# Employment Tax Returns:

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URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A8ee0c567cbf91343

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- **Collection:** Agency decision
- **Document type:** Agency decision

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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?

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A8ee0c567cbf91343. Public record. Not legal advice.