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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 2. Failure To File/Failure To Pay Penalties

20.1.2  Failure To File/Failure To Pay Penalties

20.1.2.1  (04-25-2008)
Overview

  1. This section of the consolidated penalty IRM discusses the Failure to File and Failure to Pay penalties.

20.1.2.1.1  (04-25-2008)
Failure to File Tax Return or Pay Tax

  1. The failure to file (FTF) and failure to pay (FTP) penalties covered in this chapter are:

    • IRC Section 6651(a)(1)
      Failure to file tax return

    • IRC Section 6651(a)(2)
      Failure to pay tax as shown on return

    • IRC Section 6651(a)(3)
      Failure to pay tax after notice and demand for tax not shown on return

    • IRC Section 6651(d)
      Increase in the penalty for failure to pay in certain cases

    • IRC Section 6651(f)
      Increase in the penalty for fraudulent failure to file

    • IRC section 6651(g)
      Returns prepared by the Secretary under IRC section 6020(b)

    • IRC Section 6651(h)
      Failure to pay penalty reduced during installment agreement

    • IRC Section 6698
      Failure to file a partnership return

20.1.2.1.2  (04-25-2008)
General Information

  1. General applications:

    1. IRC section 6651(a)(1) : The FTF penalty applies on the amount due from the return due date (or extended due date) until a return is filed or until the 25% maximum penalty rate has been applied. The FTF penalty rate is 5% a month. (See exception (2)(a) below.)

    2. IRC section 6651(a)(2): The FTP penalty, for failure to pay amounts shown on the return as filed, applies on the amount due from the return due date to the date paid at 1/2% a month, not to exceed 25%.

    3. IRC section 6651(a)(3): The penalty for failure to pay amounts not shown on the return (e.g., audit deficiencies or other subsequent adjustments) applies on the additional amount due, beginning after 21 calendar days from the notice and demand for payment (23C date) to the date paid, at 1/2 % a month, not to exceed 25%.

      Note:

      If the total balance due on the notice, including interest and any penalties, equals or exceeds $100,000, the FTP penalty under IRC section 6651(a)(3) starts 10 business days from the 23C date.

  2. Coordination between FTF and FTP penalties:

    1. Tax on return. When the FTF penalty under IRC section 6651(a)(1) and the FTP penalty for failure to pay tax shown on the return under IRC section 6651(a)(2) both apply for the same months, the 5% FTF penalty rate under IRC section 6651(a)(1) is reduced by the 1/2% FTP penalty rate under IRC section 6651(a)(2).

    2. Tax on subsequent assessments. The FTF penalty applies on subsequent assessments (deficiencies) at 5% a month for the same number of months the return was originally late, not to exceed 25%. The 5% FTF rate on subsequent assessments is not reduced by any FTP penalty rate.

20.1.2.1.2.1  (04-25-2008)
Extension of Time to File

  1. IRC section 6081 and the related regulations provide for a reasonable extension of time to file a return. The " reasonable extension" is not to exceed six months. If the taxpayer has a valid extension of time for filing a return, the taxpayer is not liable for the FTF penalty for the duration of the extension period. The computation of the FTF penalty begins immediately after the extended due date. See IRM 3.12.212.

  2. An extension of time to file is not an extension of time to pay. However, if the taxpayer:

    1. has a valid extension of time to file,

    2. has paid 90% of the tax due by the return due date (excluding extensions),

    3. files the return by the extended due date, and

    4. pays remaining amounts due in full with the return,

    the Service will assume the taxpayer satisfies the reasonable cause exception to the FTP penalty and it will not be assessed. See Treas. Reg. §301.6651–1(c)(3). Absent any one of the above four factors, the FTP penalty is assessed from the original return due date.

  3. The Service may void a previously granted automatic extension where the taxpayer’s Form 4868 or Form 7004 is invalid. For example, when a taxpayer has reason to know that he will have a tax liability, has no estimated payments or withholding and, on the application for an automatic extension of time to file, enters "zero" for the tentative tax liability, the Service may invalidate the extension and apply FTF from the return due date. See Rev. Rul. 79-113 1979-1 C.B. 389, Crocker v. Commissioner 92 TC 899 (1989), McPike v Commissioner TC Memo 1996-46, RIA TC Memo P 96046, 71 CCH TCM 1988 and Treas. Reg. §§1.6081-3(a)(3) and 1.6081-4T(b)(4). This consideration will most often arise in the context of an examination.

    1. When the voiding of an extension of time to file creates or increases a FTF penalty, the FTF penalty originally assessed on the delinquent return does not follow deficiency procedures and any change must be assessed within three years of the filing of the delinquent return. The Assessment Statue Expiration Date (ASED) for the FTF penalty in this context is not suspended by issuance of a statutory notice. On the other hand, the FTF penalty amount calculated on a deficiency is included in the revenue agent report (30-day letter) and in the statutory notice (90-day letter). The statute of limitations on assessment in this context is suspended by the issuance of the statutory notice.

