This section discusses Appeals procedures for receipt, analysis, reports and closing of an employment tax case. Generally, employment tax cases come from LMSB, SB/SE, or TE/GE. All three functions use the same forms and report writing procedures.

Most of the cases received in Appeals involve employee/independent contractor issues; however, the entire range of employment tax issues can be worked. Cases involving fringe benefit issues, allocated tip income issues, withholding on certain gambling winnings, backup withholding requirements, etc. can be received by Appeals. (See IRM 4.23, Employment Tax, for multifunctional employment tax procedures.)

Section 530 of the Revenue Act of 1978 provides certain safe havens relating to employee/independent contractor employment tax issues. The applicability of Section 530 may be an issue in many of these employment tax cases. (See also Rev. Proc. 85-18, 1985–1 C.B. 518; Notice 2002-5, 2002-3 IRB 320; Training Pub 3320-102, Independent Contractor or Employee?; and IRM 4.23.5, Technical Guidelines for Employment Tax Issues.)

Appeals has jurisdiction over the following employment tax cases:

Returns filed for employment taxes and their due dates are as follows:

Form 942 was eliminated for tax years after 1994. Generally, reporting household wages is now shown on Schedule H and filed as part of Form 1040.

When an employment tax case is received, follow the same general procedures detailed in IRM 8.2.1, Pre-90-Day and 90-Day Cases, Agreed 90-Day Income Tax Cases, to acknowledge receipt of the case and verify the contents of the file.

Use the same procedures for establishing controls on AIMS and/or ACDS. The only difference is the ACDS Type Code is "EMPL" for Employment Tax Case Form 941 and Form 940.

Once the case is established send it to the Appeals Team Manager (ATM) following the same procedures found in IRM 8.2.1.

Follow the procedures detailed in IRM 8.2.1, to decide if the case is adequately developed and to do a preliminary review of the case file to determine if all returns and forms are present.

At a minimum, review the case file upon receipt to insure the following material is contained with the file:

Tax returns may be original or copies, but make sure there is a return for each tax period covered by the examination report. Cases with return copies must have transcripts attached verifying the copies are accurate.

The AO has the same responsibility in the settlement of an employment tax case as any other case. The settlement must be fair and impartial.

Employment tax issues considered by Appeals include the following:

A non-exclusive list of settlement options include:

The workpapers must contain all the appropriate information and documentation to support and explain what occurred during the Appeals process.

In cases where the correct employment status of the workers is an issue, it is essential to have a detailed and complete description of the work relationship. Include the not only a description of what work is to be completed, but also exactly how the end result is to be accomplished, i.e., an accurate detailed statement of the facts.

The same developmental principles used when developing the relief and status issue also apply to wage, employer, and employment issues.

The following subsections cover the procedures to use when the settlement results in either an agreed or an unagreed employment tax case. The subsections cover the settlement computations that are prepared and the procedures that are needed to close the case.

Settlement computations for employment tax cases are prepared by the Tax Computation Specialist (TCS) or by the Appeals Officer (AO) assigned the case.

If an employee’s cash tips total $20 or more in a month while working for any one employer, he or she is required to pay social security or railroad retirement tax on such tips. The employee reports such tip income to his or her employer. The Social Security or railroad retirement tax is then collected by the employer to the extent the employee has wages or other funds available to cover the amount of tax. If funds are insufficient to cover the social security or railroad retirement tax, the employee shows the uncollected tax in the bottom margin of page 1 of the employee’s Form 1040 and adds the amount to the balance due or subtracted from the overpayment.

If an employee subject to social security tax does not report all of the tip income to his or her employer, the employee is required to file Form 4137, Computation of Social Security Tax on Unreported Tip Income. A railroad employee who does not report all of his or her tips to his or her employer is required to contact the Railroad Retirement Board. The Railroad Retirement Board computes the amount of railroad retirement tax to be reported on Form 1040.

Returns with income tax under Subtitle A of the IRC and employment tax on unreported tips under Subtitle C of the IRC are processed, assessed, and billed as if both taxes were under Subtitle A of the IRC.

For cases involving unreported tip income, two settlement computations are prepared:

Form 885-T:

When preparing the Form 5403 Instructions to APS spreadsheet:

If the adjustment involves railroad retirement tax, prepare a memorandum to the Railroad Retirement Board (ROB) stating the employee’s name and SSN, the name of the railroad employer, and the amount of the adjustment subject to railroad retirement tax. Retain a copy of the memorandum in the administrative file and forward the original memorandum to:

Beginning in 1995, an individual who employs domestic workers generally reports employment tax payments annually on Schedule H, "Household Employment Taxes" (which is attached to Forms 1040, 1040-NR, 1040-SS) instead of filing quarterly Form 942.

