Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 2. Failure To File/Failure To Pay Penalties

20.1.2  Failure To File/Failure To Pay Penalties

20.1.2.1  (04-19-2011)
Overview

  1. This IRM section covers additions to tax and penalties for failure to file certain returns or to pay tax.

  2. IRC 6651 provides for additions to tax for failure to file returns required to be filed to report tax, and for failure to pay tax required to be reported on those returns.

  3. IRC 6698 provides for a penalty for failure to file a complete partnership return as required under IRC 6031.

  4. IRC 6699 provides for a penalty for failure to file a S-corporation return as required by IRC 6037.

  5. Penalties for failure to file information returns (other than partnership and S-corporation returns) are discussed in IRM 20.1.7, Information Return Penalties.

  6. Penalties for failure to file returns relating to exempt organizations and certain trusts are discussed in IRM 20.1.8, Employee Plans and Exempt Organizations Miscellaneous Civil Penalties.

  7. The penalty for failure to make required payments under IRC 7519(f)(4)(A), is discussed in IRM 20.1.10.17, IRC Section 7519 Required Payments for Entities Electing Not to Have Required Taxable Year.

20.1.2.1.1  (04-19-2011)
When Timely Mailing Equals Timely Filing or Paying (Received Date vs. Filing/Payment Date)

  1. IRC 7502 provides that any return or payment received after its due date is to be treated as filed or paid on the postmark date, provided all of the following requirements are met:

    1. The return or payment is deposited in the mail in the United States on or before the due date for filing or paying.

    2. The envelope containing the return or payment is properly addressed.

    3. The envelope contains sufficient postage for delivery.

    4. The envelope was deposited with the United States Postal Service or a designated private delivery service. For a list of designated private delivery services see Notice 2004–83.

  2. IRC 7503 provides that, in the case where the due date for filing or paying falls on a Saturday, Sunday, or legal holiday, the return or payment is considered to have been filed or made on the due date if it is mailed on the next succeeding day which is not a Saturday, Sunday, or legal holiday. "Legal holiday" means any legal holiday in the District of Columbia, or any Statewide legal holiday of the State where the taxpayer files his returns.

  3. Returns and payments that are received after their respective due dates are treated as filed or made on the return or payment due date if the postmark date indicates timely mailing.

    Note:

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

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

    Exception:

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

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

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

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

  7. IRC 7502 also applies with respect to any payment due date stated in a notice and demand for payment. Penalty or interest does not accrue beyond the notice date on amounts paid (mailed) by the date stated in the notice. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The date for payment stated in a notice is —

    • 10 calendar days after the date of the notice for any notice dated 12/31/1996 or earlier;

    • 21 calendar days after the date of the notice for any notice dated after 12/31/1996, if the amount in the notice is less than $100,000.00;

    • 10 business days after the date of the notice for any notice dated after 12/31/1996, if the amount in the notice is $100,000.00 or more.

20.1.2.1.1.1  (04-19-2011)
Unsigned Returns

  1. IRC 6061 through IRC 6065 require that any return made under the provisions of the internal revenue laws must be signed by the taxpayer (or other such authorized individual) under penalties of perjury. A return that is not signed by the taxpayer (or an authorized individual) fails to meet the requirement to file that return, and may subject the taxpayer to penalties for failure to file. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. If it is determined that the failure to sign a return was an intentional attempt to avoid civil or criminal penalties associated with signing a false return (see IRC 7206), then the penalty for failure to file should be duly explored to the fullest extent of the law. See IRM 20.1.2.2.7.5, Fraudulent Failure to File.

  3. Also see IRM 20.1.2.1.9, Frivolous Returns.

20.1.2.1.2  (04-19-2011)
Disregarded Periods

  1. IRC 7508 and IRC 7508A provide that certain periods are to be disregarded in determining whether a taxpayer has complied in a timely manner with the requirement to perform certain acts.

20.1.2.1.2.1  (04-19-2011)
Combat Zone — IRC 7508

  1. IRC 7508 provides that a certain period relating to duty in a combat zone (or in a contingency operation designated by the Secretary of Defense) is to be disregarded in determining whether a taxpayer has complied with statutory requirements to perform certain acts by a given date.

  2. With respect to the time available (after the end of a tax year) to prepare and file a return, and to pay the tax, the period to be disregarded in determining any penalty for filing late or paying late is—

    1. The period of service in the combat zone or in the contingency operation, plus

    2. Any period of continued hospitalization attributable to service in the combat zone or in the contingency operation, plus

    3. 180 days following the exit date.

    Example:

    A member of the Armed Forces serves in a combat zone from March 25, 2009, until February 20, 2010. The soldier normally has 105 days (106 days in a leap year) from the end of the taxable year until the due date of the return. 51 of those 105 days were spent in the combat zone. Therefore, those 51 days, plus the additional 180, are disregarded in determining whether the soldier filed his return on time, or paid his tax on time. In other words, if the soldier files the 2009 return within 231 days after 4/15/2010 (on or before 12/2/2010), the return will be considered on time. If the soldier had exited the combat zone before 12/31/2009, only so much of the 180 days as did not expire in 2009 would be added to the normal return due date in determining if the return was filed on time.

  3. The period to be disregarded applies to individuals serving in the Armed Forces of the United States, and to those serving in support of those Armed Forces.

  4. The period to be disregarded also applies to the spouses of those serving in the combat zone. However, the period to be disregarded does not apply to the spouses for any taxable year that begins more than two years after the date of termination of combat activities in the combat zone.

20.1.2.1.2.2  (04-19-2011)
Federal Disaster Area — IRC 7508A

  1. IRC 7508A provides that the Secretary of the Treasury may specify a period of up to one year to be disregarded with respect to acts required to be performed by taxpayers determined by the Secretary to have been affected by a federally declared disaster, or a terroristic or military action.

  2. In order for the period to be disregarded to impact either the penalty for filing late or the penalty for paying late, the due date for filing or paying must fall within the disaster period as determined by the Secretary. If the normal due date for filing or paying falls within the disaster period, the taxpayer's return or payment will be considered on time if it is mailed by the date published by IRS for timely filing or paying for the covered disaster area.

  3. IRS identifies taxpayers qualifying for disaster relief based on their zip code. Qualifying taxpayers receive a Transaction Code (TC) 971 with Action Code 086, 087, or 688 posted in the entity module of their account. Disaster TC 971 transactions contain a transaction date and a secondary date. The transaction date is the beginning date of the disaster period, and the secondary date is the ending date. The ending date corresponds with the date published by IRS for timely filing or paying.

  4. Unlike periods disregarded due to time spent in a combat zone, disaster periods that begin after the end of the taxable year, and end prior to the return due date, do not extend the time for filing and paying.

    Example:

    Taxpayer B, a partnership, is identified by the Secretary as being affected by the severe winter storm in New Jersey (FEMA 1897), and TC 971 AC 688 is posted in the entity with transaction date 03122010, and secondary date 04152010. B's penalty for filing or paying late for Form 1065, U.S. Return of Partnership Income, is not impacted because the Form 1065 due date (04/15/2010) does not fall within the disaster period.

  5. Any penalties for filing or paying late of affected taxpayers are computed using the disaster end date as the new "disaster due date" for determining the correct penalty.