  4. Individuals are granted the automatic 6-month extension of time to file if the following conditions are satisfied (Treas. Reg. §§1.6081–1 and 1.6081–4T):

    1. The individual must have completed Form 4868 , Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and

    2. filed the application on or before the due date of the return, and

    3. properly estimated the tax due.

      The extension request can also be e-filed from tax preparation software or through a tax return preparer.

  5. Individuals outside the United States are granted an automatic 2-month extension (until June 15, for calendar year taxpayers) to file a return and pay any federal income tax due if the individuals are U.S. citizens or residents and on the regular due date of the return:

    1. live outside the United States and Puerto Rico, and their main place of business or post of duty is outside the United States and Puerto Rico, or

    2. are in the military or naval service on duty outside the United States and Puerto Rico.

    To use this automatic 2-month extension:

    1. The individual must attach a statement to his/her return explaining which situation (a or b above) qualifies for the extension.

    2. If a joint return is filed, only one spouse has to qualify for this automatic extension. If separate returns are filed, the automatic extension applies only to the spouse who qualifies.

    3. The 2-month automatic extension is from April 15 to June 15 (CCC "N" .) If the taxpayer only needs the extra two months, he is not required to file a Form 4868. However, he has until June 15 to file Form 4868 to get an additional 4-month extension. If the taxpayer files and pays on or before June 15, FTF and FTP do not apply. If the taxpayer files and pays after June 15, without having filed a Form 4868 on or before June 15, FTF and FTP are both calculated from June 15. If the taxpayer filed a valid Form 4868 on or before June 15, and files on or before the extended return due date of October 15, FTF does not apply; if the same taxpayer files and pays before the extended return due date of October 15 and meets the exception in IRM 20.1.2.1.2.1.(2), no FTP applies; if he does not meet the exception in IRM 20.1.2.1.2.1 (2), FTP applies from June 15; if he files and pays after October 15, FTF applies from October 15 and FTP applies from June 15.

      Note:

      1. Parallel conditions for an automatic 2-month extension of time to file and pay exist for partnerships which are required under §1.6031(a)–1(e)(2) to file returns on the 15th day of the fourth month following the close of the taxable year when their records and books of account are kept outside the United States and Puerto Rico.

      Note:

      2. Parallel conditions exist for a 3-month automatic extension for domestic corporations which transact their business and keep their records and books of account outside the United States and Puerto Rico, foreign corporations that maintain an office or place of business within the United States, and domestic corporations whose principal income is from sources within the possessions of the United States. See Treas. Reg. §§1.6081-5T, 1.6072-2 and the instructions to Form 7004.

  6. Service in a Combat Zone, IRC Section 7508.The time for filing a return or paying a tax should be automatically extended for 180 days after the period an individual:

    1. serves (or supports) the Armed Forces of the United States in an area designated as a combat zone by the president of the United States, or

    2. is hospitalized as a result of an injury received in an area designated as a combat zone.

  7. Partnership (Treas. Reg. §1.6081–2T):

    1. A partnership required to file Form 1065 is granted an automatic 6-month extension of time to file when it submits a properly completed Form 7004, Application for Automatic 6-Month Extension of Time to File Certain Business Income Tax, Information, and Other Returns.

    2. The request must be filed with the Service on or before the original due date of the return.

    3. The extension of time to file Form 1065 and Form 1120S does not extend the time to make the required payment under IRC section 7519 relating to an IRC section 444 election of a taxable year other than a required taxable year (related forms: Form 8716, Election to Have a Taxable Year Other Than the Required Taxable Year and Form 8752, Required Payment of Refund under IRC section 7519.) For extension of time to file Form 8752and pay required tax, see IRM 3.11.212.14. Any FTP penalty applies under IRC section 7519(f)(4) as a tax that follows deficiency procedures, input Transaction Code (TC) 240 on MFT 15 using Reference Number 684. See IRM 21.2.4.4.32 and IRM 20.1.10.26.

  8. Corporations are granted an automatic 6-month extension of time to file when they:

    1. file Form 7004 , Application for Automatic 6-Month Extension of Time to File Certain Business Income Tax, Information, and Other Returns before the original return due date, and

    2. properly estimate and pay the tax before the return due date (excluding extensions.)

    The FTP penalty will be administratively waived under reasonable cause criteria if the above requirements are satisfied, 90% of the tax has been paid by the return due date and the remaining amount is paid in full by the extended due date. See IRM 3.15.129.10.3 regarding foreign corporation filing requirements and extensions.

