Employment Tax Returns:

Publication 5146

Employment Tax Returns:

Examinations and Appeal Rights

The Internal Revenue Service (IRS) accepts most federal employment tax

returns as filed. However, some employment tax returns are examined to

determine if wages, tips, compensation, credits, and taxes are reported

accurately.

This publication discusses general rules and procedures that the

IRS follows when examining employment tax returns. It explains

what happens before, during, and after an examination, as well as

appeal procedures and special procedures dealing with tips, worker

classification, and section 530 relief issues.

The IRS must follow the tax rules that Congress sets in the Internal

Revenue Code (IRC). We also follow Treasury Regulations, case law, and

other rules and procedures written to administer the tax laws.

What’s Inside?

An Overview of Employment Taxes..................................................................... 2

How Does the IRS Select Returns to Examine?................................................. 2

Once Your Return Is Selected for an Examination, What You Can Expect......... 3

What Happens During the Examination?............................................................ 4

The IRS Mission

What the Results of the Examination May Be..................................................... 6

Provide America’s

taxpayers top-quality

service by helping them

understand and meet

their tax responsibilities

and enforce the tax law

with integrity and fairness

to all.

If You Agree with the Results of the Examination............................................... 7

What Should You Do After You Receive the Examination Results...................... 7

If You Disagree with the Results of the Examination........................................... 8

How Do You Appeal an IRS Decision.................................................................. 9

How the Appeal System Works........................................................................... 9

Special Procedures for Worker Classification Issues.......................................... 10

Section 530 of the Revenue Act of 1978 as amended May Provide Relief......... 10

You May Be Eligible for the Classification Settlement Program.......................... 10

IRC 3509 Provides Reduced Rates..................................................................... 10

We May Send You a Notice of Determination of Worker Classification.............. 11

Tip Examinations................................................................................................. 12

What Should You Do When You Receive a Bill for Your Balance Due................ 13

Trust Fund Recovery Penalty.............................................................................. 13

About Trust Fund Taxes....................................................................................... 13

Publication 5146 (Rev. 1-2026) Catalog Number 66432Y Department of the Treasury Internal Revenue Service www.irs.gov

An Overview of

Employment Taxes

Employment taxes include the amounts you

must withhold from your employees’ wages

or compensation for income, social security,

Medicare, and Railroad Retirement Tax Act

(RRTA) taxes. You must pay over the amounts

withheld and pay the employer share of social

security, Medicare, and RRTA taxes.

In addition to withholding Medicare tax, you

must withhold a 0.9% Additional Medicare Tax

from wages or compensation you pay to an

employee in excess of $200,000 in a calendar

year. Additional Medicare Tax is only imposed

on the employee. There is no employer share

of Additional Medicare Tax. All wages or

compensation that are subject to Medicare

tax are subject to Additional Medicare Tax

withholding if paid in excess of the $200,000

withholding threshold.

Federal unemployment taxes are also

considered employment taxes. Only employers

pay federal unemployment taxes;

they are not withheld from employees’ wages or

compensation.

For purposes of this publication, the term

employment taxes includes withheld income

tax reported on Form 945, Annual Return of

Withheld Federal Income Tax.

How Does the IRS Select Returns

to Examine?

The IRS accepts most employment tax returns as

filed. However, we examine some returns to determine

if wages, tips, compensation, credits, and taxes are

reported accurately. Examinations are also called audits.

The process of selecting a return to examine usually

begins in one of two ways:

•

We use computer programs to identify returns that

may have incorrect amounts. The programs may

be based on information returns, on studies of past

examinations, or on certain issues that other special

projects have identified.

•

We use information from compliance projects that

suggests a return may have incorrect amounts. We

may use information from various sources including

news media and public and internal records. If we

determine that the information from these sources

is accurate and reliable, we may use it to select a

return to examine.

If we select your return to examine, it does not mean

that you have made an error. Depending on the results

of the examination we may determine that you:

•

Owe additional tax,

•

Are entitled to a refund, or

•

Have no changes to your liability as reported.

For more information on the examination ”process,”

refer to the IRS web page titled IRS Audits located at

https://www.irs.gov/businesses/small-businesses-selfemployed/irs-audits

Employment tax returns include the following

returns and any related Spanish-language

returns or returns for U.S. possessions:

2

•

Form 940, Employer’s Annual Federal

Unemployment (FUTA) Tax Return

Your Rights as a Taxpayer

•

Form 941, Employer’s QUARTERLY Federal

Tax Return

•

Form 943, Employer’s Annual Federal Tax

Return for Agricultural Employees

•

Form 944, Employer’s ANNUAL Federal Tax

Return

As a taxpayer, you have the right to be treated

fairly, professionally, promptly, and courteously

by IRS employees. Publication 1, Your Rights

as a Taxpayer, explains your rights when dealing

with the IRS.

•

Form 945, Annual Return of Withheld

Federal Income Tax

•

Form CT-1, Employer’s Annual Railroad

Retirement Tax Return

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

How to Contact Your

Taxpayer Advocate

The Taxpayer Advocate Service (TAS) is an

independent organization within the IRS whose

employees ensure that every taxpayer is treated

fairly and that you know and understand your

rights. TAS employees assist taxpayers who

experience financial hardship, who seek help

in resolving tax problems that have not been

resolved through normal channels, or who

believe that an IRS system or procedure is not

working as it should, or the manner in which

the tax laws are being administered raise

consideration of equity or impair your taxpayer

rights.