    Example:

    Taxpayer C, a corporation, is identified by the Secretary as being affected by the severe winter storm in New Jersey (FEMA 1897), and TC 971 AC 688 is posted in the entity with transaction date 03122010, and secondary date 04152010. C's penalty for filing or paying late for Form 1120, U.S. Corporation Income Tax Return, is computed using the disaster due date (04/15/2010) as the penalty start date for any penalty for filing or paying late, because the normal due date for Form 1120 (03/15/2010) falls within the disaster period.

  6. Because the period specified by the secretary may be disregarded in the computation of any penalty, the penalty for paying late generally is not charged for any month that begins on or after the disaster start date, but before the day following the end of the disaster period.

    Example:

    Taxpayer D, an individual, filed his 2007 return without payment on 1/5/2009. The return reflects tax of $32,000 with a balance due of $16,000. D had an extension of time to file until 10/15/2008, but was identified by the Secretary as being affected by Hurricane Ike (FEMA 1791) from 9/7/2008 until 1/5/2009. Because D had an extension of time to file until 10/15/2008, the return due date fell within the disaster period. Since D filed by the end of the disaster period, there is no penalty for filing late.
    An extension of time to file does not, however, extend the time to pay. Therefore, D will be charged a penalty for paying late. The penalty will be computed for each penalty month that begins after the original return due date but prior to 9/7/2008, and for each penalty month that begins after 1/5/2009, until the tax is paid. (For rules on how to determine when a penalty month begins and ends, see IRM 20.1.2.2.8.4.2 and IRM 20.1.2.2.8.5.2.)

  7. The following taxpayers also qualify for relief under IRC 7508A; however, they must call the IRS disaster hotline at 866–562–5227 to request that relief.

    • Taxpayers whose books or records necessary to meet a filing or payment deadline, or whose tax professional who maintains the taxpayer's records, are located within a disaster area, while the taxpayer's business (or residence in the case of individuals) is not.

    • Relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in a covered disaster area.

    Caution:

    Only IRS employees in the Disaster Assistance and Emergency Relief Program Office (DPO) have the delegated authority to determine whether a taxpayer was affected by a federally declared disaster, and only those employees are authorized to cause TC 971 AC 086, 087 or 688 to be posted in a taxpayer's entity. See IRM 25.16.1.3.1, Duties, through IRM 25.16.1.3.3, -S Freeze. IRS employees should not abate or adjust any penalties because of a federally declared disaster unless TC 971 AC 086, 087 or 688 is posted in the entity, and the penalty is restricted from automatic computation by a restricting penalty Transaction Code.

    Reminder:

    Even though a taxpayer may not be considered to be affected by a federally declared disaster, a penalty for failure to file or pay still may not apply if the failure was due to reasonable cause and not due to willful neglect. See IRM 20.1.2.1.4.1, Penalty Abatements and Re-assessments.

  8. IRS employees can research disaster areas by going to http://www.icce.irs.gov/fema/, or to http://serp.enterprise.irs.gov/databases/irm-sup.dr/disaster.dr/disaster-toc.htm. Information on tax relief in disaster situations is available to the general public at www.irs.gov.

20.1.2.1.3  (04-19-2011)
Extensions of Time to File and Pay

  1. IRC 6081 provides that the Secretary of the Treasury may grant a reasonable extension of time for filing any return, declaration, statement, or other document. Additionally, it provides that, except for taxpayers who are abroad, no such extension shall be for more than 6 months. See IRM 20.1.2.1.3.1, Extensions of Time to File.

  2. IRC 6161 provides that the Secretary of the Treasury may extend the time to pay certain tax for a reasonable period. See IRM 20.1.2.1.3.2, Extensions of Time to Pay.

  3. Treasury Regulation 1.6081–5 provides for an automatic extension of time to file and pay for certain individuals, partnerships and corporations abroad. See IRM 20.1.2.1.3.3, Taxpayers Abroad.

  4. The specifics regarding the following extensions of time to pay are not covered under this section of the IRM:

    • IRC 6163, Extension of time for payment of estate tax on value of reversionary or remainder interest in property. See Treasury Regulation 20.6163–1. If the time to pay is extended, the penalty for paying late must be restricted, or manually computed and adjusted. Also see IRM 4.25.2.1.5, Estate Tax Extension of Time to Pay Under IRC section 6163.

    • IRC 6164, Extension of time for payment of taxes by corporations expecting carrybacks. See Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback, instructions for the year under consideration. If the time to pay is extended, the penalty for paying late must be restricted, or manually computed and adjusted. Also see IRM 21.5.9.5.28, Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting an NOL Carryback.

    • IRC 6166, Extension of time for payment of estate tax where estate consists largely of interest in closely held business. See Treasury Regulation 20.6166–1 and Treasury Regulations 20.6166A–1 through 20.6166A–4. If the time to pay is extended, the penalty for paying late must be restricted, or manually computed and adjusted. Also see IRM 4.25.2.1.6, Estate Installment Privileges under IRC Section 6166.

    • IRC 6167, Extension of time for payment of tax attributable to recovery of foreign expropriation losses. This extension becomes operative by taxpayer electing to spread attributable tax out over a period of 10 years, reporting 1/10th of the tax each year. With respect to the penalty for paying late, no special processing is required.

20.1.2.1.3.1  (04-19-2011)
Extensions of Time to File

  1. In order to qualify for an extension of time to file, all taxpayers must estimate the amount of their tax for the year. When a specific form is designated for requesting an extension of time to file, the request for the extension should be filed on that form. However, if a specific form has not been designated, an extension may be requested by mailing a letter to the IRS office where the return is required to be filed. Such letter must include the following information:

    • The form for which the extension is requested, including the taxable year.

    • The reason why the extension should be granted.

    In most cases the letter requesting the extension must also include an estimate of the tax due, and payment of that tax.

  2. Qualified taxpayers may request an automatic extension of time to file by filing the appropriate form, depending on the type of tax return. For a list of forms provided to request an extension of time to file, see Document 6209, Section 2, Part 4,Extension Forms.

  3. In order to obtain an automatic extension of time to file, Corporations are required to pay, on or before the due date for payment, the amount properly estimated as the tax for the year covered by the return. The payment should accompany Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

  4. In order to obtain an automatic extension of time to file returns for years that ended prior to 12/31/1993, individuals were required to pay, on or before the due date for payment, the amount properly estimated as the tax for the year covered by the return. For taxable years ending 12/31/1993 and later, individuals are no longer required to pay the amount they estimate in order to obtain the automatic extension of time to file.

  5. An extension of time to file does not extend the time to pay. However, Treasury Regulation 301.6651-1(c)(3) and (4) provides that reasonable cause will be presumed in the case of failure to pay income tax if the following criteria are met:

    1. In the case of an individual, at least 90 percent of the amount of tax shown on the return must have been paid on or before the due date for payment, and the remainder must be paid with the return.

    2. In the case of a corporation, at least 90 percent of the amount of tax shown on the return must have been paid on or before the due date for payment, and the remainder must be paid by the extended return due date.

    IRS computers are programmed to automatically apply this waiver of the late payment penalty for reasonable cause if the taxpayer qualifies.

  6. Joint extension requests apply equally to each spouse, even if they subsequently file separate returns.

  7. There are no regulations covering an extension of time to file employment tax returns. Therefore, these returns do not qualify for an extension of time to file. However, no penalty for filing late is asserted if the taxpayer paid (i.e., via Federal tax deposits, etc.) 100 percent of the tax required to be paid on or before the due date for payment.