However, instead of filing a Schedule H, an individual who employs both household employees and non-household employees may choose to report employment taxes for all employees (household and other employees) quarterly on Form 941, Employer’s Quarterly Federal Tax Return, or Form 943, Employer’s Annual Return for Agricultural Employees, and report FUTA taxes annually for all employees on Form 940, Employer’s Annual Federal Unemployment Tax Return.

If an individual is not required to file an income tax return (for example, because income is below the amount that requires the individual to file), Schedule H may be filed by itself.

The employer's use of Schedule H to report and collect these taxes does not change the character of the taxes that are withheld and paid by household employers from employment taxes to income taxes.

The IRS has simplified the rules for eligible small employers filing employment tax returns. Generally, eligible filers are required to file Form 944, Employer’s Annual Federal Tax Return, instead of quarterly Forms 941, beginning with the 2006 calendar year. The 2006 Forms 944 are due on January 31, 2007.

Additional information regarding Form 944, the Form 944 Program, and the transition of current filers may be found in IRM 21.7.2.4.14.

Any adjustments to items reported on Form 944 are made to the 4th quarter on Form 4668.

All non-payroll items were removed from Form 941, effective the first quarter of 1994.

Now, Form 945, Annual Return of Withheld Federal Income Tax, is used to report non-payroll items. Non-payroll items include pensions, Individual Retirement Accounts (IRAs), certain annuities, other deferred income and gambling winnings, military retirement pay, and backup withholding.

Adjustments to non-payroll items reported on Form 945 are made to the 4th quarter on Form 4688.

Document 6209, Section 8 identifies the specific reference codes applicable to employment tax cases. Also see IRM 4.5.2 for additional information.

There may be some cases where the reference code amounts are difficult to determine. In these instances, the employee preparing the settlement computations may need to provide the reference code amounts to APS. The amounts do not have to be provided on the face sheet, but should be provided in a manner that enables APS to easily understand them.

See IRM 4.23.16.7. This section discusses preparing a settlement computation when an employment tax case contains only worker reclassification and/or Section 530 issues.

An employment tax case may contain both worker reclassification/Section 530 issues and non-worker reclassification/Section 530 issues.

Separate reports MUST be prepared if both Section 7436 issues and Non-Section 7436 issues are present. The Appeals Officer must identify the worker reclassification and/or Section 530 issues for the TCS if the TCS is preparing the settlement computations.

If a case involves both Section 7436 and Non-Section 7436 issues, take the following steps:

Unagreed non-docketed cases:

IRC 3402(d) abatement cases:

If an adjustment is made to backup withholding under IRC 3406, use Form 4668.

Employment tax on tip income (FICA and RRTA) is adjusted as Form 941 tax only when the employer failed to properly report and pay tax on tip income reported to him or her by the employee.

An employee's share of the FICA taxes might be adjusted as discussed below:

If an employee’s share of FICA is adjusted, prepare Form 885-E, Schedule for FICA Tax Adjustment of Wages not Previously Reported, to compute and report the amount of wages subject to the FICA tax.

Since the adjustment for employee FICA is an employment tax and not an income tax, prepare a separate Form 3610 to show the employee’s liability and attach a copy of the Form 885-E.

Prepare the Form 3610, Audit Statement, as follows:

See Exhibit 4.23.16-3. This is an example of a Form 885-E and the instructions to complete it.

Information on the FICA tax rates may be found in Section 3-14, Document 6209, IRS Processing Codes and Information (Rev. 1-2006).

When a taxpayer refuses to file an employment tax return, the return may be prepared by the Service under the authority of IRC 6020(b) in either of the following two ways:

A Technical Advisory Unit reviewer reviews Area office cases prior to transmitting them to Appeals.

On agreed cases, Appeals requests that the taxpayer sign the prepared return. If the taxpayer agrees to a revised tax, request the taxpayer sign a new return. In either case, the return is marked "Delinquent" .

If the proposed liability is conceded by Appeals, mark the prepared return "VOID–do not process" and retain in the case file.

Unagreed cases:

Forward a copy of the Appeals report providing information about the disposition of the case to the Area Technical Services.

For information on application of the failure to file and failure to pay penalties, see IRM 20.1.2, Failure to File/Failure to Pay Penalties.

Occasionally an employment tax case is received in Appeals which contains Form 4669 with a Form 4670 filed by the taxpayer during the examination.

In the event IRC 3509 rates are not used, the taxpayer is entitled to IRC 3402(d) relief. If this is the case, forward Forms 4669 and 4670 to the Campus.

When considering settlement of an employment tax case, advise the taxpayer to correct any subsequent quarterly return(s) not under examination in accordance with IRC 6205 and the applicable regulations.

Provide feedback to Compliance Examination/Collection on all employment tax cases initiated by them. A copy of Form 5402, Appeals Transmittal and Case Memorandum, is sent to the respective function within LMSB, SB/SE, or TE/GE, when the case is closed in accordance with customized Form 5402 procedures.

