Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 2. Failure To File/Failure To Pay Penalties (Cont. 1)

20.1.2  Failure To File/Failure To Pay Penalties (Cont. 1)

20.1.2.2 
Failure to File a Tax Return or to Pay Tax - IRC 6651

20.1.2.2.7 
Failure to File a Tax Return — IRC 6651(a)(1)

20.1.2.2.7.6  (04-19-2011)
Cross-references

  1. For periods disregarded in determining the due date used for computing the penalty, see IRM 20.1.2.1.2.

  2. For individuals and entities outside the United States see IRM 20.1.2.1.3.3.

  3. For return due dates (without regard to extensions) see Document 6209, Section 2, Part 3, Due Date of Returns.

  4. For explanatory language regarding the failure to file (FTF) penalty on a notice of deficiency, see IRM 4.8.9.13.2, Failure to File and Failure to Pay Penalties.

20.1.2.2.8  (04-19-2011)
Failure to Pay Tax — IRC 6651(a)(2) and (3)

  1. Taxpayers are required to pay the tax shown on their returns without assessment or notice and demand for payment. The due date for tax shown on the return is the due date for filing, without regard to any extension of time to file. See IRC 6151(a). However, see IRM 20.1.2.1.2 for periods that are disregarded in determining whether a taxpayer paid on time, and IRM 20.1.2.1.3.2 for extensions of time to pay.

  2. Some taxpayers may elect under IRC 6014 to have IRS compute the tax shown on their return. In the case of a taxpayer who has made this election, the due date for tax shown on the return is 30 days after the date of notice and demand stating the amount of tax due. See IRC 6151(b).

  3. When the tax shown on a return is less than the tax required to be shown, the taxpayer is required to pay the additional amount by the date stated in the notice and demand for payment issued by the IRS. See IRC 6155. However, see IRM 20.1.2.1.2 for periods that are disregarded in determining whether a taxpayer paid on time, and IRM 20.1.2.1.3.2 for extensions of time to pay.

  4. In the case of any failure to pay on or before the date fixed for payment, a penalty is assessed for failure to pay unless the failure is due to reasonable cause and not due to willful neglect.

  5. See IRM 20.1.2.2.8.4 for failure to pay tax shown on the return, and IRM 20.1.2.2.8.5 for failure to pay tax upon notice and demand for payment.

  6. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief. Also see IRM 20.1.2.1.4.1, Penalty Abatements and Re-assessments for an in-depth discussion of reasonable cause considerations relating to the failure to pay tax.

20.1.2.2.8.1  (04-19-2011)
Computing the Penalty

  1. For each month of the period during which each failure to pay (FTP) penalty applies, the penalty is computed by multiplying the amount subject to the penalty by the penalty rate. The total penalty is the sum of the penalties for all months to which a failure to pay penalty applies.

    Note:

    When the penalty rate and the underpayment amount remain the same over several months, the computation can by simplified by multiplying months X unpaid tax X penalty rate.

  2. The basic penalty rate is generally 1/2 percent.

  3. For conditions under which the basic penalty rate is increased to 1 percent, see IRM 20.1.2.2.8.1.1.

  4. For conditions under which the basic penalty rate is decreased to 1/4 percent, see IRM 20.1.2.2.8.1.2.

  5. The penalty for each underlying tax assessment may not exceed 25 percent in the aggregate. That means that each month the penalty rate is added to the sum of the penalty rates for all preceding months subject to that penalty. The penalty rate for any month cannot be greater than the rate needed for the aggregate rate to reach 25 percent.

    Example:

    Presuming that the aggregate penalty applied under IRC 6651(a)(2) at the end of the last penalty month was 241/4 percent, and that the current base penalty rate is 1 percent per month. Notwithstanding the base penalty rate of 1 percent, the maximum penalty rate that may be applied to the current month would be 3/4 percent, since that is the amount needed to bring the aggregate rate to the 25 percent maximum.

  6. A separate penalty computation applies to tax shown on the return, and to each notice reflecting additional tax required to be shown on the return which was not included in a prior notice. This means that the 25 percent aggregate maximum may be reached for tax shown on the return while the FTP penalty is still accruing for additional tax billed in a subsequent notice.

  7. When the 25 percent aggregate maximum has been reached for ALL tax assessed in a module, Master File generates Transaction Code (TC) 971 with Action Code (AC) 262. If the penalty is being manually computed and assessed, TC 971 with AC 262 may need to be manually input if the aggregate maximum has been reached for all assessed tax.

20.1.2.2.8.1.1  (04-19-2011)
1 Percent Penalty Rate — IRC 6651(d)

  1. IRC 6651(d) provides that the basic failure to pay (FTP) penalty rate increases to 1 percent for any month following—

    1. 10 days after IRS gives notice of intent to levy under IRC 6331(d); or

    2. the day IRS makes demand for immediate payment of a jeopardy assessment under IRC 6331(a).

  2. A notice of intent to levy may consist of (and may be identified by) any of the following:

    • CP 504 — Final Notice, Notice of Intent to Levy Certain Assets (identified by Master File status 58).

    • Collection Due Process notification (identified by Transaction Code (TC) 971 with Action Code (AC) 069).

    • ACS letter LT11, or Field Collection Letter 1058 (identified by TC 971 with AC 035).

    • Assessments by Service Center Collection Branch that incorporate a notice of intent to levy if a liability is not paid by the date shown in the notice (identified by assessment doc code 51 with blocking series 140–149).

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. A jeopardy assessment accompanied by a demand for immediate payment is identified by assessment doc code 51 with blocking series 100–119.

  4. The 1 percent penalty rate applies to all late payment penalties for all months subject to a penalty for paying late that begin after the date of the penalty rate increase. The 1 percent rate does not apply to new assessments after the module balance (including accruals) is zero, unless the penalty rate for the new assessment is increased again as described above.

    Example:

    The tax module for a 2009 calendar year return reflecting $10,000 tax and no payments reflects Master File status 58 dated July 10, 2010. The date prescribed for payment of the tax is April 15, 2010. The first penalty month begins on April 16, 2010, and ends on May 15, 2010. Each subsequent penalty month also begins on the 16th and ends on the 15th of the following month. The 1 percent rate applies to the any penalty month that begins after the 10th day following the status 58 date, meaning after July 20, 2010. This means the 1 percent rate applies to any penalty month that begins August 16, 2010 and later, except during months where the taxpayer qualifies for the 1/4 percent rate. See IRM 20.1.2.2.8.1.2.

20.1.2.2.8.1.2  (04-19-2011)
1/4 Percent Penalty Rate — IRC 6651(h)

  1. For penalty months beginning after 12/31/1999, IRC 6651(h) provides that—

    • In the case of an individual taxpayer (a taxpayer that is not a corporation, a partnership, a trust, or an exempt organization),

    • Who filed his or her return on or before the due date for filing (including extensions),

    the basic penalty rate decreases to 1/4 percent for any month that begins on or after the taxpayer has entered into an installment agreement with the IRS under IRC 6159.

  2. The date an installment agreement goes into effect is identified by the date of Transaction Code (TC) 971 with Action Code (AC) 063.

    Reminder:

    The mere presence of TC 971 with AC 063 does not mean the that 1/4 percent rate applies. Both of the requirements in paragraph (1) above must be met.

  3. The 1/4 percent rate ends following the month during which the installment agreement is terminated.

  4. The installment agreement is considered terminated on—

    • The date of TC 971 with AC 163 (installment agreement terminated due to default or full payment);

    • 10 days after IRS gives notice of intent to levy (see IRM 20.1.2.2.8.1.1); or

    • The day IRS makes demand for immediate payment of a jeopardy assessment (see IRM 20.1.2.2.8.1.1).

    Caution:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ 1/4≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. When applicable, the penalty rate decrease may apply to all tax liabilities that qualify for the reduction: Individual income tax, employment tax, and excise tax.

  6. Estate tax returns (in the case of a decedent's estate) and generation skipping tax returns also qualify for the 1/4 percent rate because these returns are generally filed by or on behalf of an individual.

  7. When an installment agreement is terminated, the basic penalty rate reverts to the rate in effect prior to the installment agreement beginning with the first penalty month that begins after the installment agreement is terminated.

  8. The following conditions cause an installment agreement to be terminated:

    1. The taxpayer fails to make payments in accordance with the agreement.

    2. Additional tax is assessed that was not included in the installment agreement.

    3. The liability becomes uncollectible (TC 530 posts in the account).

    4. The taxpayer files for bankruptcy protection (see IRM 20.1.2.2.8.6).

  9. When a taxpayer sets up an installment agreement and expects to owe additional tax that has not yet been assessed (but which is to be included in the agreement), the IRS turns "on" the assessment indicator in the taxpayer's installment agreement history. This allows the agreement to continue when an additional assessment is posted to the taxpayer's account, including in the same tax module.

  10. If the assessment indicator is "off" when an additional assessment posts, the installment agreement defaults and is terminated. The 1/4 percent rate will cease to apply to any existing liability, nor will it apply to the new liability, unless the installment agreement is reinstated with the new liability included.

20.1.2.2.8.2  (04-19-2011)
Application of Payments

  1. IRS's computers determine "unpaid tax" by applying specific rules in the application of payments to unpaid liabilities. Manual penalty computations should follow the same rules for the sake of consistency and fairness.

  2. For the purpose of computing the penalties for failure to pay tax, payments credited against a tax return liability are applied as of their effective date.

  3. The following are considered payments for the purpose of this subsection:

    • Estimated tax payments.

