Letter 4204: the TE/GE compliance check of a nonprofit's or government's W-2s and 1099s, and what it can and cannot ask

What a compliance check is, and is not

The authority is Rev. Proc. 2005-32: a compliance check determines "whether an entity or organization is adhering to record keeping and information reporting requirements," and because it is not an examination it does not open a tax year, does not use up the IRS's one examination per period, and does not start the section 530 clock on worker classification. The manual says the check "is a tool to help educate TE/GE entities, organizations, practitioners, plan sponsors and participants and encourage voluntary compliance" (IRM 4.70.10.2, May 29, 2025).

The limits are the point. In an income tax audit the examiner is required to ask about your 1099 procedures (see the 1099 check inside every IRS audit). In a compliance check the examiner is forbidden to ask how you decided a payment belonged on a 1099 rather than a W-2, and forbidden to ask whether a worker is an employee. Those questions, if they come, mean the contact has become something else, and the manual gives the examiner no authority to ask them here.

What the examiner looks at

The check reviews filed returns, not records: "Form 94X series," "Forms W-3, W-2, including Forms W-3c and W-2c," "Form 1099 and Form 1096," "Form 1042," "Form 1042-S," the Form 990 family, Form 5500, Forms 4720, 720 and the 8038 series, "as applicable" (IRM 4.70.10.2). Three things on that list reach the TIN compliance program directly:

• Missing information on W-2s and 1099s. A blank or malformed TIN, a missing address, a name that does not match. These are the same defects that produce a CP2100 and a 972CG, seen here one payer at a time.
• The same payee on a W-2 and a 1099. The manual reads a duplicate as a flag for fringe benefits or wages routed through a 1099. The common innocent case is a retiree rehired as a contractor in the same year, or an employee paid a one-time honorarium; the check cannot ask you to justify the classification, but it can refer the pattern.
• Volume against size. "Should there be more or less": an entity with a large contracted-services budget and three 1099-NECs invites a delinquent-return request.

Before the letter goes out the examiner has already pulled IDRS: wage and withholding totals from the Forms 941 and 944, the W-2 counts, the information returns on file, and the freeze codes on the account (IRM 4.70.10.2.4.1.2). The letter arrives with the IRS's view of your filings already formed.

The letters and the clock

"Letter 4204 is initial opening letter used to open all compliance checks," sent "with a response due date of 30 calendar days and a follow-up date of 45 days" (IRM 4.70.10.2.3, May 29, 2025). It comes with Form 13837, Compliance Check Information Request, which is the actual list of what to provide. "If taxpayer requests an extension of time, allow 10 additional business days. More time may be allowed with lead/manager approval."

Letter 3854 "is the certified letter, often referred to as the second letter. It must be sent via certified mail," with 15 days to respond. "If a partial response is received in response to Letter 3854, send a second Letter 3854 ... with a revised Letter 13837, Compliance Check Information Request, identifying the information still needed" (IRM 4.70.10.2.2). The examiner must answer your correspondence within seven business days and, once the case is submitted, the manager has three days to close it.

Two closing letters: "Letter 4220 is the closing letter used when closing the compliance check with disposal code(s) 773 (No Response) or 213 (Partial Response). Letter 4140 is the closing letter when all compliance issues have been resolved" (IRM 4.70.10.2.3). Letter 3948 goes out when mail is returned undeliverable, and Letter 937-A copies a power of attorney.

If you do not respond

Participation is voluntary and the manual says so. It also scripts the consequence. When the certified letter was received and a phone number is available, the examiner calls and, if leaving a message, uses this script: "We will need to receive your reply before (applicable date). If you fail to reply by that date, we will be required to forward your case for examination consideration. If you have questions or problems, please call me before that date" (IRM 4.70.10.2.4.2.2, May 29, 2025). A refused or unclaimed certified letter, or a discussed issue with no reply, closes with Letter 4220. Examination consideration is a referral, not an examination; but it is the step that turns a review of filed forms into a case that can inspect records.

Address changes are handled rather than excused. If no phone number is found and IDRS shows a new address, a fresh Letter 4204 goes to the new address with a new 30-day clock; if the address has not changed, the certified Letter 3854 follows (IRM 4.70.10.2.4.2.1).

Delinquent 1099s and W-2s

"During the compliance checks, examiners frequently identify information returns that were not furnished or filed" (IRM 4.70.10.2.4.2.6). For 1099s: "the examiner should require the payer to furnish the delinquent returns to payees and file them with the examiner. In the alternative, the taxpayer should submit substantiation that the returns have been filed electronically ... The payer should be given a reasonable time, e.g. 30 days, to prepare the delinquent information returns, furnish them to the payees, and file" (IRM 4.70.10.2.4.2.6.1). The manual still names the FIRE system and its 10-day hold; FIRE accepts nothing after November 19, 2026, so the substantiation now is the IRIS acknowledgment, as explained on FIRE to IRIS.

Paper 1099s secured by the examiner are date-stamped and sent to the Austin or Kansas City campus by Form 3210; copies are kept only "when information return penalties are being proposed." High-dollar delinquent 1099s are referred on Form 5666 for the payee's own underreporting. Delinquent W-2s are secured before the check can close, filed through SSA's Electronic Wage Reporting with the confirmation receipt and its Wage File Identifier as proof, or on paper to SSA's Wilkes-Barre center (IRM 4.70.10.2.4.2.6.2).

The penalty exposure is the ordinary IRC 6721 and 6722 schedule for late forms, unless the payer refuses, in which case the intentional disregard rates apply with no annual cap; how the IRS decides that is on intentional disregard. Filing the forms within the 30 days the examiner allows is, for almost every entity, the better outcome.

Reasonable cause

The examiner is pointed to the servicewide reasonable-cause standard in IRM 20.1.1.3.2 and, for exempt organizations, the EO criteria, and is told to "Review the taxpayer's filing history with command codes BMFOLI and BMFOLT ... Determine if the taxpayer has filed returns timely for prior and subsequent tax years" (IRM 4.70.10.2.4.2.7). A first lapse by an entity with a clean history is weighed differently from a repeat. For 1099 penalties the governing regulation is the one described on Treas. Reg. 301.6724-1, and the missing-TIN defense is the solicitation record.

How to answer Letter 4204

• Read Form 13837, not just the letter. It is the list. Answer each item; a partial answer restarts the certified-letter cycle with a revised list.
• Provide filed forms and transmittal proof, not ledgers. The check is of returns. If asked for books or records, or how a worker was classified, ask the examiner to confirm the request is within a compliance check under IRM 4.70.10.2.
• Run your own duplicate test first. Any payee with both a W-2 and a 1099 in the year is the pattern the manual names. Know why before the examiner asks what the forms show.
• Check TINs on what you filed. Missing or malformed TINs are on the examiner's list. Fix them with corrections and solicit the W-9 or W-8 now.
• File what is missing inside 30 days. Through IRIS, with the acknowledgment as substantiation. The penalty for late forms is capped; the penalty for refusing is not.
• Ask for the extension in writing if you need it; 10 business days is the examiner's own authority, more needs a manager.
• Keep the closing letter. Letter 4140 is your record that the issues were resolved; Letter 4220 means a referral is possible.

Questions people ask