The CSP guidelines require that a copy of the closing agreement, which includes a paragraph requiring the taxpayer to treat the workers as employees starting on a certain date, be forwarded to the area CSP Coordinator for Employment Taxes for follow-up.

Where Appeals feels some aspect of a closed case warrants special attention in addition to the ACM, feedback is provided in separate memorandum. Favorable comments by memorandums are encouraged.

The Office of the Associate Chief Counsel (TEGE) has responsibility for all coordination procedures between National Office and the Central Office of the Social Security Administration.

If Appeals reaches a conclusion different from the Social Security Administration with respect to the same factual situation in an employment tax case, the Associate Chief Counsel (TEGE) contacts the Central Office of the Social Security Administration and presents the views of Appeals for reconciliation.

If the taxpayer does not qualify for Section 530 relief, consider Classification Settlement Program (CSP). A taxpayer qualifies for a CSP offer if the taxpayer has filed all required Forms 1099 for the particular class of workers in question for the tax periods at issue. The taxpayer is still entitled to the CSP settlement even if it is rejected in Examination/Collection.

Under CSP, Service examiners are able to offer businesses under examination a worker classification settlement using a closing agreement when a worker who was treated as an independent contractor is determined to be an employee.

If the taxpayer timely filed Form 1099's, but clearly fails the substantive consistency test or does not have a reasonable basis, the CSP offer provides that the taxpayer begins to treat the workers correctly and agrees to a deficiency assessment equal to one year's tax for the latest audit year.

If the taxpayer timely filed Form 1099's and has a reasonable basis argument with some merit, the CSP offer includes prospective compliance and agreement to an assessment equal to 25% of the latest audit year deficiency.

If the Form 1099's are not timely filed then the taxpayer is not entitled to a CSP offer but the case can be settled in Appeals based on the hazards of litigation.

For detailed information on CSP see IRM 4.23.6.

Delegation Order No. 66 ( IRM 1.2.47.5) vests settlement jurisdiction in Appeals offices during the 90-day period in all protested cases in which the Territory Manager issued the Notice of Determination of Worker Classification (NDWC).

The delegation order permits the Area Director of Appeals to relinquish this jurisdiction by waiver to the office of the Territory Manager that issued the notice, except in those cases in which criminal prosecution is pending or the ad valorem fraud penalty is involved. Similarly, the Area Director of Appeals for the region that includes Washington, D.C., may relinquish jurisdiction to the office of the Assistant Commissioner (International) if that office issued the notice. Appeals may waive jurisdiction in all cases that were handled by the Examination function, regardless of the amount involved.

When issued, the waiver of jurisdiction operates to vest in the office of the Area Director complete jurisdiction of the case during the 90-day period, including the authority to transfer the case to another Area.

The office clearly labels the top of this revised examination report, "Supplement to the "NDWC." This revised report does not nullify or supersede the original notice, nor does it extend the statutory period for filing a petition with the Tax Court.

IRC 6205 provides that an employer who makes, or has made an under collection or underpayment of employee taxes (FICA/RRTA) or income tax (withholding), may make interest-free payments of the tax due when certain conditions are met. This provision does not apply to FUTA.

IRC 6205 allows employers to report additional liability for FICA and withheld income taxes as an interest-free adjustment if certain requirements are met. Under the regulations to IRC 6205, to be interest-free, the additional tax must be reported and paid by the date a return is required to be filed for the tax period (quarter) in which the error is determined.

If the case is agreed in Appeals, the taxpayer receives the interest free adjustment until the day after the due date of the return for the quarter the case is settled in Appeals. Rev. Proc. 60-17, 1960-2 C.B. 942, as modified by Rev. Proc. 84-66, makes it clear that interest starts the day after the due date of the return for the quarter in which the correction is reported. For quarterly employment tax returns, the due date is the last day of the calendar month following the end of the quarter.

If cases are unagreed in Appeals, the interest free period ends when the taxpayer has exhausted appeal rights. This occurs when the Service issues the Notice of Determination of Worker Classification (NDWC) to the taxpayer on cases involving worker classification and/or Section 530 issues. Thus, if the Service prevails in Tax Court, interest accrues from the date the Notice of Determination of Worker Classification (NDWC) is issued until the tax is paid by the taxpayer. In employment tax cases not involving worker classification and/or Section 530 issues, the interest free period ends upon receipt of notice and demand for payment based upon an assessment.

Interest free adjustments are not allowed if the taxpayer, after being informed of his tax status as an employer, knowingly underreports the employment tax liability in subsequent periods. (See Rev. Rul. 75-464, 1975-2 C.B. 474)

The employer may report the additional tax due on wages and compensation paid as an adjustment on a current return for the period in which the adjustment is made. If an adjustment is reported but the amount is not paid when due, interest thereafter accrues.