  9. TE/GE blanket extensions or filing exceptions have been granted to certain exempt organizations under Rev. Rul. 71–236 , 1971–1 C.B. 398, Rev. Proc. 83–23 , 1983–1 C.B. 687, as supplemented by Rev. Proc. 94–17, 1994–1 C.B. 579 and Rev. Proc. 96–10, 1996–1 C.B. 577. See IRM 20.1.8 for TE/GE penalties.

  10. When the Service recognizes a failure to timely input TC 460--before or after the return posts and before or after the FTF penalty is assessed--input a TC 460 with the proper extension date. The TC 460 will systemically reverse the TC 166. Use Penalty Reason Code (PRC) 045 for this correction.

  11. When a valid married-filing-joint extension is filed by taxpayers who subsequently file married-filing-separate returns, the extension is equally valid for both. The sum of any amount paid with the joint extension may be divided on the separate returns.

  12. See IRM 25.7.2-5 for BMF return due dates.

  13. For extensions of time to file using Form 4768 , Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, Form 8892, Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax, or Form 8868, Application for Extension of Time To File an Exempt Organization Return, see IRM 4.25.2.1.1 and IRM 3.12.263.3.1.2 . For extension of time to file using Form 8809, Application for Extension of Time to File Information Returns, see IRM 3.11.180.2.1.3.1.

    Note:

    The Service discretion to grant or deny a request for extension of time to file an estate tax return under IRC section 6081(a) is subject to judicial review.

  14. When a prescribed return due date is extended for taxpayers in a disaster area, the disaster extended return due date is also the extended due date for purposes of filing an extension of time to file.

  15. See IRM 3.11.212.4.2 for extension filing due dates. See IRM 3.11.212.1.1 for a listing of extension request forms.

  16. There is no extension of time to file employment tax returns under IRC section 6081. See IRM 4.23.9.9 .

20.1.2.1.2.2  (04-25-2008)
Unsigned Returns

  1. IRC section 6061 and IRC section 6065 require that any return made under the provisions of the internal revenue laws must be signed by the taxpayer under penalties of perjury. As a result, the Service will not treat a tax return that does not contain the taxpayer's signature as a valid return.

20.1.2.1.2.3  (04-25-2008)
Received Date

  1. A return is considered timely filed if received prior to, or on, the due date or extended due date of the return. If the due date falls on a Saturday, Sunday, or legal holiday, and the return is filed (i.e. postmarked) by the next business day, consider it filed on the due date. When the envelope containing a return, payment, or request for extension of time to file is postmarked on or before the due date--including due dates extended by virtue of the regular due date falling on a Saturday, Sunday or legal holiday--it is always considered timely filed without regard to the date it is received by the Service. For example, an individual return with a due date of April 15 that falls on a Saturday, postmarked on or before April 17, received by the Service on April 30--is timely filed, and any enclosed payment is timely paid. See IRM 3.11.3.5 and LEM 20.1.2. For a partnership received date, see IRM 3.11.15.6. For Form 1041 received date, see IRM 3.11.14.13.

  2. U.S. Postal Service: Consider a return timely filed if postmarked by the U.S. Postal Service (or designated delivery service) by the original or extended due date. See LEM 20.1.2.4.

    1. A return or payment is late if the postmark date is after the prescribed due date. See IRC section 7502.

    2. When more than one United States Postal Service postmark date appears on an envelope, consider the earlier postmark date as the date the return was mailed.

  3. Registered and Certified Mail: The date of registration for registered mail is treated as the postmark date. The postmark date on certified mail is treated as the postmark date.

  4. Privately Metered Mail: In general, consider a return timely filed if it contains a postal meter stamp that:

    1. bears the date on or before the last date (or last day of the period) prescribed for filing the return, and

    2. the return is received not later than the time the return would normally have been received if it had been mailed on the last date (or last day of the period) prescribed for filing the return.

  5. If the return is received after the normal time and the postmark is not made by the U.S. postal service, the taxpayer must prove the factors in Treas. Reg. §301.7502–1(c)(1)(iii)(B):

    1. The document must show a postmarked date that is on or before the last day of the period prescribed for filing the document.

    2. The document must be received by the Service not later than the time the document would have been received if it were postmarked at the same point of origin by the United States Post Office.

    3. In addition, the person who is required to file the document must establish that the document was deposited before the last collection of the mail (from the place of deposit) on or before the last day prescribed for filing the document and any delay in receiving the document was due to a delay in the transmission of the mail.

  6. Date Stamp: The Service date stamps the received date on returns filed after the original due date. Returns filed by the original due date carry the due date as the received date and are not date stamped when received. The received date for a late-filed return is the date a return reaches any IRS office or service center. See IRM 3.12.212.1.10 .