  8. Partnerships and S corporations that have elected to have a taxable year other than a required taxable year (in other words, their taxable year does not end on December 31st), are required under IRC 7519 to file Form 8752, and pay the amount shown on that return. The due date for the return is April 15th of the calendar year following the calendar year in which the fiscal year begins. For example, if the fiscal year began on November 1, 2009, then the return and payment are due April 15, 2010. Taxpayers may request an extension of time to file Form 8752 by writing a letter to the service center or district director where they are required to file, on or before the April 15 due date. The letter must include the following:

    • A detailed explanation why the extension is needed.

    • The amount of additional time needed (not to exceed 90 days, unless the taxpayer is abroad, in which case it's not to exceed 6 months).

    • An estimate of the amount due.

    • Payment of the estimated amount due.

    The director may approve an extension of time to file for up to 90 days (up to 6 months, if the taxpayer is abroad), or the request may be denied. The extension will be denied if the request was late, or if payment of the estimate has not been made.

  9. Extensions of time to file are recorded in the applicable tax module with Transaction Code (TC) 460 carrying the extended due date.

  10. The computer generally will not allow the input of an extension beyond 6 months after the normal return due date. However, when a longer extension is allowed by law, the extension may be input by using a "foreign" universal location code (ULC) on the TC 460 input screen. The foreign location codes available are:

    • Philadelphia — 98 (IMF and BMF)

    • Ogden — 60 (BMF)

    • Austin — 20 (IMF)

    Service centers that are not listed above are not able to process an extension in excess of 6 months. The ULC used with this extension request does NOT extend the time to pay. If the taxpayer qualifies for an automatic extension of time to pay under Treasury Regulation 1.6081–5, the taxpayer's return will need to be processed with the proper file location code or computer condition code as applicable. See IRM 20.1.2.1.3.3, Taxpayers Abroad.

20.1.2.1.3.1.1  (04-19-2011)
Extension of Time to File Not Found

  1. Occasionally taxpayers respond to a notice of assessment of a penalty for filing late with a claim that an approved or automatic extension of time to file had been obtained.

    IF AND THEN
    The taxpayer provides clear and convincing evidence of

    • an approved extension of time to file, or

    • a valid, timely request for an automatic extension of time to file,

    		 TC 460 is not posted in the module in question. Use TC 460 to record the extension on the appropriate tax module. Use the original due date as the TC 460 transaction date. Research IDRS to determine if the extension was erroneously posted on another account. If found on another account, use TC 462 to reverse any incorrectly posted extension.

    Note:

    TC 460 posted on the spouse's account is not erroneous if a joint extension request was filed and the taxpayers subsequently filed separately.

    The taxpayer is unable to provide clear and convincing evidence that a timely extension request was filed or approved. TC 460 is not posted in the module in question. Research IDRS to determine if the extension was erroneously posted on another account.

    • If found on another account, use TC 460 to record the extension on the correct tax module. Use TC 462 to reverse any incorrectly posted extension.

    • If not found, go to next row.
    The taxpayer is unable to provide clear and convincing evidence that a timely extension request was filed or approved. TC 460 is not found anywhere. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 20.1.1.3.2, Reasonable Cause.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    "Clear and convincing evidence" is tangible evidence that would lead a reasonable person to presume that it is more likely than not, that a valid, and timely, extension request was submitted. Examples of "clear and convincing evidence" would include a certified mail receipt along with a copy of the extension; or a list of extensions filed by a tax professional where most extensions on the list have been received and posted; or a payment posted to the account that was mailed with the extension request. (This list is not all-inclusive.)
    A history of approved extensions, a mere unsigned statement that an extension request was filed, or even a copy of the extension request that was allegedly filed, are not in and of themselves evidence of filing an extension for the current year. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 20.1.2.1.3.1.2 (4).

  2. If the criteria for input of TC 460, or for abatement of the penalty, have not been met, notify the taxpayer of your determination and of any appeal rights.

  3. Retain the source document (correspondence, write-up of call, etc.) in the taxpayer's file using established procedures (e.g., attach to the return, or send to Files as adjustment source document, including TC 290 .00, etc.). If reasonable cause was considered, an adjustment transaction is required:

    • If the penalty is abated, use Reason Code 062 with the appropriate Penalty Reason Code (see IRM Exhibit 20.1.1–3, Penalty Reason Code Chart.)

    • If the penalty is not abated, input TC 290 for zero amount with Reason Code 062 and the appropriate blocking series (see IRM 20.1.1.3.5.3, Taxpayer Not Entitled to Relief).

20.1.2.1.3.1.2  (04-19-2011)
Extension of Time to File Voided

  1. An extension of time to file is initially approved or denied based on the taxpayer's statements presented at the time the extension is requested.

  2. IRS may void an approved extension of time to file if it is later determined that the extension request was invalid, or if upon examination of the facts it is determined that the extension of time to file was obtained using false pretenses.

  3. An extension request is invalid if it does not contain information required by law, or if the information entered is false or fraudulent. For example, taxpayers applying for an automatic extension of time to file are required to estimate their projected tax liability, and to enter that amount on the appropriate line of the extension request. If a taxpayer's estimate grossly understates the actual liability, and there is no reasonable explanation for the difference, then the extension request may be declared invalid and the extension voided.

  4. If an extension is allowable only if it is accompanied by payment of the estimated tax liability, and the taxpayer (subsequent to having the extension approved) claims that the payment with the extension should be applied against another liability, then the extension should be voided.

  5. Approved extensions of time to file are voided using TC 462 with a transaction date that matches the transaction date of the TC 460 being reversed. When an extension of time to file is voided, and the action will result in a penalty for filing late, the taxpayer must be informed of the reason for the action. If the action is not part of an examination of the taxpayer's return, also inform the taxpayer that we will include information about appeal rights with the notice of penalty assessment.

    Caution:

    If voiding an extension request will result in the assessment of a late filing penalty based on tax shown on the original return, that assessment is not subject to deficiency procedures, and it must be made within the normal 3 year period of limitations. If the assessment statute expiration date (ASED) is imminent (within 90 days of the projected 23C date of the assessment), contact your statute coordinator for guidance to assure timely assessment of the penalty. The period of limitations for assessment of any late filing penalty attributable to a deficiency is suspended during the period that the service is prohibited from assessing the deficiency.

20.1.2.1.3.2  (04-19-2011)
Extensions of Time to Pay - IRC 6161

  1. Taxpayers may use Form 1127, Application for Extension of Time for Payment of Tax, to apply for an extension of time to pay tax shown on their return. The Service will grant the extension provided the taxpayer is able to show that undue hardship will be suffered if payment is made on the payment due date (see IRC 6161(a) and regulations relating thereto). If granted, the extension generally may not exceed 6 months (12 months in the case of estate tax).

  2. Taxpayers may also use Form 1127 to request an extension of time to pay certain taxes determined as a deficiency, providing the deficiency is not the result of negligence, intentional disregard of rules and regulations, or fraud with the intent to evade tax. The Secretary must be satisfied that payment of the deficiency upon the date fixed for the payment thereof would result in undue hardship to the taxpayer. If granted, the extension may not exceed 18 months; and in exceptional cases, an additional 12 months.

  3. If an extension of time to pay is granted, the failure to pay (FTP) penalty for the underlying tax will not begin to accrue until after the expiration of the extension period.

    Note:

    Deferred payment arrangements (i.e., when the Service grants additional time to pay before initiating enforced collection action) are not extensions of time to pay under IRC 6161. The penalty for failure to pay does accrue during any deferral period.