    • Credit for withheld income tax.

    • Credit for excess withheld social security tax.

    • Regulated investment credit from Form 2439.

    • Overpayments of other taxes or from other periods credited against this tax.

    • Any other payments made by, or on behalf of, the taxpayer via cash, check, or money order.

  4. Each payment is applied individually to individual assessments that make up the overall liability until that payment is used up, or until the overall liability is paid. Payments are applied to assessments until the assessment is paid, in the following order of priority:

    1. All payments are applied in effective date order—

      1. To tax shown on the return, and then

      2. To additional tax assessed as a math error assessment.

    2. Each payment made on an existing liability is applied in effective date order—

      1. To the earliest unpaid tax, then

      2. To any penalty (other than the penalty for paying late), fees, charges, or other additions to tax assessed prior to the next unpaid tax assessment.

      3. Repeat 1) and 2) for any unused portion of each payment until the payment is used up, or until all tax, penalty (other than the penalty for paying late), fees, charges, or other additions to tax are paid. If all are paid, any unused remainder is applied in accordance with c) below.

    3. Payments made in excess of existing assessments (described in a) and b) above) are applied in effective date order—

      1. To any penalty (other than the penalty for paying late), fee, charge, or other addition to tax, assessed prior to the assessment of any additional tax; then

      2. To any additional tax assessed (in assessment date order), then

      3. To any penalty (other than the penalty for paying late), fee, charge, or other addition to tax, assessed after the assessment of any additional tax; then

      4. To any penalty for paying late, and finally

      5. To any interest.

    Example:

    The account for a return reflects the following:

    Item Date Amount
    Tax shown on the return 04/15/2009 500.00
    Math error assessment 07/13/2009 100.00
    Penalty for filing late 07/13/2009 120.00
    (1) Credit for withheld tax 04/15/2009 –480.00
    (2) Payment with return 06/18/2009 –20.00
    (3) Subsequent payment 08/05/2009 –80.00
    Additional Assessment 09/07/2009 150.00
    (4) Subsequent payment 09/14/2009 –80.00
    (5) Subsequent payment 10/13/2009 –80.00
    (6) Subsequent payment 11/11/2009 –80.00

    Payment (1) is applied against tax shown on the return, leaving $20 of that amount unpaid (priority a1).
    Payment (2) is applied against tax shown on the return (priority a1), paying it in full.
    Payment (3) is applied against math error assessment (priority a2), leaving $20 of that amount unpaid.
    Payment (4) is applied against math error assessment (priority a2 or b1), with $60 unused. The unused $60 portion of payment (4) is applied against the penalty for filing late (priority b2).
    Payment (5) is applied against the additional tax assessment (priority b1).
    Payment (6) is applied against the additional tax assessment (priority b1), with $10 unused. The unused $10 portion of payment (6) is applied against the penalty for filing late (priority b2), leaving $50 of that amount unpaid.
    Any future payments will be applied first to the remaining penalty for filing late (priority b2), then to late payment penalty (priority c4), and finally to interest (priority c5).

  5. The effect of refunds and offsets out of the module is to

    1. Reduce any unused portion of any payment made before the date of the refund (but not below zero), or to

    2. Reduce the amount of any payment made after the date of the refund (but not below zero). This applies only if the amount of the refund exceeded the available overpayment at the time of the refund, and if there is no intervening tax assessment.

    In other words, payments that have been refunded or offset are not available for payment of subsequent tax assessments. Payments received after a refund or offset, but prior to a new tax assessment, repay any excessive portion of the refund or offset before any unused portion of the payment can be applied against a subsequent tax assessment.

    Example:

    The account for a return reflects the following:

    Item T/C Date Amount
    Tax shown on the return 150 04/15/2009 500.00
    (1) Credit for withheld tax 806 04/15/2009 –580.00
    Refund issued or offset 846 05/25/2009 80.00
    (2) Prepayment of deficiency 640 06/18/2009 –200.00
    Additional Assessment 300 09/07/2009 150.00
    (1) Withholding reduced 807 04/15/2009 50.00

    Payment (1) [withholding] was reduced by $50 from $580 to $530. Payment (1) is applied against tax shown on the return (priority a1), with $30 unused.
    The refund reduces the unused portion of payment (1) by $80, but not below zero. $50 of the refund is "excessive." .
    Payment (2) is reduced by the $50 "excessive" portion of the refund, with $150 of payment (2) remaining.
    The remaining $150 of payment (2) are applied against the additional tax assessment.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. IRC 6601(e)(3) provides that no additional interest is to be imposed beyond the date of any notice and demand for payment to the extent that the amount shown in the notice is paid within 21 days after the date of the notice (10 business days, if the amount in the notice is $100,000 or more). Although there is no similar provision in the law governing the penalty for paying late, IRS also will not impose additional late payment penalty computed beyond the date of notice and demand to the extent that the tax shown in the notice is paid within the given time frame. To accomplish this, IRS treats payments that are mailed within the given time frame as made on the date of the notice. See IRM 20.1.2.1.1, When Timely Mailing Equals Timely Filing or Paying.

20.1.2.2.8.3  (04-19-2011)
Application of Tax Abatements

  1. For the purpose of determining tax shown in a notice and demand for payment, tax abatements are applied to preceding tax assessments in "first in, first out" (FIFO) order.

  2. After all preceding assessments have been set to zero, any remaining abatement is applied to "tax shown on the return," which may end up being less than zero.

20.1.2.2.8.4  (04-19-2011)
Failure to Pay Tax Shown on the Return — IRC 6651(a)(2)

  1. IRC 6651(a)(2) provides for a penalty if the tax shown on any return is not paid by the due date for payment, unless the failure to pay is due to reasonable cause and not due to willful neglect.

    Note:

    An extension of time to file does not extend the time to pay.

  2. Reasonable cause is presumed for certain taxpayers with an extension of time to file if specific criteria are met. See IRM 20.1.2.1.3.1 paragraph 5. Also see IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief, and IRM 20.1.2.1.4.1, Penalty Abatements and Re-assessments for an in-depth discussion of reasonable cause considerations relating to the failure to pay tax.

  3. This penalty applies to the following returns:

    • Income tax returns;

    • Employment tax returns and other returns of withheld income tax;

    • Excise tax returns;

    • Gift tax returns; and

    • Estate tax returns.

  4. This penalty does not apply to:

    • Information returns required under Chapter 61, Subchapter A, Part III;

    • Payments of estimated tax; and

    • Partnership returns (other than electing large partnerships).

  5. For each month or part of a month that the tax remains unpaid, the penalty is generally 1/2 percent of the unpaid tax. However, the penalty rate may increase to 1 percent per month, or decrease to 1/4 percent per month. See IRM 20.1.2.2.8.1.1 and IRM 20.1.2.2.8.1.2.

  6. The penalty generally does not apply for any month during which a bankruptcy proceeding is pending against the taxpayer. See IRM 20.1.2.2.8.6.

20.1.2.2.8.4.1  (04-19-2011)
Amount Subject to IRC 6651(a)(2)

  1. For each month, the amount subject to this penalty is the portion of the amount shown as tax on the return that is not paid before the beginning of that month, either by payment, or by credit against the tax that may be claimed on the return.

  2. Currently IRS defines "amount shown as tax" as "total tax per taxpayer" reduced by the following credits per taxpayer (if applicable):

    • Earned income credit.

    • Additional Child Tax Credit.

    • Fuel Tax Credit.

    • Credit for Prior Year Alternative Minimum tax.

    • Refundable Education Credit.

    • Health Coverage Tax Credit.

    • First Time Homebuyer Credit.

    • Making Work Pay Credit.

    • American Opportunity Credit.

    • Adoption Credit.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. See IRC 6651(b)(2) and (3).

20.1.2.2.8.4.1.1  (04-19-2011)
Special Rule — IRC 6651(c)(2)

  1. If the amount required to be shown as tax on the return is less than the amount shown, then the amount subject to the penalty under IRC 6651(a)(2) is computed by using such lesser amount.

20.1.2.2.8.4.2  (04-19-2011)
Months Subject to IRC 6651(a)(2)

  1. Provided there is an amount subject to this penalty, the first month subject to the penalty for paying late under IRC 6651(a)(2) begins on the day following the latest of the following dates:

    • The due date for payment. See IRM 20.1.2.2.8 paragraphs (1) and (2).

    • The extended payment due date in the case of an approved extension of time to pay under IRCs 6161 through 6167, or under Treasury Regulation 1.6081–5.(see IRM 20.1.2.1.3.2 and IRM 20.1.2.1.3.3).

    • The disaster due date after application of periods to be disregarded under IRC 7508A (see IRM 20.1.2.1.2.2).

    • The combat zone due date after application of periods to be disregarded under IRC 7508 (see IRM 20.1.2.1.2.1).

  2. The penalty applies for each month or part of a month during which the failure to pay continues. However, see IRM 20.1.2.2.8.6, Bankruptcy, for an exception.

  3. Each month subject to the penalty ends on the day of the month that corresponds with the day of the month of the latest payment due date as determined above, and each new month subject to the penalty shall begin on the following day, with the following exceptions:

    1. In the case where the day of the month of the due date is the last day of the month, each new month subject to penalty shall begin on the first day of the following month.

    2. In the case of February, if the day of the month of the due date does not exist in February, the new month subject to penalty shall begin on the first day of March.

