CAWR: how the IRS reconciles your W-2s against Forms 941 and 945

Two programs, two letters

The Combined Annual Wage Reporting program has "two basic components," the manual says. IRS-CAWR is the tax side: it compares "the employer's data provided to the IRS on Forms 941, 943, 944, 945 or Schedule H to the data provided to SSA on Forms W-2/W-2-C and/or to the IRS on Forms 1099-R and W-2-G" and issues Letter 99-C, the "Letter of Employment Tax Problem" (IRM 4.19.4.1.1(2), 4.19.4.11(2), 4.19.4.3.48(4), June 11, 2025). SSA-CAWR is the penalty side: SSA has already written twice about W-2s it could not reconcile, and the IRS issues Letter 98-C proposing information return penalties (IRM 4.19.22.2(1), July 2, 2025). "When referring to all Form 941, Form 943, Form 944, Form 945, this IRM will read 94X" (IRM 4.19.22.1.1(1)), so Form 945 filers are in scope even with no employees. The program compares employer-level totals, never individual W-2s by name or SSN (IRM 4.19.4.11.1(1)).

The four fields that are matched

The manual's list of causes: wage statements "under one EIN and Form 94X under a different EIN," math errors, third-party sick pay, the wrong period, a missing return, and missing W-2s or W-3s (IRM 4.19.4.11(8), Mar. 28, 2018). It also concedes that "IRS processing errors in recording Forms 94X-X are often the source of out of balance conditions" (IRM 4.19.4.3.4(5)). On a transcript the CAWR module is MFT 88, and "A Blocking Series of 55 on the last available quarter with a TC 150 present indicates CAWR made an adjustment" (IRM 4.19.4.11.1(3) Note).

Where Form 945 comes in: 1099-R and W-2G withholding

Form 945 is a 94X for CAWR, but only some of what it reports has anything to match against. The information returns feeding the withholding side are Forms W-2, 1099-R (document type 98) and W-2G (document type 32). "The only information returns filed with IRS that may include FIT are the Form 1099-G, Form W2-G, and Form 1099-R... Form 1099-G FIT amounts are not included in the reconciliation balancing phase of CAWR" (IRM 4.19.4.2.3(1) Note, Apr. 14, 2020). Backup withholding on Forms 1099-NEC, MISC, INT and DIV is not named anywhere in either section. A Form 945 built from it has nothing on the other side to tie to, which is how a Form 945 "over withholding of FIT" case is born.

The screener is told how to close that case without writing. "When the only (or only remaining) discrepancy is for FIT and the exact amount is reported as Backup Withholding (BUWH) on the Form 945 and no other BUWH is required to be reported," the examiner checks PMFOL, the file built from your Form 1096 transmittals, for the amount; a match closes the case in screening. The same applies when the backup withholding exceeds the gap and PMFOL shows the rest on another return. But "When the BUWH is less than the discrepant amount, or there are other fields that remain discrepant, issue correspondence" (IRM 4.19.4.2.3(1) to (4)). The Form 945 checker runs that screen on your numbers.

Line 2 of Form 945 is where this goes wrong: pension, annuity and gambling withholding belongs on line 1, only IRC 3406 backup withholding on line 2. The other pattern is the plan administrator: "Discrepancies are usually caused when the taxpayer fails to file Forms 945/1099-R or has a third party administrator." The administrator's EIN resolves a no-945 case with a cross-reference; but if a Form 945 was filed and "Form 1099-R (Doc Code 98) money amounts are more than Form 945" with no explanation, the IRS assesses the difference on the Form 945 module and may add a failure-to-deposit penalty (IRM 4.19.4.3.33(1), Apr. 22, 2022).

