.

    Note:

    The surviving spouse will not necessarily be the representative; this could be an executor, administrator, or anyone legally appointed to be in charge of the decedent's property and business.


    2. Research IDRS for an administrator's or executor's name and address using CC ENMOD, CC INOLE, and/or CC MFTRA.

    Note:

    If a representative was appointed for the estate, IDRS CC CFINK will show it.
    A representative's name is not found, Research Form 706 (MFT 52), United States Estate Tax Return, Form 56, Notice Concerning Fiduciary Relationship, or Letters of Testamentary attached to the taxpayer's last filed returns secured.
    The name of an executor or administrator is found: 1. Prepare Form 2363, Master File Entity Change, to update Master File when legal documentation of the taxpayer's death has been provided.
    2. For correspondence purposes, edit "DEC'D" behind the sole proprietor's name (e.g., John Smith, DEC'D) on the CAP Entity Screen.
    3. Enter the executor's or administrator's name (preceded by in care of) as a second or third name line, as appropriate.
    4. Process the Form 2363 by local procedures.
    An executor's or administrator's name is not obtained, and the response is from a personal representative who signs his/her name do the following: 1. Suspend the case.
    2. For correspondence purposes, edit "DEC'D" behind the sole proprietor's name on the CAP Entity Screen.
    3. Send correspondence to the representative, requesting the name and address of the executor/administrator and documentation of his or her appointment.
    The information requested is received: 1. Prepare Form 2363, Master File Entity Change, to update Master File when legal documentation of the taxpayer's death has been provided.
    2. For correspondence purposes, edit "DEC'D" behind the sole proprietor's name only. (e.g., John Smith, DEC'D).
    3. Enter the executor or administrator's name (preceded by in care of) as a second or third name line, as appropriate.
    4. Process Form 2363 using local procedures.
    The case discrepancy is not resolved through research or by the correspondence received: 1. Input the appropriate adjustment amount you will be assessing and the number of tax modules (quarters) adjusted on the CAP Detail Screen.
    2. Send a 2057C closing letter on CAP explaining why the reply was insufficient and request the necessary Forms to resolve the discrepancy. When the correct information is received we will reconsider the adjustment.
    3. Close the case on CAP using the appropriate status/closing code.
    4. Input a TC 290 adjustment with the appropriate money amount using BS 55 with the appropriate Reference Numbers (RN).
    5. Input TC 180 using Penalty Reason Code (PRC) 003 or 011 in the first position for 10% of the TC 290 tax amount on the last available return (quarter) posted for the appropriate tax year.
    6. Monitor the case for the additional TC 180 - 5% Tier (PNTIER) with CC ACTON.
    7. Forward the case to ACS using local procedures to accelerate processing.
    8. Input a history item on TXMODA using CC ACTON "DEC'D Sole P. Referred to ACS on IDRS" .
    9. Note: Use CC ACTON as many times as necessary to do this history item).
    10. Do not input a STAUP.
    11. Do not keep the case open solely for an entity change.

     

4.19.4.3.16  (05-10-2005)
Responses Identifying Third Party Sick Pay

  1. If the taxpayer responds and explains that the discrepancy is due to a Third Party Sick Pay reporting problem. See IRM 4.19.4.2.8.

  2. After referring to IRM 4.19.4.2.8, if the case cannot be closed, order the tax return and use the following to work the case when the return is received:

    1. If third-party sick pay wages are not reported on lines 6a and 7 of the Form 941, but the credit was taken on line 9 of Form 941, assess the sick pay wages and the full tax (12.4% for social security and 2.9% for Medicare) on the employer's account.

    2. If the employer did not report the wages or the tax, assess the sick pay wages and half the tax (6.2% for social security and 1.45% for Medicare) on the employer's account.

    3. If the employer states that there is a discrepancy for income tax withheld by the third-party, accept the employer's word. This type of discrepancy cannot be avoided and does not indicate a reporting error by the employer. If no other discrepancies exist, input a TC 290 for .00 on the employer's account.

    4. Refer to IRM 21.7, Business Tax Return and Non-Master File Accounts and Publication 15-A, Employers' Supplemental Tax Guide for any additional information for working the case that are not covered here.

     

    IF THEN
    The reply indicates Third-party Sick Pay, 1. Contact the taxpayer and secure the name and EIN of the Third Party Sick Pay provider, if it is not stated in the correspondence.
    2. Send a 2057C closing letter on CAP.
    3. Close the case on CAP using the appropriate status/closing code
    4. Input a TC 290 for .00 using BS 55 to the last available return posted for the appropriate tax year.

