In 1955, there were approximately 14 penalty provisions in the Internal Revenue Code. There are now more than ten times that number. With the increasing number of penalty provisions, the IRS recognized the need to develop a fair, consistent, and comprehensive approach to penalty administration.

In November 1987, the Commissioner established a task force to study civil penalties, and in February 1989, the Commissioner’s Executive Task Force issued a "Report on Civil Tax Penalties." The report established a philosophy concerning penalties, provided a statutory analysis of the three broad categories of penalties (filing of returns, payment of tax, accuracy of information), and made recommendations where warranted to resolve the inconsistencies. Those recommendations were, in part, that the IRS should:

In keeping with the Commissioner’s Executive Task Force Report and Congressional recommendations, the consolidated penalty IRM was developed.

This handbook is arranged in a user-friendly format. The chapters follow the logical sequence of events when working a penalty case. Appropriate headings are provided that describe the text that follows.

The handbook is designed for use both as an everyday reference guide and as a training document. Figures and examples are included in the text where they are most useful. Figures that are referenced frequently throughout the text are included as chapter exhibits to conserve space.

The handbook contains criteria, guidelines, and procedures for asserting, not asserting, and abating penalties. Chapters are included covering the penalty policy statement and philosophy, the application of reasonable cause, and the procedures for penalty appeals. The sections in IRM 20.1 are:

This section contains Exhibits to assist the user in researching penalty issues:

Overall responsibility for penalty programs is assigned to the Servicewide Penalties group. Servicewide Penalties is a matrix organization residing in Exam Policy (Small Business/Self Employed) Division. Servicewide Penalties is charged with coordinating policy and procedures concerning the administration of penalty programs, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching taxpayer attitudes and opinions, and determining appropriate action necessary to promote voluntary compliance.

Every function in the IRS has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the penalty policy statement and philosophy. Attention should be directed to the coordination of penalty programs between offices and functions to make sure that approaches are consistent and penalty information is used for identifying and responding to compliance problems.

Managers should continuously review information for trends that may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Managers should institute, on an ongoing basis, a quality review system that evaluates the timely (Action 61 cases) and correct disposition of penalty cases and encourages consistent administration of penalties. See IRM 21.3.3.4.2for Action 61 requirements and guidelines.

All employees should keep the following objectives in mind when handling each penalty case:

Service officials and managers must communicate security standards contained in the Manager’s Security Handbook ( IRM 1.4.6 ) to subordinate employees and establish methods to enforce them.

Employees are responsible for taking required precautions to provide security for the documents, information, and property which they handle in performing official duties.

Employees using IDRS should only access those accounts required to accomplish their official duties. Any unauthorized access or browsing of tax accounts by employees is prohibited by the IRS. IRM 10.81provides the authority and standards for Information Technology security.

While the IRS is always striving to improve its systems and provide better service, some taxpayers still have difficulty obtaining a solution to a problem or an appropriate response to an inquiry. The purpose of TAS is to give taxpayers someone to speak for them within the IRS—an advocate. TAS guarantees that taxpayers will have someone to make sure their rights are protected, someone to turn to when the system is not responsive to their needs. TAS steps in and takes action on behalf of taxpayers when their complaints or inquiries concerning problems related to Federal taxes meet TAS criteria.

The purpose of the criteria is to ensure that problems and complaints which have not been handled properly through normal channels are included in TAS. See IRM 13.1,Taxpayer Advocate Case Procedures.

Form 911, Request for Taxpayer Advocate Service Assistance (and Application for a Taxpayer Assistance Order (ATAO)) may be initiated by an IRS employee on behalf of the taxpayer to request review of an account if:

See IRM 13.1.7.8 for additional information.

Taxpayers in the United States assess their tax liabilities against themselves and pay them voluntarily. This system of self-assessment and payment is based on the principle of voluntary compliance. Voluntary compliance exists when taxpayers conform to the law without compulsion or threat.

Compliant self-assessment requires a taxpayer to know the rules for filing returns and paying taxes. The IRS is responsible for providing information to taxpayers, which includes:

In addition to (2) above, the IRS must also provide a means to preserve and enhance our voluntary compliance by fairly, consistently, and accurately administering a system of penalties.

Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties.

Penalties advance the mission of the Service when they encourage voluntary compliance. The IRS has formalized this obligation to the public in its Mission Statement.

Voluntary compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.

Penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.

The IRS has the obligation to advance the fairness and effectiveness of the tax system. Penalties should:

IRS personnel may educate taxpayers and encourage their future compliance by:

Penalties should relate to the standards of behavior they encourage. Penalties best aid voluntary compliance if they support belief in the fairness and effectiveness of the tax system. This belief encourages compliance in areas that cannot be reached through audits or other programs. The Service’s approach to penalties is embodied in Penalty Policy Statement 20-1, See Exhibit 20.1.1-1.