The letter sequence

Letter 98-C is mass generated "at a determined volume per week ... up to and including cycle 33" (IRM 4.19.4.2.14(1) to (4), Apr. 14, 2020); Letter 99-C opens an IRS-CAWR case (IRM 4.19.4.3.48(4)). Letter 5825-C is the interim letter, issued at 25 days open, then every 55 days (IRM 4.19.22.2.3.1(2), July 2, 2025). Letter 2057-C is the closing and explanation letter, and also the one that asks for more reasonable-cause detail (IRM 4.19.4.7(4), 4.19.4.3.1.4(7)). The penalty arrives as a CP 215 on the civil penalty module, MFT 13 (IRM 4.19.4.3.1.1(1)); a denial of reasonable cause comes on Letter 854-C with "the specific reason" (IRM 4.19.4.6.1(11), Apr. 10, 2024). The SSA letters that precede all this, SSA-L-94-SM and SSA-L-96-SM, are not IRS correspondence (IRM 4.19.4.11.1(2)).

Clocks, thresholds and the two-to-three-year lag

"The taxpayer is given 45 days to answer the Letter 98-C. If the taxpayer does not respond to the letter by the end of the suspense period (11 cycles from letter date) the case becomes a No Reply. Status code 91 automatically posts ... The Intentional Disregard Penalty automatically assesses when the BMF posts status code 91" (IRM 4.19.4.3.1(5), June 11, 2025). Clerical staff treat a letter "close to 81 days prior to the current date" as about to go no-reply (IRM 4.19.22.2.1.1(1)), so the machinery assesses at roughly 77 to 81 days while the letter says 45. Treat 45 as the deadline; the manual allows one suspension of "30 days from the date of the employer's correspondence" (IRM 4.19.4.3.29(1)). No reply window is stated for Letter 99-C.

Size decides the path at status 91: "Penalties of less than $25,000.00 automatically assess on IDRS. Penalties of between $25,000.00 and $999,999.99 are held in a re-sequencing file until after PCD ... Penalties of 1 million dollars or more do not automatically assess" (IRM 4.19.4.3.1(5)). A tolerance below which nothing is assessed exists but is redacted (IRM 4.19.4.2.14(4) Note). On the tax side, no-reply cases are auto-assessed on the last quarter of the year; an assessment of $100,000 or more requires "subsequent contact" first and a supervisor's signature (IRM 4.19.4.4(1) to (3) and (12)).

The lag is built in. Tax year 2023 IRS-CAWR cases were released April 7, 2025, with Letters 99-C mailed by December 15, 2025; tax year 2022 SSA-CAWR letters were issued by August 9, 2025 (IRM 4.19.4.10(4) and (5)). The manual says it plainly: "the Forms W-2 were due two to three years prior to the IRS issuing the Letter 98-C and that SSA has previously contacted the taxpayer twice" (IRM 4.19.4.3.1.4(5)). The assessment statute "is 3 years from the due date of the return" (IRM 4.19.22.4(3)). Late replies are "Recons," worked with balance-due notices suspended (IRM 4.19.4.6(1) to (4)).

PRN 549 and PRN 550

PRN 549, intentional disregard, IRC 6721(e). "Imposed on employers who do not comply with our requests to file correct Forms W-2." The statute offers the greater of a per-form amount or 10 percent of the aggregate amount, but the manual picks one: "use only the 10 percent of the aggregate amount method due to a problem with the data appearing in the number of employees field on the Form 94X returns and CATRS." The examiner adds Social Security wages and tips, compares that and Medicare wages to the W-2 fields, and is told to "Assess the 10 percent Penalty on the larger discrepancy." "There is no maximum to the Intentional Disregard penalty" (IRM 4.19.4.3.1.1(1) and (2)). The 10 percent runs on the wage gap, not the tax: a $200,000 gap is a $20,000 penalty on top of any tax. Federal agencies, defunct or bankrupt entities, unamended IRC 6020(b) quarters and cases where "The only wage field out of balance is Total Compensation" are excluded (IRM 4.19.4.3.1.1(3)).