     

4.19.4.3.17  (05-10-2005)
Wages Earned vs. Wages Paid Replies

  1. Forms W-2 should be issued to employees for the wages actually paid during a calendar year, not the wages earned during that time. Discrepancies may result if employers report earned, rather than paid, wages on Forms W-2.

  2. If the taxpayer states that the wages were earned in the current CAWR tax year being worked, but reported on a Form 941 for a different year:

    IF THE REPLY THEN
    The tax was paid in subsequent tax year periods, (200403, 06, 09, 12 ) indicating Wages Earned vs. Wages Paid. 1. Research CC TXMODA to make sure the proper amount of tax was paid in the subsequent tax year.
    2. When payments are identified, send a 2057C Letter informing the taxpayer of the adjustment made to their account and explain that the same discrepancy situation will occur for the subsequent tax year (2004).
    3. Input the appropriate adjustment amount you will be assessing and the number of tax modules (quarters) adjusted on the CAP Detail Screen.
    4. Close the case on CAP using the appropriate status/closing code.
    5. Input (TC 291) for appropriate money amount (with a credit bar) using BS 55 to decrease the quarter to which the wages were erroneously paid on the subsequent tax year (2004).
    6. Transfer the credit amount using the appropriate payment transfer codes to the prior tax period (200312).
    7. Input (TC 298) interest free assessment using BS 55 on the prior tax period (200312) and the appropriate interest computation date or payment date
    8. Input TC 180 for .00 to suppress the penalty.

    Note:

    Refer to IRM 21.5.8, Credit Transfers and Credit transfer procedures in the handout section.

     

4.19.4.3.18  (05-10-2005)
Replies Indicating AEIC

  1. Eligible employees may receive EIC on their Form 1040 or may receive AEIC during the year from their employer.

  2. If the employer pays AEIC to the employee, this is shown as a credit on the employer's Form 941.

    Note:

    Effective March 1, 2005, the adjustment reference codes are changing. However, the AEIC reference codes are not changing.

     

  3. AEIC is indicated by Transaction Code (TC) 766 on the module.

  4. See LEM 4.19.4.3.18.

    Reminder:

    Use TC 766 to increase AEIC and TC 767 to decrease this credit.

     

  5. See LEM 4.19.4.3.18.

  6. See LEM 4.19.4.3.18.

  7. If Forms W-2c are received, but they do not resolve the discrepancy and they cause the Form W-2 AEIC to exceed the Forms 941, creating a credit owed to the employer, a Form 843, amended Form 941, or Form 941c is needed before the credit (TC 766) can be allowed on the account.

    1. Enter the net amount of the TC 29X adjustment on the CAP.

      Reminder:

      Do not add AEIC amounts to any TC 29X adjustment amount. This is a separate figure.

       

    2. See Circular E and IRM 21.7, Business Tax Return and Non-Master File Accounts, for more information on this subject.

     

  8. If Forms W-2c are received, but they do not resolve the discrepancy and they cause the Form W-2 AEIC to be less than Forms 941, creating a debit to the employer, assess the account using TC 767.

  9. Correspond with the taxpayer, explaining the adjustment.

    1. Enter the net amount of the TC 29X adjustment and the AEIC on CAP.

      Reminder:

      Do not add AEIC amounts to any TC 29X adjustment amount. This is a separate figure.

       

    2. See Circular E and IRM 21.7, Business Tax Return and Non-Master File Accounts, for more information on this subject.

     

    IF THEN
    The reply shows there is more AEIC on Forms W-2 than on Forms 941 and the taxpayer submits Forms W-2c decreasing AEIC to match the Forms 941: 1. Prepare automated Form 6209 to decrease AEIC. Do not use the minus sign.
    2. Send a 2057C letter on CAP informing the taxpayer of the adjustment.
    3. Close the case on CAP using the appropriate status/closing code.
    4. Input a TC 290 for .00 with BS 55 to the last available return (quarter) posted for the appropriate tax year.
    The taxpayer submits Form 941c or Form 843 to increase the AEIC amounts to agree with the Forms W-2: 1. Send a 2057C letter on CAP informing the taxpayer of the adjustment.
    2. Close the case on CAP using the appropriate status/closing code.
    3. Input TC 290 for .00 with a Reference Number (RN) 766 to increase the AEIC using BS 55 to the appropriate quarter(s) based on Form 941c or Form 843.
    If there is less AEIC on Forms W-2 than on Forms 941 and the taxpayer submits an amended Form 941 or Form 941c to decrease AEIC to match Forms W-2 1. Send a 2057C letter on CAP informing the taxpayer of the adjustment.
    2. Close the case on CAP using the appropriate status/closing code.
    3. Input TC 290 .00 with Reference Number (RN) 767 (with a credit bar after the $ amount) to decrease AEIC using BS 55 to decrease the appropriate quarter(s) based on Form 941c.