  7. A TC 610 may show the received date on the transcript. IDRS shows the received date under the posted return information section as " RET–RECD–DT" .

  8. Notice 97-50 provides that the Service will issue a new list of designated private delivery services on or before September 1 of each year. This relates to determining the date that is treated as the postmark date for purposes of the "timely mailing as timely filing-paying" rule under IRC section 7502 . See IRM 3.12.22.4.4.6.3, IRM 3.0.273.32.4.1, and IRM 3.12.263.4.8.2 .

20.1.2.1.2.4  (04-25-2008)
Definition of Month

  1. For FTF/FTP penalty purposes, a month is calculated from the date the penalty period begins to the same date in each following month, or part of a month. Both penalties continue to apply monthly until the maximum penalty rate is applied or (for FTF) the return is filed or (for FTP) the tax is paid. For example:

    1. The return due date is April 15, 2005. The return is received July 17, 2005 with tax due of $1,700 paid in full. FTF and FTP both apply for four months.

    2. The extended return due date is October 15, 2005. The return is received December 21, 2005, showing tax on return of $2,000, withholding of $800, and amount due of $1,200 paid in full with return. FTF applies for three months from October 15, 2005. FTP (under IRC section 6651(a)(2) ) applies for nine months from April 15, 2005.

  2. For any return or payment due date that begins on the last date of a month, the following examples apply:

    1. Return or payment due date January 31: first month ends February 28; second month ends March 31; third month ends April 30.

    2. Return or payment due date falling on the 30th of any month: all subsequent months end on the 30th except February which ends on the 28th or the 29th.

  3. If a return is not timely filed or the tax is not timely paid, the fact that the date prescribed for filing the return or paying the tax, or the corresponding date in any succeeding calendar month falls on a Saturday, Sunday, or a legal holiday is immaterial in determining the number of months for the FTF/FTP penalty. Treas. Reg. §301.6651–1(b)(3).

20.1.2.1.2.5  (04-25-2008)
Net Amount Due

  1. For the FTF penalty under IRC section 6651(a)(1) , the net tax amount is the amount of tax required to be shown on the return less allowable credits. This amount is reduced by payments made on or before the prescribed due date of the return (excluding extensions), such as withholding credits, tax deposits, estimated tax payments, overpayments from prior periods, or other payments.

  2. The FTF penalty applies not only to tax shown on a taxpayer’s original return, but also to any additional tax subsequently assessed.

  3. The net tax amount required to be shown on the return includes all income taxes as well as employment taxes. For example, the uncollected employee FICA tax on tips is a tax required to be shown on Form 1040 , Individual Tax Return; thus, this uncollected FICA tax on tips should be included in the net tax amount.

  4. Certain taxes may be paid in installments, e.g., heavy vehicle use tax ( Form 2290) and estate taxes ( Form 706.)

    1. If the taxpayer elects to pay this type tax in installments (and does), the FTP penalty does not apply.

  5. When computing the net tax amount from the return due date for the FTF penalty, do not consider amounts which were paid after the due date of the return, but before the date of filing. For example:

    1. Taxpayer sends in payment of $700 for TY 2005 Form 1040 on May 27, 2006 before he files the return.

    2. Taxpayer files return August 27, 2006 and pays remaining amount due of $200.

    3. Tax on return, $1,200; withholding, $300; balance due as of return due date, $900.

    4. FTP is calculated on $900 times two months, times 1/2% a month = $9. Plus, FTP is calculated on $200 times three months, times 1/2% a month = $3. Total FTP penalty = $12.

    5. FTF penalty is calculated on $900 times five months, times 41/2% a month = $202.50.

20.1.2.1.3  (04-25-2008)
Penalty Abatements and Re-assessments

  1. IRM 20.1.1.3 provides guidance for determining if the taxpayer meets the criteria that will allow relief from a penalty. See Exhibit 20.1.1–3 of IRM 20.1.1, Introduction and Penalty Relief, for a complete list of penalty reason codes.

  2. The Service will abate the FTF/FTP penalty when the taxpayer shows reasonable cause and not willful neglect for failure to file a return or pay tax as required. In some instances the abatement will only apply to the portion of the penalty for the period the taxpayer meets relief criteria.