The IRS’s approach to penalty administration must ensure:

IRC section 6751(b), added under the Restructuring and Reform Act of 1998 (RRA 98), provides, in general, that no penalty under the Code shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. The provision became effective after June 30, 2001. At this time, the Secretary has not designated any higher level official to approve initial determinations.

Notwithstanding the exception noted in paragraph 3 below, this approval requirement will also apply to the imposition of any fraud penalty including fraudulent failure to file penalty under IRC section 6651(f).

IRC section 6751(b) provides an exception to the managerial approval requirement for penalties calculated through electronic means. This exception applies to the following penalties: IRC section 6651 (failure to file tax return or to pay tax), IRC section 6654 (failure by individual to pay estimated income tax), IRC section 6655 (failure by corporation to pay estimated income tax), and any other penalties automatically calculated through electronic means (see paragraph 5 below).

For purposes of this section, the term "penalty" includes any addition to tax or any additional amount. IRC section 6751(c).

"Penalty automatically calculated through electronic means " , means something more than merely an electronic device to perform arithmetic functions to determine the amount of a penalty. Instead, the assessment of a penalty qualifies as one calculated through electronic means if the penalty is assessed free of any independent determination by an IRS employee as to whether the penalty should be imposed against a taxpayer.

The managerial review and approval must be documented in writing and retained in the case file. The manager must indicate the decision reached, and sign and date the case history document.

IRC section 6751(b) does not require the IRS to provide a taxpayer with a copy of the manager's written approval of penalties assessed against the taxpayer. However, the IRS may wish to provide the taxpayer with a courtesy copy of the document showing that a manager approved the penalties. Taxpayers are entitled to request these documents under the Freedom of Information Act.

A Revenue Agent Report (RAR) that includes penalties may be approved by a manager in writing after the RAR is presented to a taxpayer for signature. The RAR does not have to be reviewed by a manager prior to discussions with the taxpayer regarding the penalties. Nor does the RAR have to be reviewed before the taxpayer agrees to the penalties. However, the manager must perform a meaningful review of the employee's penalty determination prior to assessment. The manager should verify that the penalties were fairly imposed and accurately computed; that the employee did not improperly assert the penalties in the first instance as a bargaining chip; and that the employee's conclusions regarding "reasonable cause" (or the lack thereof) were proper.

When the IRC section 6662 accuracy-related penalties for negligence and substantial understatement are assessed under the Automated Underreporter program without an employee independently determining the appropriateness of the penalty, the penalty is one automatically calculated through electronic means and may be assessed without written managerial approval of the penalty. However, if a taxpayer responds either to the initial letter proposing a penalty or to the notice of deficiency that the program automatically issues, an IRS employee must consider the response. When considering the response, the employee must make an independent determination as to whether the response provides a basis upon which the taxpayer may avoid the penalty. Whether the employee decides to apply the penalty or not, the employee's independent determination of whether the penalty is appropriate means that the penalty is not automatically calculated through electronic means. Accordingly, IRC section 6751(b)(1) would require written managerial approval of an employee's determination to assert the penalty.

IRC section 6751(b) applies, and managerial approval is required, when an IRS employee does not use IDRS Command Code (CC) FTDPN to determine whether the federal tax deposit (FTD) penalty applies (IRC section 6656). This determination is not free of any independent determination by an IRS employee as to whether the penalty should be imposed against a taxpayer.

Managerial approval is not required when CC FTDPN is used to determine an FTD penalty. For example, managerial approval is not required if CC FTDPN was used to determine the penalty on the following types of cases:

IRC section 6751(b) provides that the assessment of a penalty shall be "approved (in writing) by the immediate supervisor of the individual making the initial determination of such assessment." Generally, an immediate supervisor is the person who writes an employee's evaluation or approves the employee's leave. On-the-Job Instructors do not qualify as the "immediate supervisor" for the purpose of IRC section 6751(b).

Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless is unable to comply with those obligations.

In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations (Treas. Regs.), Policy Statements, and IRM Part 20.1.

Reasonable cause relief is not available for all penalties; however, other exceptions may apply.

The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM sections for the rules that apply to a specific IRC section.

Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this section, See IRM 20.1.1.3.

Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

These two very separate categories are placed together because in many instances an Administrative Waiver is an extension of rules that were provided for by statute.

An IRS error can be any error made by the IRS in computing or assessing tax, crediting accounts, etc. See Exhibit 20.1.1-3. , Penalty Reason Code Chart, for the appropriate PRC to be used when abating either a systemically-generated or manually-input penalty.

General Service Error (systemically generated— PRC 015). This PRC is used to identify penalties abated as the result of a Master File Recovery.

When an analyst from any area of the IRS identifies a computer programming application that caused a penalty to be assessed in error, that analyst should work with an analyst from Servicewide Penalties to:

Other Service Error (manual input—PRC 045). This PRC should be used to identify penalties abated as the result of IRS errors that occur individually. Some examples are: