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Internal Revenue Manual

Part 4
Examining Process

Chapter 23
Employment Tax Handbook

Section 11
Delinquent Return Procedures

Overview: Initial Delinquency Procedure

  1. This section outlines the procedures for delinquent returns.
  2. In the interest of conserving resources and reducing multiple contacts with taxpayers, examiners will attempt to determine whether the taxpayer is fulfilling all Federal tax obligations during the course of either a compliance check or an examination of an assigned return.
  3. When an examiner discovers during any examination that a taxpayer has failed to file required Federal tax returns, he/she will, before soliciting any returns:
    1. Determine the taxable periods for which the taxpayer was required to file returns.
    2. Ascertain the reasons why the taxpayer failed to file the required returns.
    3. Determine whether any indications of fraud exist.
  4. When information is developed indicating that the taxpayer's failure to file a required return or returns is willful, or if there is any other indication of fraud, the case will be referred to Criminal Investigation. In such cases the examiner will not solicit delinquent returns, payment of tax, or any agreement from the taxpayer. If the taxpayer furnishes delinquent returns to the examiner or indicates he/she intends to file delinquent returns, the examiner will notify Criminal Investigation through proper channels.
  5. If it is determined that indications of fraud are not present, the taxpayer will be advised that he/she is required to file all delinquent returns without regard to the number of years or taxable periods involved. In addition, all taxes, penalties and interest are immediately due. The taxpayer will be asked to deliver the returns promptly to the examiner, together with a written statement under penalty of perjury, giving all the facts which caused the delay. The statement should also include any reasons which the taxpayer believes would establish reasonable cause for failure to file.
  6. The examiner will set a specific date for receiving the return(s). The taxpayer will be informed that failure to tender the delinquent return(s) by the specific date will be considered as a definite refusal to file under the provisions of the Code.
  7. When a taxpayer is advised to file all required delinquent returns but refuses to file, or states he/she is unable to file all of the returns, a determination will be made as to the extent the filing requirements should be enforced. This determination must be consistent with the criteria in Policy Statement P-5-133. Any deviation from the general six year guideline will be approved by the group manager.
  8. For delinquent information returns and employee wage statements, see sections and of this Handbook.
Nontaxable Delinquent Returns

  1. There are some nontaxable delinquent employment tax returns filed for which additional tax is developed as the result of examinations. Ordinarily, since the returns as filed were nontaxable, they were processed without considering the delinquency features or without securing from the taxpayer any statement of reasonable cause for delay in filing. In such cases, the examiner will, after considering the statement of the taxpayer, recommend assertion or non-assertion of the delinquency penalty in the examination report. Any appropriate comments as to the recommendation for assertion or non-assertion of the penalty will be incorporated in the report transmittal or workpapers.
Processing Delinquent Returns

  1. Examiners securing delinquent returns will advise the taxpayer that all tax, penalty and interest is immediately due.
  2. All delinquent returns will be date stamped with an official received date stamp by the securing employee and forwarded immediately for processing.
  3. If a delinquent return appears to have fraud potential, refer the return to Criminal Investigation.
  4. In some cases a taxpayer may have returns with a refund due and have a balance due on other returns. Attach a separate Document 6469 to each return to expedite processing and check the box "Delinquent Return." The refund returns will subsequently post and offset to the balance due module.
  5. Attach a Form 3198 to the case jacket, noting whether or not the Delinquency Penalty should be assessed.
Delinquent Return Package

  1. Delinquent and Substitute Returns must be established on AIMS as soon as it is known that an examination will be made or when examination time is first applied.
  2. Forward the tax return package to Case Processing Support. The package should be assembled in the following manner:
    1. Face of folder--Form 3198, Special Handling Notice, or Form 9231, Collection-Employment Tax Examination Handling/Routine Instructions,
    2. Inside left of folder--Form 5345, Examination Request Master File. The appropriate push code must be used when establishing the case on AIMS in order to hold the TC 424 at Master File until the TC 150 posts.
    3. Inside right of folder, Form 3198, or Form 9231 attached to each return, document 6469, Expedite Processing Cycle, attached to each return, current transcript (60 days) attached to each return, returns or Substitutes for Returns, other documents.
  3. The examiner will retain a copy of the return and transcript of account to be used for the subsequent examination. It should be clearly marked as a copy.
  4. Such examination will be made as soon as possible after the returns are received, and to the extent deemed necessary.
Delinquent Tax Returns Secured (Other than Employment Tax Returns)