    1. Reasonable cause determinations must be made on the individual facts and circumstances of each case.

    2. Generally, the taxpayer must pay the tax due before the Service will abate a FTP penalty for reasonable cause. The penalty continues to accrue until the tax is paid. The taxpayer may have reasonable cause for some months, but not for others. A final determination cannot be made until after the tax is paid. FTP abatements on accounts with unpaid tax compound re-computations and require adjustments to the 25% maximum applicable rate, increasing the possibility of an incorrect penalty assessment. The Service is not denying the taxpayer's statutory right to reasonable cause consideration; the Service is defining the pre-conditions for administering the provision. There is no statutory requirement that the tax has to be paid in full before a FTP abatement request can be considered or can in fact be made. In the same way, there is no statutory requirement that the Service has to consider a FTP penalty abatement before the tax is fully paid. Thus, this guideline is decided per administrative discretion in the interests of the taxpayer and the Service. It is not in the taxpayer's interest for the Service to consider or effect FTP penalty abatements on accounts with outstanding tax due, as the penalty continues to accrue and often leads to the taxpayer having to make a second request for abatement. As a further example, if the Service were to consider and allow an abatement of FTP on a return filed five months late with unpaid tax, and the 1/2% FTP is abated for the first five months, the FTF rate goes from 41/2% to 5%, effectively transferring the decreased FTP amount over to an increased FTF amount, creating a wash, while the maximum applicable FTP rate that had gone down to 221/2% is re-started once again at 25%. These type scenarios do not provide quality taxpayer relations and only serve to multiply confusions. See IRM 20.1.1.3.5.1 for first-time-abate/clean-compliance-history provisions.

    3. The reasonable cause exception for FTF and FTP penalties under IRC section 6651(a)(1) and IRC section 6651(a)(2) requires the taxpayer to satisfy the burden of proving that the failure to timely file a return and pay tax was in fact due to reasonable cause and not willful neglect. Reasonable cause requires the taxpayer to demonstrate that he exercised ordinary business care and prudence but was nevertheless unable to file/pay within the prescribed time. Willful neglect involves a conscious, intentional failure or reckless indifference. See United States v. Boyle, 469 U.S. 241, 245 (1985), E. Wind Indus., Inc. v. United States, 196 F.3d 499, 504 (3d Cir. 1999), and Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

    4. FTF can be subject to abatement before the tax is fully paid because, once the return is filed, the penalty is a fixed amount and does not continue to accrue on the unpaid tax like the FTP penalty does.

  3. Examiners should address the reason for the FTF or FTP penalty when securing or examining returns on which the penalty applies. Making this initial determination will prevent the need for subsequent abatements. Enter Reason Code (RC) 062 in any of the first three reason code fields for adjustments involving requests for reasonable cause consideration, and the applicable penalty reason code (PRC) in the fourth reason code field.

  4. When the FTF/FTP penalties are abated for reasonable cause using TC 271 with RC 062, Master File will not restrict future computer computations of FTP penalty (provided it was not previously restricted). The computer continues to compute the FTP penalty but will waive the amount associated with RC 062. When abating an assessed FTP penalty in full using TC 271 with RC 062, also check "INTST" to abate any remaining FTP penalty accruals.

    1. A TC 271 input without RC 062 restricts subsequent computation of the penalty.

    2. Input TC 272 with a zero amount to remove the manual restriction on the FTP penalty when a module has been restricted in error.

    3. See LEM 20.1.2 .

  5. Field personnel in contact with taxpayers, being provided more detailed information regarding the conditions relating to the original FTF/FTP penalty assessment, may abate the assessment in whole or part or re-assess a prior FTF/FTP penalty abatement provided supporting facts warrant it and the statute of limitations on assessment is still open.

  6. An abatement of FTP with a TC 270 for zero should be very rare. The specific period for the taxpayer's reasonable cause exception can be objectively determined with respect to past and current conditions. A TC 270 for zero precludes any future FTP assessments or accruals and presupposes the taxpayer's reasonable cause that applies for current and past conditions will be equally applicable tomorrow, next year, and for the future duration of the outstanding balance. A FTP penalty abatement, pre-determined with respect to future conditions, can seldom be objectively valid. An exception to this general rule involves the first-time-abate provision in IRM 20.1.1.3.5.1.

20.1.2.1.4  (04-25-2008)
Substitute for Return — IRC section 6651(g)

  1. Pursuant to IRC section 6020(b), a substitute-for-return (SFR) is prepared by the Service when it is determined that a taxpayer is liable for filing the tax return, but failed to do so after receiving notification from the Service.

  2. If a taxpayer fails to file a delinquent return when requested under the SFR program and the statutory notice of deficiency defaults, or the taxpayer executes an agreement to waive the restrictions on assessment of a deficiency (by signing a Form 870, Form 4549E or Form 4549), the Service will assess the FTF/FTP penalty when reasonable cause is not established.

    Note:

    Excise and employment tax returns do not follow statutory notice of deficiency procedures.