  4. The penalty continues until it has reached 25 percent in the aggregate.

20.1.2.2.8.5  (04-19-2011)
Failure to Pay Tax Upon Notice and Demand — IRC 6651(a)(3)

  1. IRC 6651(a)(3) provides for a penalty if tax required to be shown on a return, but which was not shown, is not paid by the date stated in the notice and demand for payment. The penalty does not apply if the failure to pay is due to reasonable cause, and not due to willful neglect. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief. Also see IRM 20.1.2.1.4.1, Penalty Abatements and Re-assessments for an in-depth discussion of reasonable cause considerations relating to the failure to pay tax.

  2. This section applies to additional amounts assessed as—

    • A deficiency,

    • An amendment to the original return, and

    • A result of a correction of a mathematical error as defined under IRC 6213(b)(1).

    The date for payment stated in the notice is 21 days following the date of the notice if the amount in the notice is less than $100,000. Otherwise the date is 10 business days after the date of the notice.

    Note:

    See IRM 20.1.2.1.1 (7), with regard to timely mailing equals timely paying.

  3. The penalty does not apply if the failure to pay is due to reasonable cause and not due to willful neglect.

  4. For each month or part of a month during which the underlying tax remains unpaid, the penalty generally is 1/2 percent of the unpaid tax. However, the penalty rate may increase to 1 percent per month, or decrease to 1/4 percent per month. See IRM 20.1.2.2.8.1.1 and IRM 20.1.2.2.8.1.2.

  5. The penalty generally does not apply for any month during which a bankruptcy proceeding is pending against the taxpayer. See IRM 20.1.2.2.8.6.

20.1.2.2.8.5.1  (04-19-2011)
Amount Subject to IRC 6651(a)(3)

  1. For each month following the date for payment stated in the notice, the amount subject to the penalty under IRC 6651(a)(3) is the portion of the net additional tax shown in the notice and demand for payment that is not paid before the beginning of the month. The term "additional tax shown in the notice and demand" refers to tax that—

    • Was not shown on the return, and that

    • Was not shown in a prior notice and demand for payment.

  2. "Net additional tax" exists if the sum total of all tax increases or decrease, plus all increases and decreases in refundable credits deemed tax, is greater than zero. Refundable credits deemed to be tax for this purpose are:

    • Earned income credit.

    • Additional Child Tax Credit.

    • Fuel Tax Credit.

    • Credit for Prior Year Alternative Minimum tax.

    • Refundable Education Credit.

    • Health Coverage Tax Credit.

    • First Time Homebuyer Credit.

    • Making Work Pay Credit.

    • American Opportunity Credit.

    • Adoption Credit.

    Example:

    Taxpayer A receives notice and demand for payment from the IRS. The notice reflects a decrease in tax of $200 and a decrease in Earned Income Credit of $300. The sum of the $200 decrease in tax (-200), and the $300 decrease in Earned Income Credit (+300), is a net change of +100. Therefore, the notice reflects "net additional tax."

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

20.1.2.2.8.5.2  (04-19-2011)
Months Subject to IRC 6651(a)(3)

  1. Provided there is an amount subject to this penalty, the first month subject to the penalty for paying late under IRC 6651(a)(3) begins the day after the date for payment stated in the notice and demand for payment:

    • For notice and demand given before January 1, 1997, the date stated in the notice was 10 calendar days following the date of the notice.

    • For notice and demand given after December 31, 1996, if the amount shown due in the notice is less than $100,000, the date stated in the notice is 21 calendar days following the date of the notice.

    • For notice and demand given after December 31, 1996, if the amount shown due in the notice is $100,000 or more, the date stated in the notice is 10 business days following the date of the notice.

    • See IRM 20.1.2.1.2, Disregarded Periods, for situations where the date stated in the notice falls within a disaster period, or within a period to be disregarded because of service in a combat zone.

  2. Each additional month subject to the penalty ends on the day of the month that corresponds with the day of the month of the date for payment stated in the notice, and each new month subject to the penalty shall begin on the following day, with the following exceptions:

    1. In the case where the day of the month of the due date is the last day of the month, each new month subject to penalty shall begin on the first day of the following month.

    2. In the case of February, if the day of the month of the due date does not exist in February, the new month subject to penalty shall begin on the first day of March.

    Example:

    If the date for payment as stated in a notice is December 30th, the first month subject to the penalty begins on December 31st and ends on January 30th. The second month begins on January 31st and ends on February 28th or 29th (depending on leap year). The third month begins on March 1st and ends on March 30th. The fourth month begins on March 31st and ends on April 30th. And so forth.

  3. The penalty applies for each month or part of a month during which the failure to pay continues. However, see IRM 20.1.2.2.8.6, Bankruptcy, for an exception.

  4. The penalty continues until it has reached 25 percent in the aggregate, or until the underlying tax is paid.

20.1.2.2.8.6  (04-19-2011)
Bankruptcy

  1. IRC 6658(a) prohibits the assertion of the late payment penalties while a bankruptcy proceeding is pending against the taxpayer if:

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

    2. The tax was incurred by the debtor before the earlier of the order for relief, or (in the case of an involuntary bankruptcy) the appointment of a trustee, and

      1. The bankruptcy petition was filed before the return due date (including extensions), or

      2. The date for making the addition to the tax occurs on or after the day on which the petition was filed.

    3. The prohibition in IRC 6658(a) shall not apply to any liability for an addition to the tax which arises for failure to pay or deposit a tax withheld or collected from others and required to be paid to the United States.

  2. In the case of tax assessed before the start of a bankruptcy proceeding, A penalty for failure to pay will not be asserted for any penalty month that begins during the period during which the bankruptcy proceeding is pending (see Rev. Rul. 2005-9, 2005-1 C.B. 470 for an explanation of when a bankruptcy case is considered "pending" ). IRS records the period during which a bankruptcy proceeding is pending through the use of transactions codes (TC) 520, 521, and 522:

    1. TC 520 with closing codes 60 through 67, 83, and 85 through 89 indicate the date the bankruptcy court was petitioned.

    2. TC 521 with the appropriate matching closing code indicates the date the bankruptcy was terminated.

    3. The period between TC 520 and the matching TC 521 is recognized by IRS's computers as the period during which the bankruptcy was pending. When a matching TC 521 or TC 522 is not present, IRS's computers presume that the bankruptcy is still pending.

    4. TC 522 with the appropriate matching closing code indicates that the bankruptcy was dismissed by the court. For the purpose of the penalty for filing late, the bankruptcy filing is disregarded if it was dismissed by the court. Therefore, IRS's computers disregard TC 520 when a matching TC 522 is posted in the module.

    Note:

    Although Transaction Code 520 with a bankruptcy closing code changes the collection status to "72" until Transaction Code 521 posts to mark the termination of the bankruptcy, status 72 does not necessarily mean that a bankruptcy proceeding is pending in court for the taxpayer.

20.1.2.2.8.7  (04-19-2011)
IRC 6651 Penalty Computation Examples

  1. The computation of the penalties under IRC 6651(a)(1) [failure to file (FTF)] and under IRC 6651(a)(2) [failure to pay tax shown on the return (FTP)] is demonstrated in the example outlined below:

    • Taxpayer P files a return showing $5,000 tax on 7/13/2009.

    • The return due date (without regard to extensions) was 4/15/2009.

    • The taxpayer did not have an extension of time to file (see IRM 20.1.2.1.3.1.

    • The taxpayer was not in a combat zone, nor was he affected by a federally declared disaster (see IRM 20.1.2.1.2.1 and IRM 20.1.2.1.2.2).

    • The taxpayer paid $2,000 on 6/1/2009, and the $3,000 at the time the return was filed.

    • The taxpayer has not received a notice of intent to levy, or a notice and demand for immediate payment (see IRM 20.1.2.2.8.1.1).

    1. Failure to pay tax shown on the return. For each month subject to the penalty, the penalty is the amount of the unpaid tax before the beginning of that month times the applicable penalty rate.

      • The months subject to this FTP penalty are the months beginning 4/16/2009, 5/16/2009, and 6/16/2009 (see IRM 20.1.2.2.8.4.2).

      • The unpaid tax is $5,000 on 4/16/2009 and 5/16/2009, and $3,000 on 6/16/2009 (see IRM 20.1.2.2.8.4.1).

      • The penalty rate is 1/2 percent for each month (see IRM 20.1.2.2.8.1).

      The penalty is—

      • 2 months X $5,000 X 1/2 percent, plus

      • 1 month X $3,000 X 1/2 percent.

      Therefore, the FTP penalty is $50 + $15 + $65.

    2. Failure to file. For each month or part of a month that the failure to file continued, the penalty is 5 percent of the tax required to be shown on the return that was not paid on the date prescribed for payment of the tax (see IRM 20.1.2.2.7). However, the penalty for failure to file is reduced by the amount of the penalty for failure to pay the tax shown on the return for each month during which both penalties apply.

      • The return was not filed by 4/15/2009, 5/15/2009, or 6/15/2009. Therefore, the return was 3 months late.

      • The tax required to be shown on the return that was unpaid on the date prescribed for payment (4/15/2009) was $5,000.

      The penalty is—

      • 3 months X 5 percent X $5,000, minus

      • The penalty for paying late ($65) for this period.

      Therefore, the FTF penalty is $750 – $65 = $685.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. The computation of the penalty under IRC 6651(a)(1) (FTF) in the case of a deficiency is demonstrated by the example outlined below. The circumstances are identical to those in the example in paragraph (1) above, except that:

    • Master File computed and assessed the FTF penalty above at $675 instead of at the correct $685 amount.