You can contact TAS by calling the TAS toll-free

at 1-877-777-4778 or TTY/TDD 1-800-829-4059

to see if you are eligible for assistance.

You can also call or write to your local taxpayer

advocate, whose phone number and address

are listed in your local telephone directory or go

to Publication 1546, Taxpayer Advocate Service

- We are Here to Help You, on how to reach

TAS. You can submit a Form 911, Request for

Taxpayer Advocate Service Assistance (And

Application for Taxpayer Assistance Order). You

can also ask an IRS employee to complete it on

your behalf.

For more information, refer to Publication 1546,

The Taxpayer Advocate Service Is Your Voice

at the IRS (pdf).

Once Your Return Is Selected for an

Examination, What You Can Expect

The length of each examination varies depending on

the type of examination, the complexity of items being

reviewed, the availability of information being requested,

the availability of both parties for scheduling meetings,

and your agreement or disagreement with IRS findings.

Some examinations are handled entirely by mail. Others

are conducted through an in-person interview to review

your records. The IRS makes the final determination of

when, where, and how the examination will take place.

Examinations by Mail

We conduct some examinations entirely by mail.

We sometimes call these correspondence or

remote examinations. If we are going to conduct an

examination by mail, we will send you a letter asking for

more information about certain items on your return.

Attach copies of the documents you are sending us to

a copy of the letter we sent you and send them to the

address provided.

DO NOT send us original documents.

We will not return any documents you

submit.

Reminder:

If we conduct the examination by mail, you can

choose to:

•

Act on your own behalf, or

•

Have someone represent you in correspondence

with us. This person must be an attorney,

accountant, enrolled agent, or the person who

prepared the return and signed it as the paid

preparer. If someone represents you, you must give

us written authorization using Form 2848, Power of

Attorney and Declaration of Representative.

Reminder:

3

Put your business name, Employer

Identification Number (EIN), and the

applicable tax periods on each page

that you send. This helps us ensure that

all pages are associated with your case.

Be sure to respond by the deadline

given in any letters from us.

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

Examinations in Person

If we are going to conduct an examination in person,

we will send you a letter to inform you that we have

selected your return for an in-person examination. We

will tell you what information you must provide. Having

the information available when requested may allow

us to complete the examination more easily and more

quickly.

If we plan to conduct the examination in person, we

can do so at your place of business, at an IRS office,

or at the office of your attorney, accountant, or enrolled

agent. The examiner will try to find a suitable time and

place with you.

Recordings

You may make an audio recording of

the examination interview. At least 10

days before the interview, write to the

examiner to ask to record the interview.

You must bring your own recording

equipment. You may not videotape or

film the examination interview.

We can also record an interview. If

we initiate the recording, you must be

notified 10 days before the interview.

You may get a copy of the recording at

your expense.

If we conduct the examination in person, you can

choose to:

•

Act on your own behalf. If you act on your own

behalf, you may leave the session to consult with

your representative. In that case, we will suspend

the interview and reschedule the examination.

However, we cannot suspend the interview if

we are conducting it because you received an

administrative summons.

•

Have someone accompany you, either to support

your position or to witness the session.

•

Accompany someone who will represent you. This

person must be an attorney, accountant, enrolled

agent, or the person who prepared the return and

signed it as the paid preparer.

•

Have your representative act for you and not be

present at the examination yourself. If someone

represents you in your absence, you must give us

written authorization using Form 2848.

4

Note:

Many employers outsource some of

their payroll and related tax duties to

third-party payroll service providers.

They can help assure filing deadlines

and deposit requirements are met and

greatly streamline business operations.

But remember, employers are ultimately

responsible for the payment of income

tax withheld and both the employer and

employee portions of social security

and Medicare taxes (though in certain

situations employers who are customers

of a Certified Professional Employer

Organization are relieved of their liability

for income tax withholding and social

security and Medicare taxes). For further

information see Outsourcing payroll

duties and Third party arrangements at

irs.gov.

What Happens During an

Examination?

The Examiner Will Verify That You Have Complied

with Information Reporting Requirements

An examiner will verify information reporting compliance,

as well as employment tax return filing compliance,

during the initial stages of an employment tax

examination. To ensure the timely and correct filing of

information returns, examiners are required to ascertain

that the taxpayer filed all required information returns

and furnished statements to the recipients from the

period of the return under examination to the most

recent calendar year. The examiner will determine

whether penalties for failure to file and failure to furnish

apply.

Three information returns that taxpayers are commonly

required to file are Form W-2, Wage and Tax Statement,

Form 1099-NEC, Nonemployee Compensation and

Form 1099-MISC, Miscellaneous Information.

Generally, you must report wages and compensation

you paid to employees on Form W-2. When correcting

an omission or error in a return, you are required to

furnish and file Form W–2c, Corrected Wage and Tax

Statement.

See the General Instructions for Forms W-2 and W-3.

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

You must file Form 1099-NEC to report payments

totaling the threshold amount or greater to persons

not treated as employees (for example, independent

contractors) for services performed for your trade or

business. All other miscellaneous reportable payments

are included on Form 1099-MISC. For details about

filing Forms 1099 for payments made during the

calendar year and for information about required

electronic filing, see the General Instructions for Certain

Information Returns for general information (these

general instructions will be replaced by new Pub. 1099

for payments made after 2025), and the separate,

specific instructions for each information return you file

(for example, the Instructions for Forms 1099-MISC and

1099-NEC).