  3. The FTP penalty on amounts shown on SFRs for returns due after July 30, 1996 (determined without regard to extensions) is calculated from the return due date under IRC section 6651(a)(2). For returns due before July 31, 1996, FTP begins 21 calender days (10 business days if the amount on the notice is $100,000 or more) after the 23C date (TC 290 or 300) under IRC section 6651(a)(3).

  4. When the FTP and the FTF penalties apply for the same months, the FTF penalty is calculated from the return due date at 41/2% a month for each month it is late, not to exceed five months.

  5. If the taxpayer has an extension of time to file (TC 460), the FTF penalty calculation begins on the extended due date.

    Note:

    Under IRC section 6651(d) the FTP penalty on an SFR increases from 1/2% to 1% after notice of intent to levy (CP 504) is issued. TC 971 with Action Code (AC) 69 or 35 also indicates that the 1% rate has been triggered.

  6. If the taxpayer files his own return (the due date for which, without regard to extensions, is after July 30, 1996) after the 1% FTP penalty rate has taken effect on the SFR assessment, the FTP penalty under IRC section 6651(a)(2) is recalculated on the amount showing due on the taxpayer's return by using the 1/2% rate for the same period the 1/2% rate was in effect on the SFR and the 1% rate for the same period the 1% rate was in effect on the SFR, not to exceed 25% in the aggregate. The 1% rate, once in effect on the SFR, continues in effect on any remaining unpaid balance showing due on the delinquent return the taxpayer files. The taxpayer may subsequently qualify for an installment agreement, but the FTP rate would not be reduced to 1/4% because the return was not filed timely. When a delinquent return is received after SFR processing, the FTP on the SFR is reversed (abated) and FTP applied on the amount due on the delinquent return from the return due date.

  7. To have MF correctly generate the FTP penalty under IRC section 6651(a)(2) from return due date on the initial assessment of tax on an account having an "SFR" indicator (or for the tax on a subsequently received delinquent return initially processed as an SFR), input Priority Code (PC) 2 with TC 290, or PC 9 with TC 300. (See IRM 4.4.12.4.19.6.) MF will correctly generate FTP under IRC section 6651(a)(3)from the 23C date after 21 calendar days (or 10 business days if the total notice amount due is $100,000 or more) on subsequent assessments when PC 2 is not used with TC 290, or PC 9 is not used with TC 300.

    1. On BMF SFRs with a "6020B" indicator, the tax shows as the TC 150 amount and FTP is systemically calculated from the return due date as it would be with any regular TC 150. However, PC 2 and PC 9 are not currently programmed to start the FTP calculation on a subsequently received delinquent return from return due date and the FTP calculation from return due date has to be done manually until a change is implemented. (See IRM 21.7.9.4.9.4 .)

    2. Inputting PC 5 with a TC 290 for zero recomputes interest and FTP from the return due date.

    3. See IRM 4.4.9.6 and IRM 4.4.12.4.19.6.1 .

  8. Procedures to ensure FTP penalties on IMF and BMF SFRs are sustained in tax court.

    1. Background: In two tax court cases in 2003, the judge denied the Service the assessment of the FTP penalty on an SFR because the requirements for a valid IRC section 6020(b) return were not met. In conjunction with Chief Counsel, Form 13496 , IRC section 6020(b) Certification, was conceived to ensure that FTP penalties on BMF and IMF SFRs would be sustained in future court cases.

    2. AIMS is now programmed to provide systemic input for SFR TC 150s on IMF and BMF returns. All SFRs for BMF MFTs that are valid on AIMS can be processed systemically. (See IRM 4.4.9.) This effectively obsoletes prior guidelines for use of a hardcopy "dummy" return in establishing an SFR account on Master File.

    3. SFRs relating to returns of tax that follow deficiency procedures with FTP applied under IRC section 6651(g) must follow Form 13496 certification procedures.

    4. For SFRs showing tax that does not follow deficiency procedures (e.g., employment and excise), whether or not AIMS is set up to be able to generate the SFR TC 150, examiners can complete the certification guidelines with Form 13496 or sign their names on the taxpayer's signature line on the hardcopy of the return followed by the words: " This return was prepared and signed under authority of IRC section 6020(b)." Follow established SFR processing.

    5. Complete Form 13496 with a live signature or a computer facsimile signature. Prepare and date the certification after the 30-day letter (or revised 30-day letter) so that the date of the certification is identical to, or later than, the 30-day letter. Attach the certification to the Form 4549 / Form 886-A. The date on the certification should be the same as, or later than, the date on the Form 4549 / Form 886-A. Anyone authorized to prepare and issue reports of proposed tax adjustments is authorized to sign the certification. (See D. O. 182 in IRM 1.2.44.5.) Whenever the examiner (or a subsequent reviewer) revises a report of proposed adjustments (without regard to whether or not the revised report is re-issued to the taxpayer), a re-certification is required on another Form 13496 dated on (or after) the same day as the revised report. A Form 13496 may not be prepared or dated after the date of the 90-day letter. Form 13496 (Rev. 10-2005) is available in fillable format on http://publish.no.irs.gov.