    • The taxpayer paid the $740 in penalties assessed above, plus $45 in interest, within 21 days following notice and demand for payment.

    • Upon examination of the return, IRS determined that there is a deficiency of $1,000.

    1. Failure to file. Because the tax required to be shown is greater than the tax shown, the FTF penalty must be recomputed. Any additional FTF penalty determined to be due must be included in the notice of deficiency. The basic FTF penalty computation remains the same as in paragraph (1) b) above, except that the tax required to be shown on the return that was not paid on the return due date is increased by the $1,000 deficiency from $5,000 to $6,000.

    The penalty is—

    • 3 months X 5 percent X $6,000, minus

    • The penalty for paying late ($65) for this period.

    Therefore, the penalty is $900 – $65 = $835. The $160 increase in the FTF penalty over the penalty originally assessed ($835 – $675 = $160) must be included in the notice of deficiency along with an explanation of the penalty computation.

  3. The computation of the penalty under IRC 6651(a)(3) [failure to pay tax upon notice and demand (FTP)] in the case of a deficiency is demonstrated by the example outlined below. The circumstances are identical to those in the examples in paragraphs (1) and (2) above, except that:

    • IRS issued the notice of deficiency for $1,000 tax plus $160 FTF penalty on 01/21/2010.

    • IRS received the taxpayer's consent to assess and collect the liability on 02/15/2010, and issued a notice of assessment dated 03/15/2010.

    • After the amount remained unpaid for 9 weeks, IRS issued a notice of intent to levy on 5/17/2010.

    • The taxpayer failed to respond to the notice of intent to levy, and on 7/19/2010 IRS prepare a Notice of Levy to be delivered to the taxpayer's bank. Interest and penalty in the notice is to be computed to 7/26/2010.

    1. Failure to pay tax upon notice and demand. To compute the FTP penalty in the notice we have to identify the following: The months subject to the penalty, the amount of unpaid tax for each month, and the penalty rate applicable to each month.

    • The deficiency was not paid within 21 days after notice and demand. Therefore, the first penalty month begins on 4/6/2010, and each subsequent penalty month begins on the 6th of that month (see IRM 20.1.2.2.8.5.2). So, as of the date of the Notice of Levy, the months subject to penalty are the months beginning 4/6/2010, 5/6/2010, and 7/6/2010.

    • The unpaid tax for the first penalty month is determined by reducing the additional tax by the amount paid on or before the 21st day following the notice and demand for payment. The unpaid tax for each additional month is determined by reducing the unpaid tax from the previous month by any tax paid on or before the last day of the previous month (see IRM 20.1.2.2.8.5.1). Although the taxpayer did not submit any payments to pay this additional assessment, part of the payments submitted to pay the original assessments are allocable to this additional tax: Payments are applied to FTP penalty and interest only after ALL other amounts are paid (see IRM 20.1.2.2.8.2, Application of Payments). Since the taxpayer paid $740 in penalties ($675 FTF and $65 FTP) plus $45 interest prior to the deficiency assessment, $110 of those payments is allocable to the deficiency assessment. Therefore the unpaid tax for each month is $1,000 – $110 = $890.

    • The penalty rate is 1/2 percent for the penalty months that begin 4/6/2010 and 5/6/2010. The penalty rate increases to 1 percent for each penalty month that begins on or after the 11th day following a notice of intent to levy (see IRM 20.1.2.2.8.1). Therefore, the penalty rate is 1 percent for the penalty months that begin 6/6/2010 and 7/6/2010.

    The penalty is—

    • 2 months X $890 X 1/2 percent, plus

    • 2 months X $890 X 1 percent.

    Therefore, the additional FTP penalty computed to 7/26/2010 is $8.90 + $17.80 = $26.70.

  4. The computation of the minimum penalty under IRC 6651(a)(1) (FTF) plus the penalty under IRC 6651(a)(2) [failure to pay tas shown on the return (FTP)] is demonstrated by the example outlined below:

    • Taxpayer J's 2006 Form 1040EZ is received by IRS on 6/15/2007. It is postmarked 6/13/2007.

    • J has not requested an extension of time to file, and there are no periods to be disregarded under IRC 7508 or IRC 7508A.

    • The return reflects $148 tax due and is accompanied by a payment for that amount.

    1. Failure to pay tax shown on the return. For each month subject to the penalty, the penalty is the amount of the unpaid tax before the beginning of that month times the applicable penalty rate.

      • The months subject to this FTP penalty are the months beginning 4/16/2009, 5/16/2009, and 6/16/2009 (see IRM 20.1.2.2.8.4.2).

      • The unpaid tax is $148 on 4/16/2007 and 5/16/2007 (see IRM 20.1.2.2.8.4.1).

      • The penalty rate is 1/2 percent for each month (see IRM 20.1.2.2.8.1).

      The penalty is 2 months X $148 X 1/2 percent. Therefore, the FTP penalty is $1.48.

    2. Failure to file. For each month or part of a month that the failure to file continued, the penalty is 5 percent of the tax required to be shown on the return that was not paid on the date prescribed for payment of the tax (see IRM 20.1.2.2.7). However, the penalty for failure to file is reduced by the amount of the penalty for failure to pay the tax shown on the return for each month during which both penalties apply. When a return is more than 60 days late, the penalty cannot be less than the minimum penalty (see IRM 20.1.2.2.7.4). The minimum penalty for this 2006 return is the lesser of $100 or the $148 unpaid tax shown on this return.

    The penalty is—

    • 2 months X 5 percent X $148, minus

    • The penalty for paying late ($1.48) for this period.

    So, normally the FTF penalty would be $14.80 – $1.48 = $13.32. However, since the return was more than 60 days late, the $100 minimum FTF penalty applies.

    Note:

    A return that is mailed after the return due date (or after the first business day following the return due date, if the return due date falls on a Saturday, Sunday, or legal Federal holiday, including a holiday in the District of Columbia) is not considered filed until it is received at the IRS office where it is required to be filed (see IRM 20.1.2.1.1). The date this return was received, 6/15/2007, is 61 days after 4/15/2007. Even though the return was mailed on the 59th day following 4/15/2007, and even though 4/15/2007 was a Sunday, the return is still 61 days late.

20.1.2.2.8.8  (04-19-2011)
IDRS Command Code COMPA

  1. IDRS command code (CC) "COMPA" with definer "F" is available to compute the penalty for paying late.

  2. The penalties under IRC 6651(a)(2) and IRC 6651(a)(3) must be computed separately when both penalties apply.

  3. The following information must be gathered for input on IDRS:

    1. In the case of Failure to Pay Tax Shown on the Return, the payment due date.

    2. In the case of Failure to Pay Tax Upon Notice and Demand, the date for payment stated in the notice.

    3. The amount of unpaid tax on the applicable date above.

    4. The dates of all payments against tax.

    5. The unpaid tax balance after each payment.

    6. The date(s) the penalty rate changed to 1 percent, if applicable (see IRM 20.1.2.2.8.1.1).

    7. The date(s) the penalty rate changed to 1/4 percent, if applicable (see IRM 20.1.2.2.8.1.2).

    8. The date(s) any installment agreement was terminated.

  4. On line 1 of the IDRS screen enter CC "COMPA" with definer "F" [COMPAF].

    • If applicable, enter the date in f) or g) above (as applicable) beginning in position 14 of line one in MMDDYYYY format. If the date is from g) above, also enter a "&" in position 23 of line 1. The computer will use the 1/2 percent rate for computational lines prior to this date, and the applicable rate (1/4 percent or 1 percent) after this date.

    • If the computation is a continuation of a previous "COMPAF" input screen, enter "CONT" in positions 8 through 11 of line 1. This will cause the computer to retain the aggregate percentage from the previous screen in its computation so that the 25 percent aggregate maximum is not exceeded.

  5. On lines 2 through 22, enter the "from" date, a space, the "to" date, a space, and the unpaid tax on the "from" date.

    • The first "from" date is the payment due date or the date for payment stated in the notice, which ever is applicable.

    • The first "to" date is the first payment date that is after the due date or date for payment stated in the notice. In determining payment dates, consider the "timely mailing" rules. See IRM 20.1.2.1.1, When Timely Mailing Equals Timely Filing or Paying.

    • The unpaid tax amount on each line is the amount of tax that remains unpaid as of the "from" date.

    • Each subsequent "from" date is the "to" date from the previous line.

    • Each subsequent "to" date is the effective date of the next payment, again taking the "timely mailing" rules into consideration with respect to any notice that may have been mailed prior to the date of payment.

  6. See IRM 2.3.29, Command Codes INTST, ICOMP, and COMPA, for more information about CC COMPA with definer "F."

  7. Also see ELMS learning courses 17293 and 25232 for BMF, and 17206 and 11442 for IMF. (The first listed course is the prerequisite for the second listed course respectively for BMF and IMF.)

20.1.2.2.9  (04-19-2011)
Excise and Employment Tax Returns

  1. Employment tax returns and excise tax returns, both annual and quarterly, are subject to the penalties under IRC 6651, except that they are not subject to the minimum penalty for filing late. See IRM 20.1.2.2.7.4.