We May Contact a Third Party About

Your Case

Extending the period of limitation will give you more time

to provide documentation to support your position or to

appeal if you do not agree with our findings. Extending

the period also allows us to finish the examination,

make any additional assessment, if necessary, and

provide sufficient time for processing.

Generally, the period of limitation for assessment is 3

years, measured from the date the return is filed.

According to the rule governing early returns, we

consider a tax return that is filed before its due date

(determined without regard to any extension of time for

filing) to be filed on the due date.

Here are some examples of specific employment forms

and their deadlines:

•

Form 940, is filed on a calendar year basis and is

due January 31 of the next calendar year. The rule

governing early returns applies. For any Form 940

filed before January 31 of the next calendar year,

the period of limitation is measured from January

31 of the next calendar year. If the return is filed

on or after January 31 of the next calendar year,

the period is measured from the date the return is

actually filed.

•

Form CT-1, is filed on a calendar year basis and is

due the last day of February of the next calendar

year. The rule governing early returns applies. For

any Form CT-1 filed before February 28 (or February

29 in a leap year) of the next calendar year, the

period of limitation is measured from the last day of

February of the next calendar year. If the return is

filed on or after the last day of February of the next

calendar year, the period is measured from the date

the return is actually filed.

•

A special rule applies to a return reporting social

security and Medicare taxes or federal income tax

withholding. Any Form 941, Form 943, Form 944,

or Form 945, that is filed before April 15 of the next

calendar year is deemed filed on April 15 of the

next calendar year. For example, if you filed your

2021 fourth quarter Form 941 on January 27, 2022,

the IRS treats the return as if it were filed on April

15, 2022. Thus, the 3-year period of limitation for

assessment ends on April 15, 2025. If the return is

filed on or after April 15 of the next calendar year,

we measure the period of limitation from the date

the return is actually filed.

•

Filing an amended Form 940 or an X form (for

example, Form 941-X, Adjusted Employer’s

QUARTERLY Federal Tax Return or Claim for

Refund), does not affect the period of limitation for

assessment.

To investigate your case, the law allows us to contact

third parties, such as neighbors, banks, employers,

employees, or independent contractors. We will notify

you before contacting other people about your tax

matters.

When we contact other people, we generally need to

tell them limited information, such as your name. The

law prohibits us from disclosing any more information

than is necessary to obtain or verify the information we

are seeking. You have a right to request a list of people

we contact. You can make your request by phone,

in writing, or when speaking to us. These third party

contact requirements do not apply:

•

When you authorized the contact,

•

If providing notice would jeopardize collection of

any tax liability,

•

If providing notice may result in reprisal against any

person, or

•

To any pending criminal investigation.

We May Ask You to Extend the Period

of Limitation for Assessment

The Internal Revenue Code requires the IRS to assess

additional taxes within specific time limits. These limits

are known as periods of limitation. When they expire, we

can no longer assess additional tax.

We try to examine tax returns as soon as possible

after they are filed, but occasionally we may ask that

taxpayers extend the period of limitation for assessing

employment taxes.

5

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

How to Extend the Period of

Limitation for Assessment

A written agreement between you and the IRS to extend

the period of limitation for assessment of employment

taxes is made using Form SS-10, Consent to Extend

the Time to Assess Employment Taxes. The Form SS10 sets a specific expiration date for the extension.

If the period of limitation for assessment is about to end,

we may ask you to sign Form SS-10. We will send you

Form SS-10 and Publication 1035, Extending the Tax

Assessment Period.

You may choose to do one of the following:

•

Agree to extend the period of limitation for

assessment.

•

Agree to an extension restricted to particular

issues or for a particular period of time, or both.

An extension restricted to particular issues allows

the period of limitation to expire for all items on

the return except those covered by the restricted

language.

•

Refuse to extend the period of limitation for

assessment.

Fast Track Settlement Can Help

Resolve Disputes

During the examination process, if you and the examiner

cannot agree on one or more issues, you may want to

consider using Fast Track Settlement (FTS). In certain

cases, the IRS offers this process to help resolve

disputes that occur during examinations.

Fast Track Settlement involves a trained mediator from

the Independent Office of Appeals who is independent

of the IRS office conducting the examination. The FTS

process:

•

Is optional,

•

May expedite resolution of your issue,

•

Requires no fee to use, and

•

Is available to most taxpayers and for most issues,

with certain exclusions. Issues must be fully

developed before starting this process.

You may ask to use this process, or we may make the

request. The process will only take place if both you and

the IRS agree. Either party may withdraw at any time.

6

Issues will only be resolved if both you and the IRS

reach an agreement. You will not be required to accept

any resolution. If any issues remain unresolved, you will

still have all of your traditional appeal rights.

•

Publication 4539, Fast Track Settlement - A Process

for Prompt Resolution of Large Business and

International Tax Issues

•

Publication 5022, Fast Track Settlement - A Process

for Prompt Resolution of Small Business Self

Employed Tax Issues

•

Publication 5092, Fast Track Settlement - A

Process for Prompt Resolution of Tax Exempt and

Government Entities (TE/GE) Tax Issues

What the Results of the Examination

May Be

If we accept your return as filed, we will send you a letter

stating that the examiner proposed no changes to your

return. Keep this letter with your tax records.