  4. For extensions of time to pay estate and gift taxes see IRM 4.25.2.1.1, Extension of Time to File Estate Tax Returns — IRC Section 6081 through IRM 4.25.2.1.5, Estate Tax Extension of Time to Pay Under IRC section 6163 and Delegation Order 4–3 in IRM 1.2.43.4, Delegation Order 4–3 (formerly DO-20, Rev. 3).

  5. Except in the case of an extension to pay gift tax, IRS currently is not able to compute the FTP penalty systemically if an extension of time to pay was granted under IRC 6161 and the tax is not paid in full by the extended due date. In all such cases the FTP penalty must be manually computed and assessed. For specific processing instructions see IRM 5.1.12.1, Overview — Cases Requiring Special Handling.

  6. Extensions of time to pay are disregarded in determining the date prescribed for payment for the purpose of computing interest or the penalty for filing late. See IRC 6601(b)(1).

20.1.2.1.3.2.1  (04-19-2011)
Extension of Time to Pay Voided

  1. If, subsequent to approving an extension of time to pay, it is determined that the extension of time to pay was obtained using false pretenses, the extension may be voided. Such a decision must be based on evidence and not conjecture. Evidence of "false pretenses" includes:

    • The omission of relevant facts in the application, which, had they been included, would have resulted in a denial of the application.

    • Misrepresentation of facts, or falsified information, without which the application would have been denied.

  2. The extension of time to pay may also be voided or revised if the taxpayer's actions show that the failure to pay is due to willful neglect, and not solely due to the circumstances set out in the application for an extension of time to pay.

    Example:

    A taxpayer requests a 6 month extension of time to pay in order to liquidate assets at fair value. He sells the assets in question after 3 months, but fails to pay the tax within a reasonable amount of time after receiving the proceeds from the sale. This failure to act may be evidence that the failure to pay is due to willful neglect, and not undue hardship. Accordingly, the extension of time to pay may be voided, or revised to reflect a reasonable period based on the date of the sale.

20.1.2.1.3.3  (04-19-2011)
Taxpayers Abroad

  1. Treasury Regulation 1.6081–5 provides for an automatic extension of time to file and pay for certain partnerships, corporations and U.S. citizens and residents. The extended due date is the 15th day of the 6th month following the close of the taxable year. The extension applies to—

    • Partnerships whose records and books of account are kept outside the United States and Puerto Rico;

    • 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;

    • Domestic corporations whose principal income is from sources within the possessions of the United States.

    • United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico; and

    • United States citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico, if the period of the tour of duty includes the entire due date of the return.

    Reminder:

    An extension of time to file or pay does not change the date prescribed for payment for the purpose of computing interest or for computing the penalty for filing late.

  2. In order for one of the above entities to qualify for this extension of time to file and pay, the person must attach a statement to their return stating that they qualify for this extension of time to file.

  3. If a person qualifying for this automatic extension needs additional time to file, they must file the appropriate application for an extension on or before the extended due date, and attach a statement to the extension request stating that they qualify for the extension in Treas. Reg. 1.6081–5.

  4. Forms 1040 identified during pipeline processing as qualifying for this automatic extension of time to file are coded with a special file location code in the DLN, or with a special computer condition code:

    1. The file location codes 20 and 98 are used for U.S. citizens and residents residing outside the U.S. and Puerto Rico.

    2. Computer condition code "N" is used for military personnel on permanent or temporary duty outside the U.S. and Puerto Rico.

    3. Computer condition code "D" is used for an 8 month extension of time to file for qualifying individuals who requested an additional extension beyond the automatic two month extension.

  5. Partnerships and corporations identified during pipeline processing as qualifying for this automatic extension are identified by computer condition codes "D" and "R" . These codes prevent Master File from ever automatically assessing either the penalty for filing or for paying late for that year's return; therefore, if either penalty ever applies, it must be manually computed and assessed.

20.1.2.1.4  (04-19-2011)
Appeal of Penalties in IRM 20.1.2

  1. The penalties referenced in this IRM section generally may be appealed after assessment, regardless whether the penalty has been paid. However, there is an exception to this general rule: If the penalty was proposed during the examination of a return, and it is part of a deficiency, then it must be appealed subject to the same rules as the deficiency that gave rise to the penalty. For more information see Publication 1, Your Rights as a Taxpayer.

  2. Appealing a penalty assessment does not stop the accrual of interest on that penalty.

    • Interest on the failure to file (FTF) penalty assessed under IRC 6651(a)(1) begins to accrue on the return due date (including extensions).

    • Interest on the other penalties reference in this IRM section begins to accrue on the date of notice and demand for payment of that penalty.

    Only payment of the penalty prevents continued accrual of interest during the appeals process. However, if the taxpayer prevails in his appeal, and the penalty is abated, all interest charged on the penalty is abated as well.

  3. A claim for refund of a penalty paid must be filed within three years after the return was filed, or within two years after the penalty was paid, whichever is later. If the claim is filed within three years after the return was filed, only so much of the penalty may be refunded as was paid during that three year period.

20.1.2.1.4.1  (04-19-2011)
Penalty Abatements and Re-assessments

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

  2. The Service will abate the penalty for failure to file or pay when the taxpayer shows that the failure to comply was due to reasonable cause and not due to willful neglect.

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

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

    3. Insufficient funds generally is not reasonable cause for failure to pay unless the funds were depleted due to unusual or unforeseen circumstances. For example, a taxpayer who incurs lavish or extravagant living expenses to the extent that the remainder of his/her assets and anticipated income is insufficient to pay his/her tax, has not exercised ordinary business care and prudence in providing for the payment of his/her tax liability.

    4. Reasonable cause for failure to pay exists if payment of the tax would result in a significant hardship for the taxpayer. For example, a taxpayer who was able to pay, but who needed the money to pay for necessary medical expenses, may be able to demonstrate that payment of the tax (in lieu of paying for the medical expense) would have resulted in a significant hardship. Similarly, significant hardship also exists if the taxpayer would only have been able to pay by liquidating assets well below fair market value.

    5. Generally, the penalty for failure to pay should not be abated until the underlying tax has been paid in full: Continued failure to pay (beyond the effect of the "reasonable cause" ) may be evidence that the underlying reason for the failure to pay is willful neglect. However, abatement for reasonable cause may not be denied merely because the underlying tax has not yet been paid. Therefore, remove the penalty if the taxpayer had reasonable cause for the failure to pay, and there is no evidence of willful neglect. If the FTP penalty is abated for reasonable cause, and a subsequent review of the account shows that the taxpayer willfully continued in his failure to pay, the penalty may be reasserted in full, computed from the original penalty start date.

    6. The penalty for failure to file can be abated for reasonable cause regardless of payment of tax, because a continued failure to pay would not constitute evidence that the failure to file was due to willful neglect.

  3. Reasonable cause determinations for failure to pay must be made separately for each assessment (i.e., tax shown on the return, math error assessment, amended return, or deficiency). For example, a taxpayer may not have had reasonable cause for his failure to pay the tax shown on his return, while he may have had reasonable cause for his failure to pay additional tax assessed as a result of a math error correction.

  4. When the failure to pay (FTP) penalty is abated for reasonable cause (Reason Code 062), the abatement should include the entire related penalty computed on the underlying tax liability, even if that penalty has not yet been assessed.