  2. Taxpayers are required to file adjusted employment tax returns on or before the return due date for the taxable year or quarter during which an error was discovered, in order to receive interest-free adjustment benefits provided by IRC 6205. Additional tax shown on the adjusted employment tax return is required to be paid with the return. If the taxpayer fails to pay additional tax shown due on the adjusted return when the return is filed, the taxpayer is subject to the penalty for paying late under IRC 6651(a)(2). The following are adjusted employment tax returns covered by this rule:

    • Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund

    • Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund

    • Form 944-X, Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund

    • Form 945-X, Adjusted ANNUAL Return of Withheld Federal Income Tax or Claim for Refund

    • Form CT-1 X, Adjusted Employer's Annual Railroad Retirement Tax Return or Claim for Refund

    • Form 1040X, Amended U.S. Individual Income Tax Return, but only to the extent that additional tax reported on the return is from Part I of a corrected Schedule H (Form 1040), Household Employment Taxes.

    Since the above returns are not "required" to be filed by a specific due date (except to qualify for an interest-free adjustment), the penalty for filing late does not apply to these returns.

  3. Form 720-X, Amended Quarterly Federal Excise Tax Return (IRM 21.7.8.4.1.19, Form 720X, Amended Quarterly Federal Excise Tax Return), and Form 8849, Claim for Refund of Excise Taxes (see IRM 21.7.8.4.5, Form 8849, Claim For Refund Of Excise Taxes) are treated like other amended returns with either overpayments or underpayments.

20.1.2.2.10  (04-19-2011)
Substitute for Return — IRC 6651(g)

  1. Pursuant to IRC 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 even after notification from the Service.

  2. IRC 6651(g)(1) provides that a return prepared under IRC 6020(b) does not constitute the taxpayer's return for determining whether or when the taxpayer filed a return for the purpose of computing the penalty for filing late under IRC 6651(a)(1).

  3. IRC 6651(g)(2) provides that for returns due after July 30, 1996 (determined without regard to extensions), the tax assessed under IRC 6020(b) constitutes the tax shown on the taxpayer's return for the purpose of determining the penalty for paying late under IRC 6651(a)(2).

    Note:

    For returns due prior to July 31, 1996, the penalty for paying late under IRC 6651(a)(2) does not apply unless the taxpayer files his own return in response to the section 6020(b) assessment. If the taxpayer files his own return (due before July 31, 1996) after an SFR assessment, FTP penalty on the amount shown on that return should be computed and assessed from the return due date. If the return is "accepted as filed (no changes)," Master File will automatically perform the computation if priority code (PC) 2 is used with Transaction Code (TC) 290 or 291, or if PC 3 or 9 is used with TC 300 or 301. (PC 3 should only be used if the module contains a duplicate return freeze.)

  4. IRC 6501(b)(3) provides that a return prepared under IRC 6020(b) does not start the running of the statute of limitations for assessment or collection.

  5. Assessment of tax related to a return filed under IRC 6020(b) may or may not require that deficiency procedures be followed. See IRC 6213(a).

    • When deficiency procedures apply, the penalty for filing late must be included in the notice of deficiency. The penalty for paying late is not subject to deficiency procedures. However, the amount of the penalty, like interest charges, should be included in the overall balance due computation.

    • When deficiency procedures do not apply, the penalties for filing late and paying late are generally computed and assessed automatically by IRS's computers when the tax determined under IRC 6020(b) is assessed.

      Note:

      Employment tax returns and most excise tax returns do not follow statutory notice of deficiency procedures.

  6. The penalties for filing and paying late are computed normally on an IRC 6020(b) assessment after applying the rules above. However, please note the special processing instructions in IRM 20.1.2.2.10.1 and IRM 20.1.2.2.10.2.

  7. If the taxpayer files his own return in response to the IRC 6020(b) assessment, the IRS is not obligated to consider such a return for the purpose of computing the penalties for filing and paying late unless tax required to be shown on the return is found to be less than tax assessed under the IRC 6020(b) return.

    1. If the taxpayer's own return is accepted as filed, and tax is decreased as a result, IRS's computers will automatically adjust the penalties for filing and paying late if they are not restricted.

    2. If the taxpayer's own return represents a tax increase over the existing assessment, IRS's computers will automatically adjust the penalties for filing and paying late provided that the penalties are not restricted, AND priority code 2 is input with TC 290, or priority code 3 or 9 is input with TC 300. (If both of these conditions are not met, the penalties will have to be manually computed and adjusted from that point forward.)

      Note:

      For IMF, TC 300 with priority code 9 will unpost if the module contains a "duplicate return" (–A) freeze. Priority code 3 should be used when the duplicate return freeze is present; otherwise, priority code 9 should be used with TC 300.

      Reminder:

      FTF penalty must always be computed and assessed manually when additional tax is assessed with TC 300.

    3. If the return is not accepted as filed, do not adjust the penalties for filing or paying late based on the tax shown on the taxpayer's return. IRS's computers will automatically adjust the penalties if tax is decreased, unless the penalties are restricted.

    Note:

    When FTP penalty is recomputed based on the taxpayer's own return after an SFR or 6020(b) assessment, the penalty will be computed using the same monthly penalty rates as were used to compute the penalty prior to the recomputation. Receipt of the taxpayer's own return does not negate any notice of intent to levy or demand for immediate payment that were issued by IRS previously with respect to that liability.

20.1.2.2.10.1  (04-19-2011)
Processing When Deficiency Procedures Apply

  1. When deficiency procedures apply, IRS posts a "substitute for return" (SFR) Transaction Code (TC) 150 on the taxpayer's account to facilitate assessment of the deficiency.

    • For business returns (BMF) a SFR return can be identified by the presence of computer condition code (CCC) 4 and zero tax with the TC 150.

    • For individual returns (IMF) a SFR return can be identified by zero tax posting with TC 150 with doc code 10 in the DLN.

  2. For business returns (BMF), for tax modules containing an SFR TC 150, IRS's computers are programmed to compute the penalty for failure to pay tax shown on a return (IRC 6651(a)(2)) using the sum of the first assessment in the module, plus any tax assessed subsequently with TC 290 with priority code 2, or with TC 300 with priority code 9.

  3. For individual returns (IMF), for tax modules containing an SFR TC 150, IRS's computers are programmed to compute the penalty for failure to pay tax shown on a return (IRC 6651(a)(2)) using the sum of all tax assessed with TC 290 with priority code 2, or with TC 300 with priority code 3 or 9.

    Caution:

    Do not forget to use the appropriate priority code with SFR assessments on IMF. When the TC 150 on IMF is a SFR return, failure to use the appropriate priority code with the first assessment of tax will render the computer unable to accurately compute any failure to pay (FTP) penalty for that tax period, and the penalty will have to be manually computed and adjusted.

  4. Also see IRM 20.1.2.2.8.3, Application of Tax Abatements.

  5. In two tax court cases in 2003, the judge denied the Service the assessment of the penalty under IRC 6651(a)(2), failure to pay tax shown on a return, because the requirements for a valid IRC 6020(b) return were not met. In conjunction with Chief Counsel, Form 13496, IRC 6020(b) Certification, was conceived to ensure that the penalty under IRC 6651(a)(2) will be sustained in future court cases.

  6. Specific procedures must be followed when deficiency procedures apply for the assessment of tax under IRC 6020(b). The procedures must be followed to assure that the assessment of the penalty under IRC 6651(a)(2) will be sustained in court if the assessment is challenged.

    1. 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.

    2. Attach the certification to Form 4549, Income Tax Examination Changes. The date on the certification should be the same as, or later than, the date on the Form 4549. Also attach Form 886-A, EXPLANATION OF ITEMS, as applicable.

    3. Anyone authorized to prepare and issue reports of proposed tax adjustments is authorized to sign the certification. (See Delegation Order. 182, IRM 1.2.44.5, , Execute Returns.)

    4. 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 a new Form 13496 dated on (or after) the same day as the revised report.

    5. Form 13496 may not be prepared or dated after the date of the 90-day letter. Form 13496 (Rev. 02-2009) is available on-line, in fillable format, at http://core.publish.no.irs.gov/forms/internal/pdf/37538b09.pdf.

    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.

20.1.2.2.10.2  (04-19-2011)
Processing When Deficiency Procedures Do Not Apply

  1. When deficiency procedures do not apply, tax determined under IRC 6020(b) can be assessed in two ways:

    1. An authorized IRS employee may execute (fill out and sign) the actual tax form and send it through pipeline processing for assessment (following their specific IRM instructions). The employee's signature on the return must be followed by the following statement: "This return was prepared and signed under authority of IRC 6020(b)." .

    2. Alternately, in lieu of signing the return with the accompanying statement, the agent may opt to complete and attach Form 13496 to the source document for assessment of tax under IRC 6020(b). In this case, all of the items described on Form 13496 under items 1 and 2 must be present as part of the source document.

20.1.2.2.11  (04-19-2011)
Failure to Pay Transferee Assessment

  1. If a transferee is liable for the indebtedness of a transferor under state law, the existing tax liability of the transferor can be assessed against the transferee under the collection procedures provided in IRC 6901. This includes any additions to tax, including the penalties for failure to file and/or pay under IRC 6651 that have been (or may be) asserted against the transferor. However, the transferee is only liable to the extent of the value of the assets transferred.

  2. The assessment of the transferred liability against the transferee does not constitute a new assessment against which the penalty for failure to pay may begin to accrue anew. IRC 6901 neither creates nor defines a substantive liability but provides merely an alternate procedure by which the government may collect taxes when collection from the transferor has failed.

20.1.2.3  (04-19-2011)
Failure to File a Partnership Return — IRC 6698

  1. For taxable years that begin after December 31, 1978, IRC 6698 imposes a penalty on a partnership that fails to file a timely or complete return (Form 1065) as required by IRC 6031. The penalty does not apply if the failure to file was due to reasonable cause. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief. Also see IRM 20.1.2.3.3, Penalty Relief, for available relief specific to this penalty.