If we do not accept your return as filed, we will explain

any proposed changes to you. It is important that you

understand the reasons for any proposed changes. Ask

us about anything that is unclear.

If your tax liability changes as a result of our

examination, you may ask us to reconsider the results.

Some reasons we may reconsider your case include:

•

You have more information to submit that could

change the additional amount we have determined

that you owe,

•

You filed an original delinquent return after we have

determined that you owe an additional amount, or

•

You identified a math or processing error that we

made.

Procedures for Requesting Relief

from Paying Income Tax Withholding

and Additional Medicare Tax

Under IRC 3402(d) and 3102(f)(3), you may be entitled to

relief from paying income tax and Additional Medicare

Tax that was not withheld if you can show that the

employees or payees have reported the income and paid

the tax. However, you are still liable for any penalties or

interest that applies.

Use Form 4670, Request for Relief of Payment of

Certain Withholding Taxes, and Form 4669, Statement

of Payments Received, to request relief from paying

income tax or Additional Medicare Tax. Discuss with the

examiner about how to submit these forms.

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

Interest, Interest-Free Adjustments of

Employment Taxes, and How to Stop

Interest from Accruing

If you underpay your employment tax, interest will be

assessed as provided by law. Interest generally accrues

from the due date of the original return to the date

the tax was paid. Interest on any penalties will accrue

from the return due date, extended return due date, or

assessment date, whichever applies.

You may qualify for an interest-free adjustment. To

qualify, an adjusted return correcting an underpayment

must be filed by the due date of the return for the return

period in which the error is discovered. Adjusted returns

include:

•

•

Agreement forms used in the context of an

examination or appeals process such as Form

2504, Agreement to Assessment and Collection of

Additional Tax and Acceptance of Overassessment

(Employment Tax Adjustments Not Subject to IRC

7436), or

X forms such as Form 941-X

If you qualify and:

•

pay the full amount of the underpayment by the

time either the adjusted return is submitted, or the

agreement form is signed, then no interest will be

assessed.

•

you pay less than the full amount, then interest

will accrue on the balance due from the date you

submitted the adjusted return until you make your

payment.

Note:

The interest-free adjustment rules do

not apply to FUTA adjustments that are

reportable on Form 940.

You will not be eligible for an interest-free adjustment if:

•

The underreported amounts relate to an issue that was

raised in an examination of a prior return period,

•

You knowingly underreported your employment tax

liability,

•

You received a Letter 3523 prior to filing the adjusted

return, or

•

You received a Notice and Demand for Payment

based on an assessment of tax. (This notice is not

the same as Letters 3263 and 4520, Section 3121(q)

Notice and Demand referred to in Tip Examinations

later in this publication.)

If you do not qualify for an interest-free adjustment and

you think you will owe additional tax at the end of the

examination, you can stop interest from accruing by

paying all or part of the amount you think you will owe.

Interest will stop accruing on the part you pay when the

IRS receives your payment. Interest will be charged only

on the tax, penalties, and interest that remain unpaid.

For more information about interest-free adjustments and

examples, refer to Rev. Rul. 2009-39, 2009-52 C.B. 951, at

www.irs.gov/irb/2009-52_IRB/ar14.html. Also see section

13 of Publication 15 (Circular E), Employer’s Tax Guide.

What Should You Do After You Receive

the Examination Results?

If You Agree with the Results of the Examination

If you agree with the results of the examination, you

should:

•

Sign the agreement form that the examiner prepared,

and

•

Pay any amount you owe.

Sign the Agreement Form

If your examination includes worker classification issues

or a section 530 relief determination issue and you have

not yet received a Letter 3523, Notice of Employment

Tax Determination Under IRC Section 7436, you can

make a deposit with the IRS to stop any interest from

accruing and still preserve your right to go to Tax Court.

Refer to Special Procedures for Worker Classification

Issues and Section 530 Relief Determination later in this

publication.

7

Agreement forms include:

•

Form 2504, Agreement to Assessment and Collection

of Additional Tax and Acceptance of Overassessment

(Employment Tax Adjustments Not Subject to IRC

7436);

•

Form 2504-T, Agreement to Assessment and

Collection of Additional Employment Tax and

Acceptance of Overassessment (Employment Tax

Adjustments Subject to IRC 7436); and

•

Form 2504-S, Agreement to Assessment and

Collection of Additional Tax and Acceptance of

Overassessment (Employment Tax Adjustments Not

Subject to IRC 7436; Worker Classification or Section

530 Issues Not Addressed in this Exam).

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

The agreement form gives us permission to assess the

proposed amounts quickly. Signing the agreement form

will not prevent you from filing a claim for refund if you

later believe that you are entitled to a refund. It will not

prevent us from later determining, if necessary, that

you owe additional tax. It will also not extend the time

provided by law for either action.

Note:

If you are entitled to a refund, you

will receive it sooner if you sign the

agreement form at the end of the

examination.

Pay Any Amount You Owe by the

Time You Submit the Agreement

Form

If You Disagree with the Results of

the Examination

If you disagree with the results of the examination, the

examiner will explain your appeal rights. You may then

ask for a meeting or a call with the examiner’s manager

to explain your position. If an agreement is reached,

sign the agreement form and pay any amount due.