    Example:

    A taxpayer files his return and pays the tax he believes is due by the return due date. IRS processes the return and finds that an incorrect amount of estimated tax payments was claimed on the return. Accordingly, IRS bills the taxpayer for unpaid tax, plus penalty and interest. A couple of months pass before the cause for the discrepancy is found, and the taxpayer agrees that his tax is, indeed, underpaid. The taxpayer pays the tax and requests abatement of the penalty for paying late.
    If the taxpayer's penalty is abated for reasonable cause, that abatement must also include any penalty that has accrued since the notice of the original penalty assessment.
    If the tax in the module is paid in full, total FTP penalty (including unassessed accruals) can be determined using CFOL command codes BMFOLT (the amount to the right of the literal "FTP TT:" ) and IMFOLT (the amount to the right of the literal "FTP TOTAL:" ).
    If the tax in the module is not paid in full, the penalty should be computed from the penalty start date to the date of payment to determine the amount to abate.

  5. Examiners should address the reason for any failure to file or failure to pay when securing or examining returns where the penalty appears to apply. Making this initial determination will prevent the need for subsequent abatements.

  6. Reasonable cause abatement requests must be documented via an adjustment with a source document.

    • If the taxpayer qualifies for relief, abate the applicable penalty amount with the appropriate Transaction Code. Enter Reason Code (RC) 062 in any of the first three Reason Code fields, and the applicable Penalty Reason Code (PRC) in the fourth Reason Code field.

    • If the taxpayer does not qualify for relief, notify the taxpayer of his appeal rights (following your functional area's guidelines), and document the abatement request with Transaction Code (TC) 290 for zero amount, with blocking series 98 or 99, and with RC 062 in any of the first three Reason Code fields.

  7. When penalties for failure to pay are abated for reasonable cause using TC 271 with RC 062, Master File will not restrict future computer computations of that penalty (provided it was not previously restricted). The computer continues to compute the penalty for failure to pay, but will waive the amount associated with RC 062. Use TC 271 with RC 062 only if the underlying tax has been paid in full, and always abate the entire penalty related to the tax in question, including accruals.

  8. A TC 271 input without RC 062 restricts subsequent computation of the penalty. Input TC 272 with a zero amount to remove the manual restriction on the FTP penalty when a module has been restricted in error.

  9. A TC 271 without RC 062 (or a TC 270 for zero amount) should only be used to abate the FTP penalty for reasonable cause (and/or to prevent additional accrual of the penalty when the failure to pay is due to reasonable cause) under two circumstances:

    1. The taxpayer qualifies for reasonable cause abatement, and all of the following apply,

      • The underlying tax has not been paid,

      • There is no reasonable expectation that it will be paid anytime soon, and

      • The circumstances that are preventing payment of the tax are expected to persist.

    2. The taxpayer has agreed to pay the balance owed upon receipt of notice of abatement of the penalty.

      Note:

      If the taxpayer fails to pay as agreed, the penalty restriction imposed by the TC 270 or 271 without RC 062 may (and should) be removed after the taxpayer is notified that we have determined (based on the failure to pay as agreed) that the failure to pay is due willful neglect, and that the penalty, therefore, does not qualify for abatement for reasonable cause.

    Use PRC 043 when abating FTP penalty for reasonable cause without using RC 062.

  10. An abatement of the penalty for failure to pay (or TC 270 for zero amount) without the use of Reason Code 062 should be very rare. A restricting penalty transaction precludes any future penalty assessments or accruals for failure to pay, and presupposes the taxpayer's continued reasonable cause beyond the present. A penalty abatement, pre-determined with respect to future conditions, can seldom be objectively valid. An exception to this general rule involves the first-time-abate provision in IRM 20.1.1.3.6.1, First Time Abate (FTA).

  11. Field personnel in contact with taxpayers, being provided more detailed information regarding the conditions relating to the original penalty assessment, may abate the assessment in whole or in part; or, they may re-assess a prior penalty abatement provided supporting facts warrant it and the statute of limitations on assessment is still open. Field personnel should follow established local procedure to adjust penalties in accordance with the policies laid out in this IRM.

  12. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

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

  13. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

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

  14. Also see IRM 20.1.1.3.6.1, First Time Abate (FTA), for first-time-abate/clean-compliance-history provisions.

    Note:

    The first-time-abate provisions do not apply to returns with an event-based filing requirement, such as Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

20.1.2.1.5  (04-19-2011)
Manual Penalty Adjustments

  1. In most conditions, IRS's computer systems are able to accurately compute and assert the correct penalty for the penalties for failure to file (FTF) and/or failure to pay (FTP). Therefore, It is important that taxpayer accounts are not unnecessarily restricted from systemic penalty computation. The following Transaction Codes reflect systemic assessment or abatement of the penalties in this IRM section:

    • TC 166/167 — systemic assessment/abatement of the penalty for failure to file.

    • TC 246/247 (without penalty reference number) — systemic assessment/abatement of the incomplete return penalty (Form 1065, U.S. Return of Partnership Income, and Form 1120-S, U.S. Income Tax Return for an S Corporation).

    • TC 276/277 — systemic assessment/abatement of the penalty for failure to pay.

  2. When IRS's computer systems are unable to compute a penalty correctly, manual computation and adjustment of the penalty is required. In the case of the FTF penalty arising out of a deficiency, manual computation and assessment is required by law (see IRC 6665(b).).

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

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

  3. When manual adjustments of the penalty are required, (e.g., Master file and IDRS mismatches, restricted accounts, multiple installment agreements and/or bankruptcy periods applicable to one tax module, and FTP computation on modules containing both refunds and reversed refundable credits and/or payments) Service personnel are responsible for determining the correct penalty amount.

  4. IDRS Command Code (CC) "INTST" is a good tool for determining whether IRS's systems are able to determine the correct total FTP penalty on accounts not previously restricted (TC 270/271):

    1. Use the appropriate CFOL command code (IMFOLT or BMFOLT) to determine total FTP penalty computed by Master File.

    2. Use CC "INTST" to compute FTP penalty to the interest date that was reflected on CFOL.

    3. Compare the Master File FTP penalty amount with the INTST FTP penalty amount. If the two amounts do not match, the correct penalty amount must be manually determined.

    4. If the Master File amount is correct, and the taxpayer has not been receiving incorrect notices, no action is necessary. (IRS uses the INTST computation for billing purposes only. Amounts shown on INTST are not assessed on Master File if they exceed the Master File computed amounts.)

    5. If the Master File amount is incorrect, or the taxpayer has been receiving incorrect notices, the module must be manually adjusted.

    Reminder:

    FTP penalty continues to accrue until the underlying tax liability is paid in full, or until the penalty has reached 25 percent in the aggregate. It is, therefore, important that FTP penalty computation is not unnecessarily restricted by a manual FTP penalty adjustment while the penalty is still accruing!

  5. The following Transaction Codes are used to manually assess or abate the FTF and FTP penalties:

    • TC 160/161 — manual assessment/abatement of the penalty for failure to file.

    • TC 162 — removal of computation restriction of the penalty for failure to file.

    • TC 240/241 (without penalty reference number) — manual assessment/abatement of the incomplete return penalty (Form 1065 and Form 1120-S).

      Note:

      This applies only to MFT 06 and 07, and to MFT 02 with return doc code 16.

    • TC 270/271—manual assessment/abatement of the penalty for failure to pay.

    • TC 272 – removal of computation restriction of the penalty for failure to pay.

  6. The following blocking Series should be used when adjusting penalties with command code ADJ54:

    1. If you have the original return, use a refile blocking series.

    2. If you don't have the original return, use any appropriate non-refile blocking series.

      Note:

      Blocking series "18" is a refile blocking series. Due to a heavy workload in files, use blocking series "18" only when you don't have the original return, and it is absolutely necessary to attach your adjustment to the original return.