    6. When the report of proposed adjustments involves more than one tax year, create a separate Form 13496 for each year and attach each one to a photocopy of the report for each year.

  9. Per IRC section 6501(b)(3), executing a SFR does not start the running of the statute of limitations on assessment or collection.

20.1.2.1.5  (04-25-2008)
Excise and Employment Tax Returns

  1. Employment tax returns and excise tax returns, both annual and quarterly, are subject to the same FTF/FTP penalties under IRC sections 6651.

  2. Form 941c, Supporting Statement to Correct Information, has a return and payment due date for the quarter in which the erroneous prior information was discovered; any failure to file and pay by the due date of the quarter in which the error was discovered is subject to FTF/FTP under IRC section 6651(a)(1)and IRC section 6651(a)(2) in the same way the related Form 941 for the same quarter would be subject to the same IRC section 6651 provisions for late filing/paying. Treas. Reg. §31.6011(a)-4 provides that employment tax returns are considered under Chapter 61, Subchapter A for FTF/FTP purposes under IRC section 6651.

  3. Form 720-X , Amended Quarterly Federal Excise Tax Return ( IRM 21.7.8.4.1.17), and Form 8849, Claim for Refund of Excise Taxes ( IRM 21.7.8.4.5) are treated like other amended returns with either overpayments or underpayments.

20.1.2.1.6  (04-25-2008)
Restrictions on Assertions

  1. According to Policy Statement P–2–4, the Service does not assert penalties against federal agencies. See IRM 1.2.1.3.2 .

  2. The general statute of limitations for assessing the penalty on a filed return is three years from either the due date or the date filed, whichever is later. There is no statute of limitations for assessing the penalty when no return has been filed.

  3. An active criminal investigation (TC 914) suspends notices but does not suspend the running of FTP penalty accruals.

20.1.2.1.6.1  (04-25-2008)
Taxpayer in Bankruptcy

  1. IRC section 6658 prohibits the assertion of the FTP penalty while a taxpayer is involved in a Title 11 bankruptcy proceeding if:

    1. the tax was incurred by an estate and the failure to pay occurred pursuant to an order of the court finding probable insufficiency of funds of the estate to pay administrative expenses, or

    2. the tax was incurred by the debtor before the order of relief or the appointment of a trustee in an involuntary case, whichever is earlier and the petition was filed before the return due date, including extensions, or the date for making the addition to the tax occurs on or after the day on which the petition was filed.

  2. In the case of a tax assessed before the start of a proceeding:

    1. no FTP penalty will be asserted for the period during which the bankruptcy case is pending (see Rev. Rul. 2005-9 for an explanation of when bankruptcy case is considered "pending " ),

    2. the FTP penalty will stop accruing at the start of the bankruptcy proceeding, and

    3. it will resume after the bankruptcy case is closed or dismissed and continue until the tax is paid or the 25% maximum penalty rate is reached.

  3. Bankruptcy is indicated by TCs 520/521, Status 72.

20.1.2.1.6.2  (04-25-2008)
Frivolous Returns

  1. A frivolous return, subject to the penalty under IRC section 6702, does not constitute a return for purposes of FTF/FTP penalty assessments under IRC section 6651.

20.1.2.1.6.3  (04-25-2008)
Taxpayers Overseas

  1. For additional information on overseas taxpayers and foreign-source returns in general, see IRM 3.15.129.1.4.1.

20.1.2.1.7  (04-25-2008)
Assessment/Abatement Procedures

  1. Delinquent returns. Examiners securing delinquent returns will solicit any explanation the taxpayer may provide on the FTF/FTP penalty determination. When adjusting the tax on a return that was filed late, determine if the FTF/FTP penalty was previously assessed or abated, and consider any factors that would apply to these penalties on a proposed tax adjustment. When the audit of a delinquent return results in an overpayment (refund), the FTF penalty and the FTP penalty under IRC section 6651(a)(2) initially assessed by the service center are recalculated and reduced.

    1. Example 1: Taxpayer filed 2004 Form 1040 on July 18, 2005 (four months late) showing a refund of $500. No FTF/FTP applies. The return is audited June 20, 2006, and a tax deficiency of $1,200 is agreed. FTF applies at 5% a month on $700 ($1,200 deficiency less the original $500 overpayment) times the same four months the return was originally late = $140. The FTP penalty would first apply at 1/2% a month under IRC section 6651(a)(3) on any amounts unpaid after 21 days from assessment (the 23C date.)