If you cannot reach an agreement with the manager at

this meeting, the examiner will prepare and provide you

an examination report explaining your position and ours.

We will send you these documents

A letter (called the 30-day

letter)

By signing the agreement form, you may qualify for an

interest-free adjustment. If you qualify, the adjustment

will be interest-free if you pay the full amount due by the

time you submit the signed agreement form.

To tell you of your right

to appeal the proposed

changes within 30 days.

Examples of 30-day

letters:

•

If you do not pay the full amount by the time you

submit the signed agreement form, we will send you a

bill. Interest will generally accrue on the balance due

from the date you submit the signed agreement form

until the date you pay. (Refer to Interest, Interest-Free

Adjustment and How to Stop Interest from Accruing

earlier in this publication.)

If you do not qualify for an interest-free adjustment,

pay the amount you owe, including any interest and

penalties. If you do not pay the entire amount, we will

send you a bill.

•

If you cannot pay the full amount due, you should pay

as much as you can as soon as you can to limit the

amount of interest that accrues.

For more information about payment options, Refer to

Publication 594, The IRS Collection Process.

Letter 950-C for

unagreed employment

tax cases involving

IRC 7436 issues.

This applies to the

reclassification of at

least one worker and/

or the determination

that the taxpayer

was not entitled to

section 530 relief.

This also applies to

wage issues that are

determined to be IRC

7436 issues.

Letter 950-D for

unagreed employment

tax cases involving

all other (for example

non-IRC 7436)

employment tax

examination issues

A copy of the examination To explain the examiner’s

report

proposed changes to your

tax liability

An agreement form

To sign and return if

you now agree with the

adjustments

Publication 5, Your

To explain the Appeals

Appeal Rights and How to process and procedures

Prepare a Protest If You

for preparing a protest

Disagree

8

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

How Do You Appeal an IRS Decision?

How to Appeal to Federal Courts

How the Appeal System Works

If you and the IRS still disagree after the Appeals

conference, or if you did not choose to use our appeal

system, you may be entitled to take your case to a

U.S. District Court, the U.S. Court of Federal Claims,

and in some cases, the U.S. Tax Court. The U.S. Tax

Court generally does not have jurisdiction to review

employment tax cases (with limited exceptions, as

explained below).

Because taxpayers sometimes disagree with the IRS

on tax matters, the IRS has an appeal system. You may

appeal our tax decision to a local Independent Office

of Appeals. The Appeals offices are independent of the

IRS office that proposed the adjustment.

An Appeals office is the only level of appeal within the

IRS. Most differences are settled at the appeals level.

An Appeals Officer has the authority to resolve tax

disputes without litigation. However, the Appeals office

cannot consider your reasons for disagreeing if these

reasons do not come within the scope of the tax laws

(for example, if you disagree solely on moral, religious,

political, constitutional, or similar grounds).

If you do not want to appeal your case within the IRS,

or if you disagree with the outcome of the IRS appeals

process, you may take your employment tax case to a

U.S. District Court or the U.S. Court of Federal Claims. If

your case involves reclassification of at least one worker

and/or the determination that you were not entitled relief

under section 530, you may also be able to take your

case to the U.S. Tax Court if certain requirements are

met.

Each of these appeal methods has specific

requirements, time limits, and procedures. Information

about the IRS appeal system and appeals to the federal

courts is provided below. For more information, refer to

Publication 5.

How to Appeal Within the IRS

You or your authorized representative may request a

conference with Appeals office personnel. If you want

to have a conference with an Appeals Officer, follow

the instructions in the 30-day letter you received, for

example, Letter 950-C or Letter 950-D.

We will send your request to the Appeals office to try

to arrange a conference at a suitable time if there is

sufficient time left on the statute of limitations. At the

conference, you or your authorized representative

should be prepared to discuss and present

documentation for all disputed issues. Conferences

with Appeals office personnel are held with you or your

authorized representative in an informal manner. Only

attorneys, certified public accountants, and enrolled

agents are allowed to represent you before Appeals.

Each of these courts is independent of the IRS. Different

procedures and time limits apply, depending on which

court you use.

U.S. District Courts and U.S. Court of Federal Claims

Generally, if you do not reach an agreement with our

examiner or the Appeals Officer, we will assess the

employment taxes we determine that you owe. (Refer

to Special Procedures for Worker Classification and

Section 530 Relief Determination Issues, below for a

possible exception for worker classification issues.)

You may seek judicial review of the assessment by filing

a refund suit in either a U.S. District Court or the U.S.

Court of Federal Claims.

Please note that before you can file an employment tax

refund suit, you must first pay to the IRS, at a minimum,

the amount of the employment tax assessment that

relates to one worker for one tax period and then file a

claim for refund with the IRS.

To file a claim for refund, you must file the X form that

corresponds to the return being corrected. For example,

Form 941-X, is used by an employer to correct

Form 941. Use an amended Form 940 to claim a refund

of FUTA taxes for a return that you previously filed.

If the claim for refund is disallowed (or the IRS does

not respond to the refund claim within 6 months),

then you may file a refund suit in a U.S. District Court

or in the U.S. Court of Federal Claims and challenge

the employment tax assessment. You generally must

file your refund suit no later than 2 years after the

IRS informs you that your claim for refund has been

disallowed.

