IRC 3402(d) and IRC 3102(f)(3) Relief Cases

In general, continue to follow the overall instructions in IRM 4.23.10.15, Partially Agreed Cases, except for IRM 4.23.10.15.2, Examination Procedures for IRC 3402(d) and IRC 3102(f)(3) Relief.

For purposes of closing employment tax cases that fall under IRC 3402(d) when penalties are proposed, a modified two-step abatement/ partial assessment process must be used.

The modified two-step abatement/partial assessment process ensures that the gross tax, penalties, and interest are computed and assessed and then some relief of some portion of the tax. This relief doesn’t apply to reduce penalties and interest based on the gross tax. It only applies to the gross tax such as:

Income taxes under IRC 3402.

Backup withholding tax under IRC 3406.

Additional Medicare tax under IRC 3101(b)(2) (including RRTA).

Do not use these partial assessment procedures if penalties are not being proposed based on the gross tax.

The two-step process results in the generation of an initial billing notice for the gross amounts. The Taxpayer will then receive a second notice containing the abatement allowed.

The first step consists of the following actions.

Create a partial closing record to assess the full tax and penalties.

In RCCMS, create a closing record for the partial assessment, following the procedures in the RCCMS Case Closing Guide.

Check the "Partial" box.

Include all examination adjustments, including any other employment tax issues (fringe benefits, IRC 3509, penalties, etc.) other than the IRC 3402(d) items on the partial closing.

Second Step:

Create a "full" closing record to include the IRC 3402(d) credit.

Do NOT check the "partial" box.

Enter the ARDI and DC as well as your time, technique code and name. Include in the adjustments on the full closing record the IRC 3402(d) relief amount.

Follow the instructions provided in IRM 4.23.10.16.3 to prepare Form 4666, 4668, and 2504 when IRC 3402(d) applies.