    2. Example 2: Taxpayer filed 2004 Form 1040 on July 18, 2005 (four months late) paying $1,400 amount due in full with return. FTF and FTP were assessed. The return is audited in June 2006 and results in an overpayment (refund) of $900. FTF penalty is recalculated on $500 ($1,400 original underpayment less $900 overpayment from audit) at 41/2% a month for four months from the return due date. The FTP penalty is also recalculated based on $500 for four months at 1/2% a month.

    3. After January 2002, TC 971 AC 262 will generate when the maximum FTP penalty rate has been applied. When the account drops from IDRS, TC 971 AC 262 will appear on CFOL (BMFOL or IMFOL.) When figuring FTP manually, TC 971 AC 262 can be input manually.

20.1.2.1.7.1  (04-25-2008)
Campus/Customer Service

  1. Manual Computation of the Penalty:

    1. In many instances, Master File calculates the FTP penalty (TC 276.)

    2. When manual adjustments of the penalty are required, (e.g., Master file and IDRS mismatches, restricted accounts, multiple status 60 and 64 on module, multiple TC 520/521, and FTP computation on reversed refundable credit) Service personnel are responsible for determining the correct penalty amount.

    3. IDRS Command Code (CC) "INTST" is available for determining the amount of assessed and accrued FTP penalty on accounts not previously restricted (TC 270/271.)

    4. IDRS CC "COMPAF" is available for computing the FTP penalty which should be assessed or abated. The "COMPAF" print may be used to document a manual adjustment.

    5. When there is a difference between computer generated and manual computations, manual computations take precedence.

  2. The following transaction codes identify assessment or abatement of the FTF and FTP penalties:

    • TC 166/167—computer generated (systemic) assessment/abatement of the FTF penalty.

    • TC 160/161—manual assessment/manual abatement of the FTF penalty.

    • TC 162—manual removal of computation restriction of the FTF penalty.

    • TC 276/277—computer generated (systemic) assessment/abatement of the FTP penalty.

    • TC 270/271—manual assessment/abatement of the FTP penalty.

    • TC 272 – removes restriction on computation of the FTP penalty on previously posted TC 270 or TC 271.

    • TC 971 AC 262 – indicates the 25% maximum FTP penalty rate has been applied.

  3. Blocking Series. When making an FTF and/or FTP adjustment:

    1. with the original return, use a refile blocking series;

    2. without the original return, use any non-refile blocking series as appropriate.

      Note:

      Blocking series "18" is a refile blocking series. Due to a heavy workload in files, use only blocking series " 18" when it is absolutely necessary to attach your adjustment to the original return when it has not been secured. The mandate to use blocking series "18" with FTP and/or interest was rescinded.

  4. Manual assessments/abatements: Since the FTP penalty accrues until the earlier of the date the tax is paid or the maximum 25% penalty rate is applied, it is important that the account is not unnecessarily restricted.

  5. System errors: Prompt action is needed to correct FTF/FTP penalties erroneously assessed or accrued due to system errors. When a system error is discovered, the Service issues special instructions identifying the problem and the steps needed to correct the situation. Usually, these system errors are quickly resolved. When a system error on an account is identified, such as a tax account suspended in notice status longer than it should have been, an adjustment to assessed and accrued FTP penalty may be needed.

  6. Before adjusting restricted FTF/FTP assessments, the original assessment documents may be obtained to check the penalty computation and rationale for restricting the penalty.

    1. Assessed and accrued FTP penalties should be manually computed (CC "COMPAF" may be used) and abated from the cycle of the last status update through the 23C date of the posting TC 271.

    2. Notify the taxpayer of the action taken and the balance due, if any.

20.1.2.1.7.2  (04-25-2008)
PINEX

  1. The IRS provides explanations of all penalty and interest charges to the taxpayer when a balance due notice or a refund is issued. Using the Penalty and Interest Notice Explanation (PINEX) system.

  2. Upon request, command code PINEX generates a notice of explanation to the taxpayer. The specific tax module requested must be on the Taxpayer Information File (TIF) data base and at least one unreversed penalty or interest transaction posted.

  3. This notice includes a computation and explanation of selected computer generated penalties and interest charged and interest paid except for computations and explanations of the failure-to-deposit penalty.

  4. PINEX notices must be reviewed by the tax examiner requesting the notice, and, if correct, mailed to the taxpayer.

  5. PINEX also provides screen displays of penalty and interest computations for an immediate response to telephone inquiries or walk-in requests made to Area Offices. IRS personnel may find the screen displays helpful in analyzing penalty and interest transactions in general.

20.1.2.1.8  (04-25-2008)
FTF/FTP on Withholding, EIC and Other Credits