    Note:

    The decrease should not exceed the amount of AEIC shown on the quarter being adjusted or the adjustment will unpost. Adjust multiple quarters, if necessary, according to Form 941c).
    There AEIC on Forms W-2 are less than AEIC on Forms 941. The taxpayer submits Forms W-2c increasing AEIC on Forms W-2 to match Forms 941: 1. Prepare automated Form 6209 to increase AEIC (using the minus sign).
    2. Send a 2057C closing letter on CAP.
    3. Close the case on CAP using the appropriate status/closing code.
    4. Input a TC 290 for .00 with BS 55 to the last available return (quarter) posted for the appropriate tax year.

     

4.19.4.3.19  (05-10-2005)
Family Employment Related Case Replies

  1.  

    IF THEN
    The reply states the discrepancy is related to family employment but the age of the child is not given. Note: A child under age 18 working for a parent causes most family employment discrepancies. 1. Verify the age and date of birth of the child using IDRS CC INOLE definer S.

    Note:

    Be sure you compute the child's age for the year the wages were earned, not the year the case is being worked
    Exempt wages and non-exempt wages are reported on Form W-2. Form W-2c should be filed to correct the discrepancy.
    The child is under 18, Wages are exempt.
    The child is between 18 and 21 and the work is done in the course of the parent's trade or business. 1. Wages are subject to Social Security Taxes
    2. Prepare automated Form 6209, if appropriate.
    3. Prepare Form 6494 using correction code (. ) Attach copies of the appropriate Forms W-2 behind Form 6494 to correct SSA records.
    4. Send a 2057C closing letter on CAP.
    5. Close the case on CAP using the appropriate status/closing code.
    6. Input a TC 290 for .00 with BS 55 to the last available return (quarter) posted for the appropriate tax year.
    The child is between 18 and 21 and services are not in the course of the parent's trade or business Wages are exempt.

     

4.19.4.3.20  (05-10-2005)
Agricultural Employers (Form 943) Replies

  1. Occasionally, discrepancies occur because the employer reports wages less than $150 incorrectly. A new test to determine if employees are exempt has been added to the $2,500 test. See the training materials for a chart to help while working these cases.

  2.  

    IF THEN
    The total amount of wages paid (under $150) is the amount of the discrepancy and no tax was reported on Forms W-2. 1. Prepare automated Form 6209, if applicable.
    2. Prepare Form 6494 using the appropriate correction code.
    3. Enter the appropriate status/closing code on CAP.
    Wages (under $150) were reported incorrectly. Determine if the employee(s) with (less than $150) are subject to Social Security taxes.
    Social Security tax has been reported on Forms W-2 for agricultural wages under $150. Send a 2057C closing letter to determine if any of these employees meet the four conditions required for exemption or if the employer paid wages totaling (less than $2,500).
    The four conditions were not met, 1. The employees are subject to Social Security tax.
    2. Input TC 290 on the employer’s account for the appropriate money amount on MFT 11 using BS 55 for the appropriate tax year.
    3. Prepare automated Form 6209 to adjust the CAWR module.
    4. Prepare Form 6494 using the appropriate correction code.
    The taxpayer states all employees with wages (less than $150) are exempt: 1. Send a 2057C closing letter on CAP.
    2. Close the case on CAP with the appropriate status/closing code.
    3. Input TC 290 .00 on MFT 11 using BS 55 for the appropriate tax year.
    4. Refer to 4.19.4.3.16, Agricultural Employers (Form 943) Replies.

     

4.19.4.3.21  (05-10-2005)
Replies — Payment of Employee's Share of Social Security Taxes Paid by Employer

  1. At times, employers pay the employees' share of the Social Security Tax without withholding it from his or her wages. When this happens, there are two ways to calculate the correct amounts to be shown on the Form W-2.

  2. The taxes on the Social Security Wages are not to be included in the Social Security Wage box on Form W-2 if the employee did not have the Social Security Taxes withheld from his or her salary and the following conditions apply:

    • The employee is a household employee and the employer files Schedule H or

    • The employer files Form 943, Employer's Annual Tax Return for Agricultural Employees.

      Example:

      In 2003, a household or agricultural employee is paid $1,100. The Social Security Tax rate