Appeals may not engage in discussions with the

originating function regarding the strengths and

weaknesses of the issues and the parties’ positions in

cases without providing the taxpayer/representative an

opportunity to participate.

9

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

U.S. Tax Court

Note:

While the U.S. Tax Court generally does not have

jurisdiction to review employment tax cases, it does

have jurisdiction over cases that involve worker

classification and entitlement to relief under section 530

when certain requirements are met.

Other determinations by the IRS in connection with

proposing employment tax adjustments are not subject

to review by the Tax Court. For more information about

the conditions needed to petition Tax Court for an

employment tax case refer to Rev. Proc. 2022-13, 20226 I.R.B. 477 at www.irs.gov/pub/irs-drop/rp-22-13.pdf).

You may also seek judicial review for worker

classification cases in a U.S. District Court or the U.S.

Court of Federal Claims. You must first pay a divisible

portion of the tax, equal to the tax liability for one

worker for one tax period, and file a claim for refund

with the IRS. You must follow the courts’ procedures

and time limits.

For more information about worker classification cases,

and entitlement to relief under section 530 see Special

Procedures for Worker Classification Section 530 Relief

Determination Issues, later in this publication.

Special Procedures for Worker

Classification and Section 530 Relief

Determination Issues

It is critical that businesses correctly determine whether

their workers should be treated as employees or nonemployees (for example, independent contractors).

In an examination, the IRS may determine that you

are not entitled to section 530 relief, that you did not

correctly classify one or more workers, and that you

owe employment taxes, penalties, and interest because

of the misclassification. For more information on worker

classification, refer to Publication 15-A, Employer’s

Supplemental Tax Guide.

Section 530 of the Revenue Act of

1978 May Provide Relief

Section 530 applies only to matters

involving the issue of the status of

an individual as an employee or nonemployee and not to matters involving

the issue of the proper characterization

of payments to that individual.

You May Be Eligible for the

Classification Settlement Program

If you do not qualify for relief under section 530,

and we determine that you incorrectly treated your

workers as non-employees, you may be eligible for the

Classification Settlement Program (CSP). The CSP is

an optional program that permits you to prospectively

reclassify workers as employees in an examination if

you meet certain criteria. In exchange, your employment

tax liability will be reduced for the past non-employee

treatment.

Under the CSP, you enter into a closing agreement with

the IRS to prospectively treat the workers as employees.

CSP may be available to you through the appeals

process. If you qualify for section 530 relief but prefer to

treat workers as employees, you can also enter into a

CSP agreement without giving up your claim to section

530 relief for prior years.

IRC 3509 Provides Reduced Rates

IRC 3509 provides special rates for the employee share

of social security and Medicare taxes and income tax

withholding when workers are reclassified as employees

in certain circumstances. The rates depend on whether

you filed the required information returns.

IRC 3509 rates are not available if you intentionally

disregarded the requirement to withhold taxes from

employees or if you withheld income tax but not social

security or Medicare taxes.

For more information about IRC 3509 rates, refer to

section 2 of Publication 15.

Note:

IRC 3509 does not apply to RRTA taxes

reportable on Form CT-1.

If you meet certain requirements, you may qualify

for relief from employment tax obligations in worker

classification disputes under Section 530 of the

Revenue Act of 1978, as amended. For more

information, refer to Publication 1976, Do you Qualify

for Relief under Section 530?

10

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

We May Send You a Letter 3523, Notice

of Employment Tax Determination

Under IRC Section 7436

You will receive a Letter 3523, Notice of Employment Tax

Determination Under IRC Section 7436, when

•

The issue involves a worker reclassification or a section

530 relief determination,

•

The issue not resolved in the examination or with the

Appeals office, and

•

The IRS has determined that you owe additional tax

because of those issues.

A Notice of Employment Tax Determination Under IRC

Section 7436 will detail how we calculated the amount of

your additional employment tax liability. The notice may

include these documents:

•

Form 4666, Summary of Employment Tax Examination;

•

Form 4667, Examination Changes – Federal

Unemployment Tax;

•

Form 4668, Employment Tax Examination Changes

Report;

•

Form 2504-T, Agreement to Assessment and Collection

of Additional Employment Tax and Acceptance of

Overassessment (Employment Tax Adjustments Subject

to IRC 7436); and

•

Publication 3953, Questions and Answers About Tax

Court Proceedings for Determination of Employment

Status Under IRC § 7436.

If you agree with our determinations in the notice, you

should sign and return the agreement form, Form 2504-T.

Form 2504-T gives us permission to assess the proposed

amounts.

If you do not sign and return the Form 2504-T, and

you do not file a petition with the U.S. Tax Court within

the time limit, we will assess the employment taxes,

additions to tax, and penalties that the notice shows

that we determined, plus the interest required by law.

We will send you a bill.

Understanding Interest-free

Adjustments in the Worker

Classification or Section 530 Context

An interest-free adjustment is not available after you

receive a Notice of Employment Tax Determination

Under IRC Section 7436, even if an interest-free

adjustment would have been available otherwise.

If your examination includes a worker reclassification

or a section 530 relief determination issue and you

have not yet received a notice, then you can make a

cash bond deposit with the IRS to stop any interest

from accruing and still preserve your right to go to Tax

Court. The IRS treats a cash bond deposit made before

receiving a notice as an interest-free adjustment. No

interest will accrue on amounts posted as a deposit.

Talk to the examiner about how to make a deposit.