  1. In situations where the examiner secured delinquent returns not within his/her examination responsibility, the examiner will file the returns with the appropriate service center under existing Manual procedures. Also, if the examiner feels the returns need to be screened further or examined by another operating division, the examiner should prepare Form 5666 (TE/GE Information Return Report) or Form 5346 (Examination Information Report), and attach a copy of the delinquent return(s) to the information report. The group manager, after approving the information report, will forward the documents to the appropriate operating division for consideration. (To ensure uniformity when forwarding information to Examination, the TE/GE examiner, may use Form 5346.)
  2. All delinquent returns will be date stamped with an official received date stamp by the securing examiner. In some cases a taxpayer may have returns with a refund due and have a balance due on other returns. Attach a separate Document 6469 to each return to expedite processing. The refund returns will subsequently post and offset to the balance due module.
  3. Attach Form 3198 to each return indicating whether or not the Delinquency Penalty should be assessed.
Delinquent Employment Tax Returns Secured

  1. Once an employment tax examination has begun, the examiner will generally not solicit delinquent employment tax returns. The examination and Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment, will report the correct figures. This procedure precludes a no-change report if the taxpayer files a delinquent employment tax return during the course of the examination.
  2. If the taxpayer submits the delinquent employment tax returns, the examiner will inspect the returns to determine whether to accept the returns as filed or to begin an examination. If the reported tax is correct, the procedures outlined in section 11.3 will be followed.
  3. When a delinquent employment tax return is received from a taxpayer, the examiner will determine whether failure to file and failure to pay penalties are to be asserted. See Policy Statement P-2-7, the Penalty Handbook, regarding acceptable reasonable causes for failure to file. The examiner's recommendation for assertion or non-assertion of the penalties will accompany each delinquent return.
  4. Delinquent returns secured by the examiner must be processed with the examiner's recommendation for assertion of applicable penalties whether or not the taxpayer agrees to the assertion of penalties. These requirements preclude affording appeal rights prior to assessment of the penalties. The taxpayer should be advised of post-assessment penalty appeal procedures. The taxpayer does not have to pay the penalties to get an administrative appeal.
Delinquency Penalty on Timely But Unsigned Return

  1. It is the policy of the Service (see Policy Statement P-2-11) not to assert a delinquency penalty if an unsigned tax return is timely filed on the prescribed form and accompanied by proper payment, provided that:
    1. The taxpayer upon request subsequently files a proper return.
    2. The facts surrounding the failure to sign the return clearly indicate there was no willful intent to disobey the taxing statute, and gross negligence is not involved.
  2. When it is necessary to rely upon a taxpayer's failure to sign a return as a defense to the statute of limitations, the delinquency penalty may be asserted to support the Service's position that the statutory period of limitations does not begin to run until a valid return has been filed.
Refusal to File Delinquent Returns

  1. When a taxpayer is advised to file all required delinquent returns but refuses to file, states inability to file, or neglects to file within the time frame set, a determination will be made as to the extent the filing requirements should be enforced. The application of enforcement procedure will depend upon the facts of each case. This determination must be consistent with the criteria in Policy Statement P-5-133 and the guidelines outlined below.
Retroactive Enforcement