  2. IRC 860F(e) provides that for the purpose of determining filing requirements, interest, and penalties, a Real Estate Mortgage Investment Conduit (REMIC) shall be treated as a partnership. Therefore, the penalty for failure to file a timely and/or complete return can apply to any REMIC return (Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return) that is late and/or incomplete. However, see IRM 20.1.2.3.3.4, REMIC Special Considerations.

  3. Although the penalty is assessed against the partnership or REMIC, for the purpose of enforced collection action the partners or investors are held individually liable for the penalty to the extent of their liability for debts of the partnership or REMIC.

20.1.2.3.1  (04-19-2011)
Assertion Criteria

  1. Generally, this penalty is imposed on a partnership which failed to file timely, or which failed to provide information required on Form 1065 or on Form 1066. The penalty does not apply if the partnership (or any of its partners) can show that the failure was due to reasonable cause.

  2. If a partnership return is both late and incomplete, do not assess both penalties; the incomplete return penalty takes precedence.

  3. See IRM 20.1.2.3.3 for a complete list of conditions under which the penalty should not be imposed

  4. The penalty is assessed systemically with Transaction Code (TC) 166 for filing late, or with TC 246 without penalty reference number (PRN) if required information was missing. The penalty is abated systemically with TC 167 or TC 247 if changes post to the partnership's account that cause IRS's computers to compute a lower penalty or no penalty.

  5. The penalty is assessed "manually" with TC 160 for filing late, or with TC 240 without PRN if required information was missing. See IRM 20.1.2.3.4 for specific procedures that must be followed for manual assessments of the penalty.

  6. The penalty is abated manually with TC 161 or TC 241 without PRN if the assessed penalty amount is excessive.

20.1.2.3.2  (04-19-2011)
Penalty Computation

  1. The penalty for the failure to file a Form 1065 or Form 1066 (or the failure to file a complete return with all the information required under IRC 6031) is charged for each month (or part of a month) that the failure continues.

    • For returns due before December 21, 2007, the penalty can be charged for up to 5 months.

    • For returns due after December 20, 2007, the penalty can be charged for up to 12 months.

  2. The penalty for each month is calculated by multiplying the applicable base penalty rate by the number of persons who were a partner in the partnership at any time during the taxable year.

    • For returns due before December 21, 2007, the base penalty rate is $50.

    • For returns due after December 20, 2007, but before January 1, 2009, the base penalty rate is $85.

      Note:

      For taxable years that begin in 2008, section 2 of the Hokie Act (Public Law 110–141) increased the base penalty rate to $86. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • For returns due after December 31, 2008, the base penalty rate is $89 if the taxable year does not begin in 2008, and the taxable year does not begin after December 31, 2009.

    • For returns due after December 31, 2008, the base penalty rate is $90 if the taxable year begins in 2008.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • For taxable years that begin after December 31, 2009, the base penalty rate is $195.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. For the purpose of computing this penalty, the definition of "month" is the same as it is for computing the penalty for filing late under IRC 6651(a)(1). See IRM 20.1.2.2.7.1.

20.1.2.3.3  (04-19-2011)
Penalty Relief

  1. If the taxpayer provides information that will allow penalty relief for failure to file a complete or timely return, abate the penalty (as applicable) using Transaction Code (TC) 161 or TC 241 without penalty reference number (PRN). Use the appropriate Penalty Reason Code (PRC) with the abatement. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief, and IRM Exhibit 20.1.1–3 for the appropriate PRC..

  2. If it can be demonstrated that the taxpayer is not required to file a particular schedule for which the penalty was charged, abate the penalty with TC 241 without PRN, and with PRC 045, IRS error.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. If the partnership return was both late and incomplete, and the incomplete return penalty is being abated (TC 241), assess the penalty for filing late using TC 160 unless the partnership had reasonable cause for filing late. See IRM 20.1.2.5.4 for specific instructions for assessment of the penalty for filing late.

    Exception:

    If the incomplete return penalty is being abated under Rev. Proc. 84-35, do not assess the late filing penalty.

  6. If a taxpayer challenges the penalty amount because an incorrect number of partners was used in the computation, verify the number of partners claimed and adjust the penalty accordingly. Use PRC 010 if the penalty is decreased due to a change in number of partners. See IRM 20.1.2.3.4 for adjustment procedures if the result is an increase in the penalty.

20.1.2.3.3.1  (04-19-2011)
Revenue Procedure 84–35

  1. IRC 6231(a)(1)(B) exempts certain small partnerships from the consolidated audit procedures contained in subchapter C of chapter 63 of the IRC. However, an exemption from the consolidated audit procedures is not an exemption from the requirement to file a timely and complete partnership return.

  2. Rev. Proc. 84-35 provides that reasonable cause for filing a late or incomplete return will be presumed for certain small partnerships if certain criteria are met:

    1. The partnership must consist of 10 or fewer partners. For the purpose of this requirement, a husband and wife (or their estate) filing a joint return is considered one partner.

    2. Each partner is either an individual (excluding nonresident aliens), or the estate of a deceased partner.

    3. Each partner's items of income, deductions, and credits are allocated in the same proportion as all other items of income, deductions, and credits.

    4. The partnership has not elected to be subject to the consolidated audit procedures under IRC 6221 through IRC 6233.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ "

    5. Each partner reported his or her share of partnership income on his or her timely filed income tax return.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. When abating the penalty under the provisions of Rev. Proc. 84-35, advise the taxpayer that the penalty will be reassessed if it is later determined that any of the criteria outlined in Rev. Proc. 84-35 have not been met: Specifically, if it is found that any partner was not a qualifying partner; or, if any partner filed late; or, if any partner failed to report their share of partnership income on their return, then the penalty will be reassessed.

  6. Partnerships that do not qualify for abatement of the penalty under Rev. Proc. 84-35 may still qualify for abatement of the penalty under normal reasonable cause criteria.

20.1.2.3.3.2  (04-19-2011)
Revenue Procedure 2003-84

  1. Rev. Proc. 2003-84 allows certain partnerships that invest in tax-exempt obligations to make an election that enables the partners to take into account monthly inclusions required under IRC 702 and IRC 707. Rev. Proc. 2003-84 also provides rules for partnership income tax reporting. Thus, a partnership that has a monthly closing election in effect for the entire taxable year and meets the other requirements in section 8 of this revenue procedure, is not required to file a Form 1065 or issue Schedules K-1 (Form 1065).

  2. An eligible partnership makes a monthly closing election that is effective as provided under section 4.02 of this revenue procedure, and all partners must consent to this election.

  3. The monthly closing election is effective on the later of:

    • The start-up date of the partnership (as defined by section 4.05(1) of this revenue procedure), or

    • The first day of the month in which the provisions described in section 5.01 of this revenue procedure is first included in the entity’s governing documents.

  4. A partnership must file an abbreviated return (considered abbreviated because only certain information is required to be completed on the form) for the first taxable year during which the monthly closing election was in effect. The abbreviated return must be filed by the date the partnership’s return would ordinarily be due. The words "Filed in Accordance with Rev. Proc. 2003-84" must be typed or written across the top of the form. See Rev. Proc. 2003-84 for the specific information that must be supplied on the abbreviated return.

  5. If a late filing penalty was assessed because the required abbreviated return was late, and the partnership does not otherwise qualify for relief under any of the criteria in IRM 20.1.2.3.3, Penalty Relief, do not abate the penalty.

  6. If a missing information penalty was assessed, and the missing information was not required under Rev. Proc. 2003–84, abate the penalty.

  7. If a penalty for filing a late or incomplete return was assessed for any year following the first year, abate the penalty provided the taxpayer still qualifies for the elimination of the Form 1065 filing requirement under section 8.02 of Rev. Proc. 2003–84.

  8. A partnership that fails to satisfy all of the requirements of section 8.02 (1) of Rev. Proc. 2003–84 is required to file a complete (not abbreviated) Form 1065 and to issue Schedules K-1 (Form 1065) to its partners as required by IRC 6031(a). A partnership that fails to file a Form 1065 or to issue Schedules K-1 as required is subject to the applicable penalties under IRC 6698 and IRC 6722 for failure to file a partnership return and to furnish payee statements, as well as any other applicable penalties. Moreover, if a partnership is required to file a return under IRC 6031(a) but fails to do so, the period of limitations on assessment of tax attributable to items of that partnership remains open indefinitely under IRC 6229(a).

  9. See Rev. Proc. 2003-84, 2003-2 C.B. 1159 and IRM 21.7.4.4.2.12, Form 1065 Filed under Revenue Procedure 2003-84, for more information.

20.1.2.3.3.3  (04-19-2011)
Common Trust Fund Filers under IRC 6032

  1. IRC 6032 requires banks that maintain a common trust fund (see IRC 584 ) to file annual information returns by April 15 following the end of the calendar year. No particular form is prescribed for making this return, but if Form 1065 is used, it should reflect all items of gross income and deductions of the fund, and identify all participants and their proportionate share.

  2. The penalty under IRC 6698 does not apply to returns required to be filed under IRC 6032Returns of Banks with Respect to Common Trust Funds. Therefore, filers who use Form 1065, U.S. Return of Partnership Income to meet their filing requirement under IRC 6032 are not subject to the penalty for filing a late or incomplete return under IRC 6698.

  3. Forms 1065 submitted by common trust fund filers, and received after April 15, should have the failure to file (FTF) penalty suppressed by applying computer condition code (CCC) "R" during processing. If information or attachments to affected returns are missing, processing functions should not apply missing schedule codes to the return.