Note:

The IRS treats a deposit made before

receiving a Notice of Employment Tax

Determination Under IRC Section 7436

as an interest-free adjustment. For

more information, see Rev. Rul. 200939, 2009-52 C.B. 951, at www.irs.gov/

irb/2009-52_IRB/ar14.html.

How to Seek Court Review of Worker

Classification Cases

Signing the agreement form will not:

•

Prevent you from filing a claim if you later believe you

are entitled to a refund,

•

Prevent us from later determining that you owe

additional tax,

•

Extend the time provided by law for either action, or

•

Change any other requirements for an employment tax

refund suit.

Refer to How to Appeal to Federal Courts, earlier in this

publication.

If you do not agree with our determinations in the notice,

the notice gives you instructions on how to ask the U.S. Tax

Court to review the IRS’ determinations. More information

about Notice of Employment Tax Determination Under

IRC Section 7436 review by the U.S. Tax Court is provided

below.

11

U.S. Tax Court Review of Determinations Made in

Worker Classification Cases

The Notice of Employment Tax Determination Under

IRC Section 7436 we send you will tell you how you can

ask the U.S. Tax Court to review our determinations in

the notice. Unlike seeking review with a U.S. District

Court or the U.S. Court of Federal Claims, you can file

a petition for the U.S. Tax Court to review a worker

reclassification or a section 530 relief determination

case without first paying any of the amounts we

determined in the notice that you owe.

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

Assessment and collection of the tax is suspended

while the U.S. Tax Court review is taking place. Also, a

case petitioned to the U.S. Tax Court will normally be

considered for settlement by an Appeals Officer before

the court hears the case if the case has not already

been considered by an Appeals office.

To seek U.S. Tax Court review of a Notice of

Employment Tax Determination Under IRC Section

7436, you must file a petition with the U.S. Tax Court

before the 91st day (or before the 151st day if the notice

is addressed to a person outside the United States)

after the notice was mailed by certified or registered

mail. The time you have to file a petition with the U.S.

Tax Court is set by law and cannot be extended or

suspended. Thus, contacting us or the U.S. Tax Court

for more information, or receiving other correspondence

from us, will not change the period for filing a petition

with the U.S. Tax Court.

The first page of the notice will include a date under the

heading Last date to petition Tax Court. Your U.S. Tax

Court Petition will be considered timely if you file by that

date.

If we send you a Notice of Employment

Tax Determination Under IRC Section

7436 by certified or registered mail and

you want to seek U.S. Tax Court review

of our determinations, you MUST file

your petition before the 91st day after

the notice was mailed.

U.S. District Court or U.S. Court of Federal Claims

Review of Determinations Made in Worker

Classification Section 530 Cases

If you disagree with our determinations in the Notice

of Employment Tax Determination Under IRC Section

7436, and the U.S. Tax Court does not review your

worker classification case, you may seek judicial

review of the assessment by filing a refund suit within

applicable time limits in a U.S. District Court or in the

U.S. Court of Federal Claims.

There are important differences between the rules for

suing in these courts and in the U.S. Tax Court. To

seek judicial review of an employment tax assessment

in a U.S. District Court or in the U.S. Court of Federal

Claims, you must first pay the IRS, at a minimum, the

amount of the employment tax assessment attributable

to one worker for any one tax period, and then file a

claim for refund with the IRS. To file a claim, you must

file the X form that corresponds to the return being

corrected. For example, Form 941-X, is used by an

employer to correct Form 941.

12

Use an amended Form 940 to claim a refund of federal

unemployment taxes for a return that you previously filed.

If the claim for refund is disallowed (or the IRS does not

respond to the refund claim within 6 months), you may file

a refund suit in a U.S. District Court or in the U.S. Court

of Federal Claims and challenge the employment tax

assessment. However, you generally must file your refund

suit no later than 2 years after the IRS informs you that your

claim for refund has been disallowed.

For more information, refer to:

•

Publication 5

•

Publication 3953

Tip Examinations

An employee who fails to report tips to the employer

is liable for the employee share of social security and

Medicare taxes on those unreported tips and is subject to

penalties under IRC 6652(b).

The employer is not liable to withhold and pay the

employee share of social security and Medicare taxes on

the unreported tips.

In addition, the employer is not liable for the employer share

of social security and Medicare taxes on the unreported tips

until the IRS makes a Section 3121(q) Notice and Demand

for the taxes to the employer.

(This notice is not the same as the Notice and Demand for

Payment referred to in Interest, Interest- Free Adjustments

of Employment Taxes, and How to Stop Interest from

Accruing, earlier in this publication.)

For employment tax examinations with an unreported

tip income issue, the following occurs at the end of the

examination:

•

You will receive a pre-notice and demand letter notifying

you in advance that we will issue a Section 3121(q)

Notice and Demand for the employer’s share of social

security and Medicare taxes due on the unreported tip

income. The letter will tell you the amount you owe.

•

No less than 30 days after you receive the pre-notice

and demand letter, you will receive a Section 3121(q)

Notice and Demand for the employer’s share of social

security and Medicare taxes on the unreported tips. The

notice and demand letter will tell you specifically how

and where to report the tax due on the unreported tip

income.

If you report and pay the tax due as instructed in the

Section 3121(q) Notice and Demand, you will not owe

interest or penalties on the additional tax due for the

unreported tips. For more information, refer to Rev. Rul.