An error is determined when the employer has sufficient knowledge of the error to be able to correct it. Such knowledge may be obtained, for example, in the course of an examination. In an agreed case, this is when the employer signs Form 2504 (Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Excise or Employment Tax)) or Form 2504-WC (Agreement to Assessment and Collection of Additional Tax Acceptance of Overassessment in Worker Classification Cases (Employment Tax)). For an unagreed case it is at the conclusion of an Appeals conference. See Rev. Rul. 75-464, 1975-2 C.B. 474.

Full payment of the tax must be made before the due date of the return for the period in which the error was determined in order to be a totally interest-free adjustment. If the tax adjustment is not paid when due, interest thereafter accrues.

Prior regulations allowed an interest-free adjustment only if a return was filed before the underpayment of tax was determined. Treasury Regulation Section 31.6205-1 extends the rules to employers who did not file a return and pay the tax solely because they improperly failed to treat one or more individuals as employees.

Appeals considers protested issues involving FICA or SECA except as provided below:

Generally, the Social Security Administration (SSA) does not give an opinion on an employment tax issue raised by the Service. SSA uses Form SSA-7000, Notice of Determination of Self-Employment Income, and Form SSA-7010, Notice of Determination of FICA Wages, to advise the Service of its findings resulting from claims for correction of the earnings posted to their social security record submitted by a self-employed person or employees.

If the Examination/Collection Area Director does not agree with those findings, IRM Part IV provides for coordination between the Area Examination function and the field office of the SSA to resolve the differences. If preliminary review of the file in an employment tax case discloses unresolved divergent views, promptly return the case to the Examination/Collection Area Director for compliance with IRM Part 4.

If Appeals disagrees with a coordinated determination made by the Examination/Collection Area Director and the SSA in an employment tax case, the Appeals Area Director or the Appeals Team Manager, notifies the Chief Appeals. To provide prompt identification for the SSA, the memorandum will supply the taxpayer's social security number or date of birth when the number is not available.

This procedure is also applicable in a case where, prior to final action, the decision reached by Appeals is in conflict with the views of the SSA, whether or not the case was previously made the subject of coordination procedure.

This section covers procedures for IRC 7436 Notices of Determination of Worker Classification.

Effective August 5, 1997, section 1454 of the Taxpayer Relief Act of 1997 added section 7436 to the Internal Revenue Code. IRC 7436(a) provides the Tax Court with jurisdiction to review certain employment tax determinations.

As originally enacted, IRC 7436 only applied to employment tax cases in which the Service determined that at least one worker was reclassified as an employee and/or that the taxpayer is not entitled to relief under section 530 of the Revenue Act of 1978. The law provides that any employment tax that depends upon such determinations cannot be assessed unless the taxpayer is given an opportunity to file a petition for Tax Court review of the Service's determinations on those two issues.

Section 341(f) of the Community Renewal Tax Relief Act of 2000, effective January 22, 2000, amended IRC 7436(a) to expand the jurisdiction of the Tax Court in employment status proceedings, retroactive to August 5, 1997. The amendment authorized the Tax Court to also determine the proper amount of employment tax and penalties ( IRC 6651 through IRC 6656) with respect to the determinations of worker status and section 530 treatment.

IRC 7436(a) provides for purposes of subtitle C of the Code, the Tax Court has jurisdiction to:

The employment taxes imposed by subtitle C of the Code are listed below:

"Employment tax" under the statutory language includes the additions to tax, additional amounts, and penalties provided by chapter 68A of the Code ( IRC 6651 through IRC 6665). Therefore, the Tax Court has jurisdiction to determine the proper amount of the additions to tax, additional amounts, and penalties that relate to the employment tax imposed by subtitle C with respect to determinations of worker classification and section 530 treatment.

The Service issues a Notice of Determination of Worker Classification after it determines that both of the following situations exist:

See Notice 2002-5 for more information concerning the procedures for preparing and issuing the Notice of Determination of Worker Classification.

If all issues are conceded, prepare the usual Form 5402, including an Appeals Case Memo and provide the settlement computations.

If the case is to be closed on the basis of full or partial concession with respect to past periods with workers as employees, include in the file a closing agreement and/or a copy of Form 941/Form 940 filed for the employees at issue.

Do not forget to keep the originating function aware of the settlement terms. A copy of Form 5402, Appeals Transmittal and Settlement Memorandum, should be sent to the respective Employment Tax Coordinator, when the case is closed.

The Internal Revenue Code defines, in some instances generally and in others in specific terms, the conditions under which interest is either restricted or prohibited on Internal Revenue taxes.

Both Examination and Collection examine employment tax cases. If the case originated in Collection, send a copy of the Form 5402, as well as a closing agreement, to the Employment Tax Examinations (ETE) Coordinator, Collection.