  4. When a Form 1065 filer requests abatement of either the penalty for filing late, or the missing information penalty, review the taxpayer's correspondence and case file for evidence that the taxpayer filed Form 1065 to meet their filing requirement under IRC 6032. Check for the following:

    • A statement that the taxpayer is a common trust fund under IRC 584.

    • A statement that the taxpayer files Form 1065 to meet filing requirements under IRC 6032.

    • The entity portion of Form 1065 indicates that the filer is a bank (or a group of two or more banks from the same affiliated group) acting as trustee, executor, administrator, guardian or custodian of accounts maintained on behalf of "fund participants."

  5. If the evidence shows that Form 1065 was filed under IRC 6032, take the following actions as applicable:

    1. Abate any late filing penalty using Transaction Code (TC) 161 with Penalty Reason Code (PRC) 045.

    2. Abate any missing information penalty using TC 241 without penalty reference number (PRN) with PRC 045.

20.1.2.3.3.4  (04-19-2011)
REMIC Special Considerations

  1. Although a Real Estate Mortgage Investment Conduit (REMIC) is treated as a partnership for the purpose of penalties related to filing, the return (Form 1066) can include tax imposed under Chapter 1 of Subtitle A. If tax is reported on Form 1066, the return is required to be filed both under IRC 6031 (relating to information returns required to be filed by partnerships), and under IRC 6012 (relating to income tax returns required to be filed by persons with income taxes under subtitle A). Therefore, when tax is reported on a late Form 1066, the return may be subject to both the penalty under IRC 6651(a)(1), and to the penalty under IRC 6698.

  2. Although there is no statutory prohibition against applying both penalties to the same return, it would be difficult to sustain such a decision in court unless there are compelling reasons for that action.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Any TC 160 or TC 166 assessed against Form 1066 represents the failure-to-file penalty under IRC 6651. This penalty should be removed if the penalty under IRC 6698 is being imposed.

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. Interest programming for Form 1066 (MFT 07) assumes that any TC 16X on MFT 07 is a penalty assessed under IRC 6651(a)(1). Accordingly, it charges interest on TC 16X assessments beginning with the return due date on MFT 07. However, interest on the penalty under IRC 6698 does not begin until the date of notice and demand for payment of the penalty. Therefore, the TC 160 should not be used to assess the penalty under IRC 6698 against Form 1066 (MFT 07). See IRC 6601(e)(2)(A).

20.1.2.3.3.5  (04-19-2011)
Electing Large Partnership Special Considerations

  1. The return of an electing large partnership (Form 1065-B, U.S. Return of Income for Electing Large Partnerships) can include tax imposed under Chapter 1 of Subtitle A. If tax is reported on Form 1065-B, the return is required to be filed both under IRC 6031 (relating to information returns required to be filed by partnerships), and under IRC 6012 (relating to income tax returns required to be filed by persons with income taxes under subtitle A). Therefore, when tax is reported on a late Form 1065-B, the return may be subject to both the penalty under IRC 6651(a)(1), and to the penalty under IRC 6698.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Example:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

20.1.2.3.4  (04-19-2011)
Procedures for Assessment or Abatement

  1. IRC 6751(a) requires IRS to include the following information with each notice of penalty:

    • The name of the penalty.

    • The section of the IRC under which the penalty is being imposed.

    • A computation of the penalty.

  2. IRS's notice programming is currently unable to accommodate these requirements unless the penalty is computed and assessed automatically during original return processing. Therefore, special procedures must be followed when a penalty for failure to file a timely or complete partnership return is being assessed under IRC 6698.

  3. Assessment of the penalty under IRC 6698 does not follow deficiency procedures, and the taxpayer does not have any pre-assessment appeal rights. However, examiners must make every effort to obtain sufficient information to determine if the penalty applies, or if the taxpayer's failure to comply was due to reasonable cause.

    Reminder:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. In order to meet the requirements of IRC 6751(a), special procedures have been developed by the Office of Servicewide Penalties in cooperation with Exam's Centralized Case Processing and Accounting. These procedures must be followed by any IRS employee imposing the penalty under IRC 6698. The procedures are found on the IRS intranet at—

    • http://sbseservicewide.web.irs.gov/penalty/penalties/FTFpartnership/default.aspx for failure to file, and at

    • http://sbseservicewide.web.irs.gov/penalty/penalties/992/default.aspx for missing information.

  5. Abatement of either penalty in part or in whole does not have the same notification requirement of tax assessments. However, any adjustment notice that is allowed to be generated by abating the penalty via use of IDRS command code (CC) ADJ54 would reflect incorrect penalty information. Therefore, hold code 3 must be used when the penalty is abated using CC ADJ54, and the taxpayer must be notified of the abatement via another means.

  6. Any questions by IRS employees regarding these procedures should be directed to the analyst in Office of Servicewide Penalties assigned to IRM 20.1.2. Analyst assignments are listed on the irweb at http://sbseservicewide.web.irs.gov/penalty/news/242.aspx.

20.1.2.3.5  (04-19-2011)
Cross-references

  1. For extensions of time to file see IRM 20.1.2.1.3.1.

  2. For periods that are disregarded in computing the penalty see IRM 20.1.2.1.2.

  3. For foreign partnerships, and domestic partnerships whose books and records are kept abroad, see IRM 20.1.2.1.3.3.

20.1.2.4  (04-19-2011)
Failure to File Partnership Return Using Electronic Media

  1. IRC 6011(e)(2) requires a partnership with over 100 partners to file their return electronically (including Schedules K-1). IRC 6721(a)(2)(A) provides for a penalty when a return is required to be filed electronically, and the partnership fails to use that method of filing the partnership return. The penalty is assessed for each partner over the 100 partner threshold (see IRC 6724(c)). The penalty does not apply if the partnership applied for and obtained a waiver from the electronic media filing requirement. The waiver is posted in the tax module as Transaction Code (TC) 971 with Action Code (AC) 320. TC 971 with AC 321 indicates that the waiver was denied.

  2. For returns due before 1/1/2011, the penalty is $50 per partner over 100. For returns due after 1/1/2011, the penalty is $100 per partner over 100.

  3. The penalty is assessed automatically by the computer using TC 246 with penalty reference number (PRN) 688. See IRM 21.7.4.4.2.8.1, Partnerships with More Than 100 Partners, for more information regarding the administration of this penalty.

20.1.2.5  (04-19-2011)
Failure to File S Corporation Return - IRC 6699

  1. For S corporation returns due after December 20, 2007, IRC 6699 imposes a penalty on a S corporation that fails to file a timely or complete return (Form 1120-S) as required by IRC 6037. The penalty does not apply if the failure to file was due to reasonable cause. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief. Also see IRM 20.1.2.5.3, Penalty Relief.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

20.1.2.5.1  (04-19-2011)
Assertion Criteria

  1. Generally, the penalty under IRC 6699 is imposed on a S corporation which failed to file a timely and/or complete Form 1120-S as required by IRC 6037. The penalty does not apply if the S corporation can show that the failure was due to reasonable cause.

  2. If an S corporation return is both late and incomplete, do not assess both penalties; the incomplete return penalty takes precedence.

  3. See IRM 20.1.2.5.3 for a complete list of conditions under which the penalty should not be imposed.

  4. The penalty is assessed systemically with Transaction Code (TC) 166 (for filing late), or with TC 246 without penalty reference number (PRN) (if required information was missing). The penalty is abated systemically with TC 167 or TC 247 if changes post to the S corporation's account that cause IRS's computers to compute a lower penalty or no penalty.

  5. The penalty is assessed "manually" with TC 160 (for filing late), or with TC 240 without PRN (if required information was missing). See IRM 20.1.2.5.4 for specific procedures that must be followed for manual assessments of the penalty.

20.1.2.5.2  (04-19-2011)
Penalty Computation

  1. The penalty for the failure to file Form 1120-S (or for failure to file a complete return with all the information required under IRC 6037) is charged for each month (or part of a month) that the failure continues, for up to 12 months.

  2. The penalty for each month is calculated by multiplying the applicable base penalty rate by the number of persons who were a shareholder in the S corporation at any time during the taxable year.

    • For returns due before December 21, 2007, there is no penalty.

    • For returns due after December 21, 2007, but before January 1, 2009, the base penalty rate is $85.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • For returns due after December 31, 2008, the base penalty rate is $89, if the taxable year does not begin after December 31, 2009.

    • For taxable years that begin after December 31, 2009, the base penalty rate is $195.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. For the purpose of computing this penalty, the definition of "month" is the same as it is for computing the penalty for filing late under IRC 6651(a)(1). See IRM 20.1.2.2.7.1.

20.1.2.5.3  (04-19-2011)
Penalty Relief

  1. If the taxpayer provides information that will allow penalty relief for failure to file a complete or timely return, abate the penalty (as applicable) using Transaction Code (TC) 161 or TC 241 without penalty reference number (PRN). Use the appropriate Penalty Reason Code (PRC) with the abatement. See IRM 20.1.1.3, Criteria for Relief From Penalties, for a discussion of penalty relief.

  2. If it can be demonstrated that the taxpayer is not required to file a particular schedule for which the penalty was charged, abate the penalty with TC 241 without PRN, and with PRC 045, IRS error.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. If the S corporation return was both late and incomplete, and the incomplete return penalty is being abated (TC 241), assess the penalty for filing late using TC 160 unless the S corporation had reasonable cause for filing late. See IRM 20.1.2.5.4 for specific instructions for assessment of the penalty for filing late.