2012-18, 2012-26 I.R.B. 1032, at http://www.irs.gov/

irb/2012-26_IRB/ar07.html.

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

What Should You Do When You Receive

a Bill for Your Balance Due?

If you did not pay your liability in full at the close of the

examination, you will receive a bill. At that point, you

should pay the amount you owe in full or you should pay

as much as you can.

You may pay the amount you owe electronically for

free through your business tax account, direct pay for

business, or Electronic Federal Tax Payment System

(EFTPS). You may use one of these methods; however,

they may charge a fee:

•

Ask your financial institution to initiate an automated

clearing house (ACH) credit payment on your behalf.

•

Ask a trusted third party, such as a tax professional or

payroll service, to make the payment for you.

•

Ask your financial institution to make a same-day wire

payment for you.

Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty is assessed against

persons (who, among others, may include an individual,

another corporation, a Payroll Service Provider (PSP), a

Professional Employer Organization (PEO) or Certified

Professional Employer Organization (CPEO)) who were

responsible for paying the trust fund taxes to the IRS

but willfully did not do so. The amount of the penalty is

equal to the amount of the unpaid trust fund taxes.

For more information, refer to Publication 15, or go to

www.irs.gov and enter “trust fund recovery penalty” in

the search box.

If you pay by check or money order, make it payable to

United States Treasury. On your check or money order,

be sure to write your EIN, tax year, and related tax

form or notice number.

If you cannot pay your bill in full, you should call the

telephone number on the bill you receive to ask about

possible payment arrangements. The collection process

will begin if you do not make payment in full and on time

after you receive your bill.

For details about what to do if you cannot pay, see

Publication 594, The IRS Collection Process. This

publication generally describes the IRS collection process.

Trust Fund Recovery Penalty

About Trust Fund Taxes

Trust fund taxes include the income tax and the

employees’ share of social security and Medicare taxes

withheld from employees’ wages. They are called trust

fund taxes because the employer holds these funds in

trust for the government until it submits them in a federal

tax deposit or payment.

To encourage prompt payment of withheld employment

taxes, Congress enacted a law that provides for the Trust

Fund Recovery Penalty.

13

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

Other IRS Products You May Need

Form 940, Employer’s Annual Federal Unemployment

(FUTA) Tax Return

Publication 556, Examination of Returns, Appeal

Rights, and Claims for Refund

Form 941, Employer’s QUARTERLY Federal Tax Return

Publication 594, The IRS Collection Process

Form 941-X, Adjusted Employer’s QUARTERLY Federal

Tax Return or Claim for Refund

Publication 966, Electronic Federal Tax Payment

System: A Guide to Getting Started

Form 943, Employer’s Annual Federal Tax Return for

Agricultural Employees

Publication 1035, Extending the Tax Assessment

Period

Form 943-X, Adjusted Employer’s Annual Federal Tax

Return for Agricultural Employees or Claim for Refund

Publication 1546, The Taxpayer Advocate Service Is

Your Voice at the IRS

Form 944, Employer’s ANNUAL Federal Tax Return

Publication 1976, Do You Qualify for Relief Under

Section 530?

Form 944-X, Adjusted Employer’s ANNUAL Federal Tax

Return or Claim for Refund

Form 945, Annual Return of Withheld Federal Income

Tax

Form 945-X, Adjusted Annual Return of Withheld

Federal Income Tax

Form CT-1, Employer’s Annual Railroad Retirement Tax

Return

Form CT-1 X, Adjusted Employer’s Annual Railroad

Retirement Tax Return or Claim for Refund

Form 2848, Power of Attorney and Declaration of

Representative

Form 4669, Statement of Payments Received

Publication 3953, Questions and Answers About Tax

Court Proceedings for Determination of Employment

Status Under I.R.C. 7436

Publication 4167, Appeals – Introduction to Alternative

Dispute Resolution

Publication 4539, Fast Track Settlement – A Process for

Prompt Resolution of Large Business and International

Tax Issues

Publication 5022, Fast Track Settlement - A Process for

Prompt Resolution of Small Business Self Employed Tax

Issues

Publication 5092, Fast Track Settlement A Process

Resolution of Tax Exempt and Government Entities (TE/

GE) Tax Issues

Form 4670, Request for Relief of Payment of Certain

Withholding Taxes

Publication 1, Your Rights As A Taxpayer

Publication 5, Your Appeal Rights and How to Prepare

a Protest if You Don’t Agree

Publication 15 (Circular E), Employer’s Tax Guide

Publication 15-A, Employer’s Supplemental Tax Guide

14

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights

Comments or Suggestions

We welcome your comments about this publication and your suggestions for future editions. Although we cannot

respond individually to each comment we receive, we do appreciate your feedback and will consider your

comments as we revise our tax products.

Because we respond to many letters by telephone, it would help if you would include your daytime phone number,

with the area code, in your correspondence.

15

Write to us at:

Internal Revenue Service

Tax Forms & Publications Division

1111 Constitution Ave. NW, IR-6526

Washington, DC 20224

Email us at:

taxforms@irs.gov. Please put Publication 5146 on the subject line.

Send us comments from

www.irs.gov/formspubs.

Click on More Information and then click on Comment on Tax Forms and

Publications.

Publication 5146, Employment Tax Returns: Examinations and Appeal Rights