  7. Before adjusting restricted penalties, the restricting adjustment documents may need to be obtained to check the penalty computation and rationale for restricting the penalty.

    1. When the penalties for paying late have to be manually computed, they should be computed to the 23C date of the input adjustment. Care must be taken to ensure that the 25 percent maximum aggregate is not exceeded.

    2. When the penalty is being increased, the law requires that a copy of the penalty computation is sent to the taxpayer with the penalty notice. See IRC 6751.

20.1.2.1.6  (04-19-2011)
Correcting Incorrect Assessments

  1. IRS employees have a responsibility to correct incorrect penalty assessments when they are identified and the statutory period for making the correction has not expired.

  2. IRC 6404(a) provides authority for IRS to abate at any time the unpaid portion of any liability that is excessive in amount, or that is erroneously or illegally assessed. A liability is excessive to the extent that it exceeds the amount provided for by law.

  3. The "paid" portion of any excessive or erroneously assessed penalty may be abated —

    • Without a claim — only if refund or credit for that portion can be made within the period of limitations for refunds; or

    • With a claim — only if the claim was filed within the period of limitations for refunds. Consider an inquiry questioning the computation of a penalty as an informal claim if you find that the assessed penalty is excessive.

    Generally, the period of limitations for refunds is three years after the return is filed, or two years after the penalty was paid, whichever is later. For exceptions see IRM 25.6.1.10.2.7, Claims for Credit or Refund – General Time Period for Submitting a Claim.

  4. Insufficient failure to file (FTF) penalty assessments may only be corrected within the period of limitations for assessment, including any extensions provided by law. Additionally, if the additional FTF penalty is the result of a deficiency, the penalty may not be assessed without following deficiency procedures. For more information about the statutory period for assessments, see IRM 25.6.1.9, Assessments.

  5. The penalty for paying late becomes due and payable as it accrues. "Assessment" of the penalty is merely a record-keeping tool to record the date of notice and demand for payment of the penalty, and the penalty amount in the notice. Therefore, notice and demand for payment of any unbilled FTP penalty may be given (via manual penalty assessment) at any time within the period of limitations for collection of the tax to which the penalty relates.

  6. The rules for disregarded periods (see IRM 20.1.2.1.2.1 and IRM 20.1.2.1.2.2) also apply in determining the period during which a penalty may be assessed or abated.

    • If "X" number of days are disregarded under IRC 7508 in determining timely filing and paying, then the same number of days are disregarded in determining whether an assessment or claim is timely.

      Reminder:

      A return filed or payment made within the disregarded period after the due date is considered filed or made on the due date. Returns filed or payments made after the disregarded period are considered late only to the extent that the period between the due date and the received date exceeds the disregarded period.

    • If the assessment or refund statute expiration date (ASED or RSED) falls within a period to be disregarded under IRC 7508 (see IRM 20.1.2.1.2.1 (2)), the assessment or claim is timely if it is made or filed within the disregarded period.

      Example:

      Taxpayer A enters a combat zone on 6/15/2010, and exits on 12/20/2010. A filed his 2007 return on 4/15/2008. The normal period for making an assessment or filing a claim for the 2007 return is three years from the date the return was filed. However, in determining that three year period, the period from 6/15/2010 to 12/20/2010, plus 180 days, is disregarded under IRC 7508. Therefore, an assessment or claim is timely if made or filed on or before 4/17/2012.

    • If the RSED falls within a period to be disregarded under IRC 7508A, the claim is timely if it is made or filed on or before the last day published for that action by IRS memo on behalf of the Secretary of the Treasury.

      Note:

      It is generally not possible to ascertain the period during which taxpayers were "affected" until after the fact; therefore, the last day for timely performance of a time sensitive act may be published after that last day.

    • For Federally declared disasters declared between January 1, 1999, and January 15, 2009, periods disregarded under IRC 7508A in determining the timeliness of a return were treated like an extension of time to file. Therefore, any claim for refund of a penalty is timely if made within 3 years after such extended due date. However, for Federally declared disasters declared after January 15, 2009, Treasury Regulation 301.7508A-1(b) clarified that IRC 7508A does not extend the due date, but merely allows IRS to disregard a certain period in determining whether a given act was timely.

20.1.2.1.6.1  (04-19-2011)
Identifying Incorrect Assessments

  1. IRS employees are not required to "second-guess" every penalty assessment they encounter. However, in order to preserve the trust of taxpayers, it is expected that obvious errors will be corrected when they are identified.

  2. Some examples of obvious errors are listed below. Please note that this list is not all-inclusive:

    • A late filing penalty has been assessed based on the received date of a return, and the postmark date of the return shows that the return was mailed on time.

    • The penalty computed and assessed by Master File does not match the penalty computed by the Penalty and Interest Explanation program (PINEX).

    • The assessed (billed) penalty amount is excessive based on the underlying tax liability.

  3. When the Master File or PINEX computation of a penalty is called into question (e.g., if PINEX and Master File penalty amounts do not match when computed to the same date), the penalty may need to be manually computed and adjusted. (See IRM 20.1.2.1.5 (4).) If the incorrect penalty is due to a computer error, the appropriate analyst in the Office of Servicewide Penalties should be notified before a correction to the penalty is input for posting. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

20.1.2.1.6.1.1  (04-19-2011)
System Errors

  1. Prompt action is needed to correct penalties erroneously assessed or accrued due to system errors. When a system error is reported, the Office of Servicewide Penalties issues case specific instructions to the reporting employee, identifying the problem and the steps needed to correct the individual situation. Usually, these system errors are quickly resolved.

  2. When a system error on an account is identified that cannot be resolved quickly, a manual (restricting) adjustment of the penalty may be needed.

20.1.2.1.6.1.2  ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

20.1.2.1.6.1.3  (04-19-2011)
Problems Involving Refundable Credits/Payments

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

  2. When Master File computes an incorrect penalty for failure to pay, the penalties for failure to file and failure to pay must be manually computed and adjusted. See IRM 20.1.2.1.5 paragraph (3).

  3. See IRM 20.1.2.2.2, Erroneous Refunds and Offsets, IRM 20.1.2.2.3, Credit for Withheld Income Tax and Excess FICA Tax, and IRM 20.1.2.2.4, Other Refundable Credits, for information about how the failure to pay (FTP) penalty should be computed.

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

20.1.2.1.6.2  (04-19-2011)
PINEX

  1. The IRS provides explanations of all penalty and interest charges to the taxpayer when a Master File assessment notice is issued. Penalties and interest may also be explained to taxpayers "on request" using the Penalty and Interest Notice Explanation (PINEX) system.

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

  3. The PINEX notice includes a computation and explanation of selected computer generated penalty and interest charges.

  4. PINEX notices must be reviewed for accuracy by the tax examiner requesting the notice. If the notice is correct it may be mailed to the taxpayer. The review should include comparison with penalty and interest on Master File. See IRM 20.1.2.1.5 (4).

  5. PINEX also provides screen displays of penalty and interest computations for an immediate response to telephone inquiries or walk-in requests at taxpayer assistance centers and field offices. IRS personnel may find the screen displays helpful in analyzing penalty and interest transactions in general.

  6. If the PINEX notice or screen display referenced above does not match the Master File computation, the penalty may need to be manually computed and adjusted, with a manually prepared explanation of the penalty computation provided to the taxpayer. See IRM 20.1.2.1.5 and IRM 20.1.2.1.6.1 for more information.