  6. IRM 21.7.4.4.4.11.2.8, Failure to File S Corporation Return Penalty, contains instructions to follow if the taxpayer challenges the penalty amount because IRS used an incorrect number of shareholders to compute the penalty. If the penalty is reduced because an incorrect number of shareholders was reported on the original return, use Penalty Reason Code 010 for the abatement.

    Note:

    If the result is an increase in the penalty, the procedures in IRM 20.1.2.5.4 (4) must be followed.

  7. Penalty relieve under Rev. Proc. 84–35 does NOT apply to S corporations.

20.1.2.5.4  (04-19-2011)
Procedures for Assessment or Abatement

  1. IRC 6751(a) requires IRS to include the following information with each notice of penalty:

    • The name of the penalty.

    • The section of the IRC under which the penalty is being imposed.

    • A computation of the penalty.

  2. IRS's notice programming is currently unable to accommodate these requirements unless the penalty is computed and assessed automatically during original return processing. Therefore, special procedures must be followed when a penalty for failure to file a timely or complete S corporation return is being assessed under IRC 6699.

  3. Assessment of the penalty under IRC 6699 does not follow deficiency procedures, and the taxpayer does not have any pre-assessment appeal rights. However, examiners must make every effort to obtain sufficient information to determine if the penalty applies, or if the taxpayer's failure to comply was due to reasonable cause.

    Reminder:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. In order to meet the requirements of IRC 6751(a), special procedures have been developed by the Office of Servicewide Penalties in cooperation with Exam's Centralized Case Processing and Accounting. These procedures must be followed by any IRS employee imposing the penalty under IRC 6699. The procedures are found on the IRS intranet at—

    • http://sbseservicewide.web.irs.gov/penalty/penalties/973/default.aspx for failure to file, and at

    • http://sbseservicewide.web.irs.gov/penalty/penalties/972/default.aspx for missing information.

    .The instructions can also be found via the following links beginning on the IRS employee home page:

    1. Click on "Business Units" (in blue area, top left of home page).

    2. Under the heading of "Deputy Commissioner - Services and Enforcement Organization," click on the link titled "Small Business/Self-Employed (SB/SE)."

    3. On the "MySB/SE" page, under the header "SB/SE's Servicewide Programs," click on the link titled "Servicewide Penalty Office."

    4. On the "Penalties" page, click on "Search Penalties" (in blue area, top left of "Penalties" page).

    5. On the "Search Penalties" page is a light blue area titled "Filter Display." Enter "6698" in the left text box, and click the "Go" button. The links on the page will be limited to those relative to IRC 6698.

    6. Click on the appropriate link for the type of penalty you are assessing.

  5. Abatement of either penalty in part or in whole does not have the same notification requirement of tax assessments. However, any adjustment notice that is allowed to be generated by abating the penalty via use of IDRS command code (CC) ADJ54 would reflect incorrect penalty information. Therefore, hold code 3 must be used when the penalty is abated using CC ADJ54, and the taxpayer must be notified of the abatement via another means.

  6. Any questions by IRS employees regarding these procedures should be directed to the analyst in Office of Servicewide Penalties assigned to IRM 20.1.2. Analyst assignments are listed on the irweb at http://sbseservicewide.web.irs.gov/penalty/news/242.aspx.

20.1.2.5.5  (04-19-2011)
Cross-references

  1. See IRM 20.1.2.1.3.3, Taxpayers Abroad, for—

    • Domestic corporations which transact their business and keep their records and books of account outside the United States and Puerto Rico;

    • Foreign corporations which 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.

  2. See IRM 20.1.2.1.3.1 for extensions of time to file.

  3. For periods that are disregarded in computing the penalty see IRM 20.1.2.1.2.

Exhibit 20.1.2-1 
Revenue Procedure 84–35

APPLICABLE SECTIONS:

26 CFR 601.602: Forms and instructions. (Also Part I, Sections 6031, 6231, 6698; 1.6031-1.)

TEXT:

SECTION 1. PURPOSE

The purpose of this revenue procedure is to update Rev. Proc. 81-11, 1981-1 C.B. 651, to conform to the small partnership provisions of section 6231 (a) (1) (B) of the IRC. Rev. Proc. 81-11 sets forth the procedures under which partnerships with 10 or fewer partners will not be subject to the penalty imposed by section 6698 for failure to file a partnership return.

SECTION 2. BACKGROUND

.01 Section 6031 (a) of the Code provides that every partnership must make a return for each taxable year including all information that the Secretary may by forms and regulations prescribe.

.02 Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 585, added sections 6221 through 6232 to the Code to provide that the tax treatment of partnership items must be determined at the partnership level. For purposes of these sections, section 6231 (a) (1) (A) defines "partnership" to mean any partnership required to file a return under section 6031 (a) except as provided in section 6231 (a) (1) (B).

.03 Section 6231 (a) (1) (B) of the Code provides an exception to the definition of "partnership" for small partnerships. In general, the term "partnership" does not include a partnership if the partnership has 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) or an estate, and each partner's share of each partnership item is the same as such partner's share of every other item. A husband and wife, and their estates, are treated as one partner for this purpose.

.04 Section 6698 of the Code imposes a penalty if any partnership required to file a return under section 6031 fails to file a timely return, or files a return that fails to show the information required by that section, unless the failure is due to reasonable cause.

.05 The Conference Committee Report concerning section 6698 of the Code states:

The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership…

H.R. Rep No. 95-1800 (Conf. Report), 95th Cong., 2d Sess. 221 (1978), 1978-3 C.B. (Vol. 1) 521, 555. See also H.R. Rep. No. 95-1445, 95th Cong., 2d Sess. 75 (1978), 1978-3 C.B. (Vol. 1) 181, 249, and S. Rep. No. 95-1263, 95th Cong., 2d Sess. 106 (1978), 1978-3 C.B. (Vol. 1) 315, 403, which contain similar statements.

SECTION 3. REQUIRED PROCEDURES

.01 A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231 (a) (1) (B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.

.02 Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each partner's interest in the capital and profits are not owned in the same proportion, or where all items of income, deductions, and credits are not allocated in proportion to the prorata interests, do not come within the exception provisions of section 6231 (a) (1) (B) of the Code and, are subject to the penalty imposed by section 6698.

.03 Although a partnership of 10 or fewer partners may not be automatically excepted from the penalty imposed by section 6698 of the Code under section 3.01, the partnership may show other reasonable cause for failure to file a complete or timely partnership return.

.04 In determining whether a partner has fully reported the partner's share of the income, deductions, and credits of the partnership, for purposes of section 3.01, all the relevant facts and circumstances will be taken into account. In making this determination, the nature and materiality of any error or omission will be considered. For example, although an isolated clerical error normally reflects no more than mere inadvertence, such an error may be of such magnitude that the partner will not be considered to have fully reported. If the error or omission results in a de minimis understatement of the net amount payable with respect to any income tax, the penalty will not be asserted. However, if the error or omission results in a material understatement of the net amount payable with respect to any income tax, the partner generally will not be considered to have fully reported and the penalty will be applied.

SECTION 4. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 81-11 is modified and superseded.

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective for returns required to be filed after June 22, 1984.

Exhibit 20.1.2-2 
References

The following are found on-line at www.irs.gov:

Exhibit 20.1.2-3 
COMPAF Examples

(1) The 1st image below represents an input screen print for computing FTP penalty at 1/2 percent per month on $890 from 4/6/2010 to 7/26/2010. The 2nd image below that represents the terminal response.

This image is too large to be displayed in the current screen. Please click the link to view the image.
This image is too large to be displayed in the current screen. Please click the link to view the image.

(2) The 1st image below represents an input screen print for computing FTP penalty at 1/2 percent per month on $890 from 4/6/2010 to 5/27/2010, and at 1% from 5/27/2010 to 7/26/2010. Note the 1 percent start date entered beginning in the 14th position of the first line. The 2nd image below that represents the terminal response.

This image is too large to be displayed in the current screen. Please click the link to view the image.
This image is too large to be displayed in the current screen. Please click the link to view the image.

(3) The 1st image below represents an input screen print for computing FTP penalty at 1/2 percent per month from 4/15/2010 to 4/20/2010, and at 1/4% from 4/20/2010 to 12/13/2010. Note the 1/4 percent start date in beginning in the 14th position of line 1, and the "&" in the 23rd position of that line. The 2nd image below that represents the terminal response. Note that the "&" has moved to the 25th position in the terminal response.

This image is too large to be displayed in the current screen. Please click the link to view the image.
This image is too large to be displayed in the current screen. Please click the link to view the image.

(4) The first image below represents the input screen for continuing the computation from paragraph (3) above at 1% beginning 12/13/2010, through 2/22/2011. Note the "CONT" entered beginning in the 8th position of the first line, and the 1 percent start date entered beginning in the 14th position of the first line. The second image below represents the response screen. Note that the "TOTAL FTP" amount on the response screen is the sum of the individual amount from this screen, plus the "TOTAL FTP" amount from the response screen from paragraph (3) above. An FTP computation can be continued over multiple screens if needed to account for multiple underpayment amounts or penalty rates. Continuing a computation over multiple screens (rather than performing a new computation each time) prevent the operator from exceeding the 25% aggregate maximum statutory limit.

This image is too large to be displayed in the current screen. Please click the link to view the image.
This image is too large to be displayed in the current screen. Please click the link to view the image.

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