  1. The extent to which enforcement of delinquency procedures will be undertaken will necessarily depend upon the facts of each case. As a general rule, enforcement should not extend beyond six prior years. But enforcement for shorter or longer periods, or not at all, may be determined where such action appears to be in the best interest of the Government from the standpoint of reasonableness, salutary effect on compliance, and prudent deployment of resources. (See P-5-133.)
  2. Specific factors that should be taken into account include:
    1. Degree of flagrancy.
    2. Special need to enforce compliance in a specific area.
    3. Whether the delinquency involves trust fund monies collected but not paid over.
    4. Special circumstances peculiar to a specific taxpayer, class, industry or type of tax.
    5. Expenditure of resources required in relation to anticipated results in terms of revenue, provided there are no other overriding considerations.
    6. Period of enforcement used by other IRS activities, in returns compliance programs in the same tax area.
  3. Delinquency procedures will generally be enforced if a taxpayer has failed to file a one-time return. In other cases when contact is made with a delinquent taxpayer, delinquency procedures should ordinarily be followed through for at least one period. However, the circumstances of each individual case must be taken into consideration. (Refusal to file cases referred to Examination or TE/GE after contact has been made by examiners are required to be fully documented prior to such referral.)
  4. If it is determined that enforcement should extend beyond a six-year period, the examiner will document the case file by outlining the facts of the case and the reasons why enforcement for the longer period is recommended. Such recommendations must receive group manager approval, prior to enforcement.
  5. If it is determined that delinquency procedures need not be enforced for the full period of the delinquency if less than six years, the case file must fully document justification for the shorter period. Such determination must receive group manager approval prior to enforcement, except in cases where the examiner is satisfied, as a result of information that is available or received from the taxpayer, that there would be no net tax due for the years for which delinquency procedures are not to be enforced.
Substitute for Employment Tax Returns

  1. If a taxpayer fails to file delinquent employment tax returns when requested by the examiner, a "Substitute for Return" will be prepared. It will be prepared on the return form prescribed for use in making such a return and will be processed with Document 6469, Expedite Processing Cycle, attached. The substitute for return will contain the following entries:
    • "Substitute for Return Prepared by (Collection, Examination or TE/GE)" entered in red ink on face of return.
    • Taxable period.
    • Name and address of the taxpayer.
    • Employer Identification Number.
  2. For returns where the taxpayer does not have a TIN, the examiner should contact the entity section of the service center to secure a TIN. Do not delay the processing of the delinquent/substitute package. Prepare the package in the normal manner, annotating Form 3198, "Taxpayer does not have a TIN."
  3. Submit return package and Form 5345 to Case Processing Support.
  4. Line item amounts (tax base data) should not be shown on the "Substitute for Return" since the total tax liability for the period will be taken into account in the examiner's report. The "Substitute for Return" will become a permanent part of the record in the case even though the taxpayer may subsequently file a return.
  5. The examiner will recommend assertion or nonassertion of the delinquency penalty in the examination report, report transmittal, workpapers and Form 3198, as appropriate. Further, the examiner will compute any delinquency penalty recommended on the total tax due for the period involved.
  6. If a "Substitute for Return" is prepared and the taxpayer executes a waiver on Form 2504, the Form 2504 constitutes a return under IRC 6020(a) and the failure to pay penalty under IRC 6651(a)(2) applies to the amount not paid by the due date of the return. The failure to pay penalty under IRC 6651(a)(2) does not apply in cases where the taxpayer does not execute a waiver and to returns prepared under IRC 6020(b). See 8.7 and 8.8 of Section 8 for procedures on failure to pay and failure to deposit penalties.
  7. The appropriate standard preliminary letters, identified in 9.10 of Section 9, will be used in all cases in which there has been a failure to file returns. Normal Appeal procedures apply to substitute returns.
Referral to the Criminal Investigation

  1. Cases are referred to Criminal Investigation by using Form 2797 (Referral Report for Potential Fraud Cases) or Form 3212 (Referral Report for Potential Fraud Cases). If a case involving a collateral examination results in a fraud referral, the effected examination areas will coordinate the referral. The general guidelines for fraud procedure are outlined in 8.5 of Section 8.
Referral to Tax Exempt and Government Entities

  1. If Collection or Examination personnel encounter a responsible officer of an exempt organization who refuses to file a required exempt organization return, he/she should prepare Form 5666 (TE/GE Information Report) or Form 5346 (Examination Information Report). The group manager, after approving the information return, will forward it to TE/GE for consideration.
Referral to Examination

  1. Prior to making a referral to Examination, Collection and TE/GE personnel should refer to the procedures outlined in the manual for refusal to file procedures.

Internal Revenue Manual??

Part 4 Examining Process Chap. 23 Employment Tax Handbook Sec. 11 Delinquent Return Procedures