20.1.2.1.7  (04-19-2011)
Short Years

  1. A new corporation filing a short-period return must file and pay by the 15th day of the 3rd month after the short period ends. Failure to file and pay by the applicable due date (including any extensions) will subject the corporation to the applicable penalty for filing and/or paying late.

  2. A corporation that has dissolved and files a "final" return generally has to file by the 15th day of the 3rd month after the date it is dissolved. However, any penalty for filing late (IRC 6651(a)(1) or IRC 6699) should be suppressed if the "Final" return is filed and tax paid after the short period return due date but on or before the normal return due date as determined if the corporation's tax year had not ended early. See IRM 20.1.2.1.3 for rules covering the time to file or pay. These rules should be applied with respect to the normal return due date, both for the purpose of determining the penalty for filing late, and the penalty for paying late.

  3. A corporation that files a short year return to end its year early before becoming a member of a consolidated group has the same return due date as the consolidated return of the parent. See Treas. Reg. §1.1502-76 and IRM 3.11.16.6.3.1, Short Period Returns – Regulation 1.1502–76.

  4. The final return of a decedent generally must be filed by the 15th day of the 4th month after the end of the year in which the taxpayer died. However, the personal representative of the decedent's estate may choose to file the return early, prior to the end of the year of death. Per IRM 3.12.3.54.3.6, Early Filed Decedent Returns, the month of the date of death is entered as the month ending the "short" taxable year for the decedent's final return. This causes IRS's computers to calculate an artificial return and payment due date that is earlier than the legal return and payment due date, and which will require manual interest and penalty computations for ANY balance due related to that return! To avoid unnecessary penalty and interest restrictions, only refund and zero balance returns should be processed as "early filed decedent returns." In the case of a deficiency found on an early filed decedent return, serious consideration should be given to "reprocessing" the early filed return as a calendar year return prior to assessment of the deficiency. See IRM 21.5.2.4.23, Reprocessing Returns/Documents, for specific instructions.

  5. Any entity that files a short year return to end its year early (other than a "final" return) must file and pay by the due date determined with regard to the last month of the short year. Failure to file and pay by the applicable due date (including any extensions) will subject the taxpayer to the applicable penalty for filing and/or paying late.

20.1.2.1.8  (04-19-2011)
Restrictions on Assertions

  1. According to IRM 1.2.20.1.2, Policy Statement 2–4, the Service does not assert penalties against federal agencies. Also see IRM 21.7.1.4.5.2, Abatement of Penalty and Interest Involving Federal Agencies.

  2. Generally the statute of limitations for assessing the penalty for filing late on a filed return is three years from either the due date or the date the return was filed, whichever is later.

  3. Similar to interest, the penalties for failure to pay under IRC 6651 (a)(2) and (3) may be assessed at any time while it may be collected. (See United States v. Krasnow, 548 F. Supp. 686 (S.D.N.Y. 1982)).

  4. There is no statute of limitations for assessing any penalty for filing late or paying late when a return has not been filed by the taxpayer.

  5. An active criminal investigation (identified by Transaction Code (TC) 914) stops reminder notices from being issued, but it does not stop the penalty for paying late from accruing.

20.1.2.1.9  (04-19-2011)
Frivolous Returns

  1. A frivolous return, subject to the penalty under IRC 6702, does not constitute a return for the purpose of the penalties for failure to file a return, or for failure to pay the tax shown on a return. See Rev. Rul. 2007-19, 2007-1 C.B. 843).

20.1.2.2  (04-19-2011)
Failure to File a Tax Return or to Pay Tax - IRC 6651

  1. IRC 6651 contains the following penalty provisions:

    • IRC 6651(a)(1) - Failure to file any return required to be filed to report any tax.

    • IRC 6651(a)(2) - Failure to pay tax shown on a return.

    • IRC 6651(a)(3) - Failure to pay tax required to be shown on a return (but which is not so shown) upon notice and demand for payment thereof.

  2. The following subsections provide additional guidance in the application of subsection (a):

    • Subsection (b) prescribes how to determine the amount subject to this penalty.

    • Subsection (c) contains limitations when two penalties apply for the same month, and a special rule when tax required to be shown on the return is less than tax shown.

    • Subsection (d) provides for an increase in the failure to pay (FTP) penalty rate in certain cases.

    • Subsection (e) excepts estimated tax installments from the FTP penalty.

    • Subsection (f) provides for an increase in the failure to file (FTF) penalty when the failure to file is due to fraud.

    • Subsection (g) provides rules for the treatment of returns prepared under IRC 6020(b).

    • Subsection (h) provides for a decrease in the FTP penalty rate for qualifying taxpayers for any month during which an installment agreement is in effect for that specific tax.

20.1.2.2.1  (04-19-2011)
Math Errors, Amended Returns and Deficiencies

  1. Tax in excess of tax shown on a return (or as previously adjusted) is essentially a deficiency as defined by IRC 6211. When the deficiency is determined by the IRS (except deficiencies determined as a result of correcting a math error or clerical error on the taxpayer's return), the deficiency procedures outlined in Subchapter B of Chapter 63 of the IRC must be followed.

  2. Not all deficiencies require that deficiency procedures be followed prior to assessment of the deficiency:

    • Taxpayers may waive the requirement for a notice of deficiency at any time that a deficiency is determined. This includes when the taxpayer files and signs an amended return reporting additional tax. (See IRC 6213(d).)

    • Tax may be assessed without deficiency procedures if the tax has been paid. (See IRC 6213(b)(4).) (Posting a bond to stop interest does not constitute payment of a proposed deficiency.)

    • Tax may be assessed without deficiency procedures if the additional tax is determined as the result of correcting a mathematical or clerical error on the taxpayer's return. However, the taxpayer has the right to require the use of deficiency procedures by protesting the assessment within 60 days after the date of the assessment. If the taxpayer protests the math error assessment, the additional tax must be removed, and it can only be reassessed via normal deficiency procedures. (See IRC 6213(b)(1) and (b)(2).)

  3. Deficiencies are assessed using Transaction Codes (TC) 29X or 30X, where the "X" represents the third digit of the Transaction Code as applicable. Deficiencies determined while correcting a mathematical or clerical error on the original return are assessed as part of the TC 150.

  4. When any deficiency is assessed (regardless of source), IRS issues a notice of assessment and (if the deficiency has not been paid) demand for payment.

  5. When the tax shown in the notice and demand for payment is not paid within 21 days after the date of the notice (10 business days if the total amount in the notice is $100,000 or more), the assessment becomes subject to the penalty for failure to pay tax upon notice and demand under IRC 6651(a)(3).

    Note:

    For notices dated before 1/1/1997, tax shown in the notice and demand for payment had to be paid within 10 calendar days after the date of the notice in order to avoid the penalty under IRC 6651(a)(3).

20.1.2.2.2  (04-19-2011)
Erroneous Refunds and Offsets

  1. There is no provision in the IRC for charging any penalty for paying late when a payment of tax was refunded in error:

    1. If payment was remitted to pay tax shown on a return, that fact is not erased if the payment was refunded in error.

    2. If payment was remitted that was clearly intended to pay tax that had not yet been assessed (i.e., an amended return, or a proposed deficiency), that fact is not erased if the payment was refunded in error. ("Clearly intended" means that the payment was accompanied by clear written communication as to how the payment was to be applied.)