PRN 550, late-filed W-2s, IRC 6721(a). Assessed "in the reply phase, when original Forms W-2 filed in response to SSA-CAWR correspondence are received. These forms are always subject to the maximum penalty of $290.00 ($280 for tax years 2020-2021, $270 for tax years 2018-2019, $100 for tax years 2010 through 2014 and $50.00 for SSA CAWR tax years 2009 and prior) for each Form W-2" (IRM 4.19.4.3.1.2(1)). Note the word maximum: CAWR applies the top per-form rate however late the W-2 is, unlike the tiers in Pub 1586. The floor: "Assess Late Filing Penalty if you have two or more Form W-2" (IRM 4.19.4.3.1.3(3)). Forms count as late originals when you do not say they were filed before, or say so and "BMFOLU and SSA (ORS or ERQY) research does not support the claim" (IRM 4.19.4.3.1.2(2)). A partial reply draws both, PRN 550 on the forms received and PRN 549 on the remaining gap (IRM 4.19.4.3.1.3(3)). The penalty estimator works both.

No First Time Abate, and the supervisory approval point

The standard is Treas. Reg. 301.6724-1: a responsible manner before and after, plus mitigating factors or events beyond your control. Responsible manner means "actions they took when the error was first identified AND subsequent actions taken to prevent future occurrence," and the statement must cover the whole period: "Any reasonable cause documentation must address the issue preventing the filing of the Forms W-2 from the period they were due up to and including the time of their response to IRS" (IRM 4.19.4.3.1.4(2) to (5)). The examiner's checklist is two questions. Did you react timely upon discovery? If not addressed, a 2057-C asks "what took place at the time the error was discovered." Did you act to prevent recurrence? If not addressed, the examiner pulls the following year's filing: timely means met; the same error again means assessed (IRM 4.19.4.3.1.4(6) to (8)). A good compliance history "should be considered whether or not the taxpayer specifically requests waiver on this basis"; reliance on a payroll provider is "not a basis for reasonable cause ... that responsibility cannot be delegated" (IRM 4.19.4.3.1.4(9) and (10)). The CAWR reasonable-cause statement is built on that checklist.

One procedural point: supervisory approval of the initial 98-C "is not required" because it is calculated electronically, but "Once the taxpayer responds to the Letter 98-C, the tax examiner's evaluation of the response, regardless of whether or not the taxpayer specifically addresses the penalty, means that the 'automatically calculated through electronic means' exception no longer applies and written supervisory approval is needed" (IRM 4.19.4.7.1(2) to (7), Apr. 14, 2020). A payer contesting a PRN 549 or 550 assessed after it replied can ask whether written IRC 6751(b) approval is in the file.

What to send

The Letter 98-C / 99-C reply template organizes these enclosures; replies go by mail or fax (IRM 4.19.22.2(3)).

W-2C or 941-X: the floor rule

A 941-X requesting an increase is treated as an agreed, interest-free assessment (IRM 4.19.4.3.4(6)). On withholding, Chief Counsel ruled for the payer: "IRS cannot hold employers liable for the federal income tax withholding shown on the original Forms W-2 if the amounts on the Forms W-2C are correct, even if employees received credit based on erroneous Form W-2" (IRM 4.19.4.11.4(2) Note).

Traps the manual describes

• Undeliverable letters are assessed, with a 15 percent penalty. After a 14-day address search the case is assessed as undeliverable, and undeliverable IRS-CAWR cases get "the full 15 percent FTD penalty" automatically (IRM 4.19.4.5.1, 4.19.4.7.4(4) Note). The IRS will not take your address from the returned envelope: addresses "can be updated on IDRS only if the taxpayer submits Form 8822, Form 8822-B, or a written request" (IRM 4.19.4.5.1).
• You cannot call the CAWR unit. "Never provide the voice number of the CAWR unit to the taxpayer or transfer the call to the CAWR unit ... You may only provide the taxpayer with the Fax number" (IRM 4.19.4.11.1(4) to (7)). See calling the IRS about a notice.
• W-2s after the CP 215 have ten days. W-2s postmarked "within 10 days of the CP 215 notice date" convert PRN 549 on those forms to PRN 550; later, and not found on SSA's systems, "Intentional Disregard Penalty (PRN 549) will remain on the account as originally assessed" (IRM 4.19.4.6.1(8)).
• The payroll service is your problem. If your information does not resolve the case the IRS assesses and tells you "they may need to contact their payroll service" (IRM 4.19.4.3.25(1)).

Questions people ask