    3. When a taxpayer fails to repay an erroneous refund upon notice and demand for payment, IRS still may not charge a failure to pay (FTP) penalty if the taxpayer fails to repay the erroneous refund. However, there is one exception to this rule: If the erroneous refund is the result of an erroneous abatement, and IRS determined that a deficiency exists as a result of the erroneous abatement, and IRS assessed that deficiency following the deficiency procedures outlined in Subchapter B of Chapter 63 of the IRC, then that deficiency is subject to the FTP penalty under IRC 6651(a)(3) if the deficiency is not paid by the date stated in the notice and demand for payment.

  2. IRS's computers generally cannot differentiate between a refund that was issued based on a taxpayer claim, and a refund that was issued in error. Refunds issued in error need to be properly identified with Transaction Code (TC) 844, regardless of who bears responsibility for causing the erroneous refund.

  3. If the erroneous portion of the refund was less than $50,000, and IRS caused the refund—

    • TC 844 should reflect a demand date that corresponds with the date we asked for voluntary repayment of the erroneous refund; and

    • The amount of a refund that was erroneous due to IRS fault should be captured as the erroneous refund memo amount.

    Note:

    In limited circumstances the IDRS penalty computation (INTST and PINEX) does not properly consider the TC 844 transaction in the FTP penalty computation. When this happens, FTP penalty must be manually computed and restricted. See IRM 20.1.2.1.6.1.

  4. Voluntary repayment of an erroneous refund is identified by TC 720. Because the law prohibits IRS from enforcing collection of amounts paid and erroneously refunded, the tax module may reflect a TC 700 "dummy" credit until the refund has been repaid.

  5. More information on erroneous refunds can be found in IRM 21.4.5.13, Interest and Penalty Consideration for Category D Erroneous Refunds, and in IRM 3.17.80, Working and Monitoring Category D, Erroneous Refund Cases in Accounting Operations.

  6. IRS computers are currently not programmed to determine whether FTP penalty applies in an erroneous refund situation where the taxpayer pre-paid an assessment, and the payment was refunded before the tax was assessed. Therefore, the FTP penalty may need to be restricted if the computer is erroneously computing an FTP penalty in such an instance.

  7. IRC 6402 gives IRS the authority to "make credits or refunds." When an overpayment of tax is offset to pay another liability, IRS "made" the credit used in the offset.

  8. When an erroneous credit is made to offset a non-tax obligation (aka an erroneous TOP offset), TOP offset reversal procedures should be used to recover the erroneous credit if possible (see IRM 21.4.6.4.2.8, TC 766 with OTN TOP Offset Reversal). If the credit cannot be recovered (see IRM 21.4.6.4.2.9, TC 899, FMS Reversal or Agency Refund of TOP Offset), the same rules apply that apply to erroneous refunds in paragraphs (1) through (4) above.

  9. When an erroneous credit is made to offset another IRS obligation (aka an erroneous TC 826/706 offset), the erroneous offset should be reversed using TC 821 and 701. Any credit interest allowed as a result of the offset must also be reversed with TC 772, and any offset of credit interest must be reversed with TC 851 and 731. Failure to reverse the erroneous credit (including credit interest) will result in incorrect penalties for paying late to be computed in all affected modules.

    Note:

    If the erroneously credited module was paid in full prior to the reversal, and reflects a balance due after the reversal, IRS will generate a notice of the reversal for the taxpayer. If a notice will not be generated automatically, the taxpayer may need to be notified of the reversal action by other means such as via an IDRS letter.

  10. To summarize:

    • Erroneous refund procedures MUST be followed any time an erroneous refund is issued. Failure to follow erroneous refund procedures (even when the erroneous refund was due to taxpayer error) will result in incorrect failure to pay (FTP) penalty computation in the affected module.

    • All erroneous offsets MUST be reversed at the time that any misapplied payment is corrected. This includes reversing any related credit interest allowed on the offset. Failure to reverse erroneous offsets (including TOP offsets) will result in incorrect FTP penalty computation on all affected modules.

20.1.2.2.3  (04-19-2011)
Credit for Withheld Income Tax and Excess FICA Tax

  1. IRS currently holds that, for the purpose of the penalties for filing late or paying late, the credit for withheld income tax and the credit for excess withheld social security tax are considered "timely payments" rather than credits against tax, because they are specifically excluded from the definition of a deficiency under IRC 6211.

  2. It is also currently the IRS's position that, when an adjustment is made to a taxpayer's timely payments, the penalty for failure to pay the tax shown on the return (under IRC 6651(a)(2)) only applies if the sum of the remaining timely payments is less than the total tax shown on the return.

    Example:

    A taxpayer's return showed total tax of $1,000, credit for withheld tax of $1,800. Based on the return as filed, the taxpayer was refunded $800.
    If the credit for withheld tax is reduced from $1,800 to $1,100 (TC 807 for $700), the penalty for failure to pay the tax shown on the return does not apply because the remaining credit ($1,100) is greater than or equal to the total tax ($1,000) shown on the return.
    If the credit for withheld tax is reduced from $1,800 to $600 (TC 807 for $1,200), the penalty for failure to pay the tax shown on the return now does apply because the remaining credit ($600) is less than the total tax ($1,000) shown on the return. Unless the taxpayer shows that the failure to pay was due to reasonable cause, IRS will, in this case, charge a penalty for failure to pay on $400 of the tax shown on the return beginning with the payment due date, and ending on the date the tax is paid.

20.1.2.2.4  (04-19-2011)
Other Refundable Credits

  1. When certain refundable credits exceed total tax, the excess is treated as negative tax for the purpose of determining the excess of tax required to be shown on a return as compared to tax shown on a return. (See IRC 6211(b)(4).)

    Example:

    A return reflecting zero income tax and $3,000 earned income credit is examined. The result of the examination is that income tax remains zero, but earned income credit allowed is also zero. If the taxpayer previously received a refund of the earned income credit claimed on the return, IRS will issue a bill for $3,000. If that bill is not paid within 21 days of notice and demand, the taxpayer will be liable for the penalty for failure to pay tax upon notice and demand (see IRM 20.1.2.2.8.5). The amount considered tax in the notice is the excess of tax required to be shown on the return ($0) over the amount of tax shown on the return ($-3,000). (The amount you have to add to $–3,000 in order to get to $0 is $3,000; and that is the excess of $0 over $–3,000.)

  2. IRM 20.1.2.2.8.5.1 lists the refundable credits that are considered "negative tax" (rather than payments) for the purpose of computing the penalties for filing and paying late.

    Reminder:

    The "credit per taxpayer" amount is used for computing "tax shown on the return" . The "allowable credit" amount is used for computing "tax required to be shown on the return."

  3. For case-specific instructions covering failure to pay (FTP) penalty computations involving adjustments to the regulated investment credit from item of Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, contact the appropriate analyst in the Office of Servicewide Penalties. Contact information can be found on the intranet at http://sbseservicewide.web.irs.gov/penalty/news/242.aspx

20.1.2.2.5  (04-19-2011)
Carrybacks and Carryovers

  1. Tax decreases resulting from any carryback do not affect the amount of tax required to be shown on the return as of the due date of that return. Therefore, these adjustments do not affect the penalty for failure to file.

  2. IRC 6601(d) provides that any tax decrease resulting from a carryback will not affect the balance of tax subject to interest prior to the filing date of the return that caused the carryback. This means that tax decreases resulting from any carryback are treated the same as credits offset against any unpaid tax effective with the due date of the return where the carryback originated; or, if earlier, on the date the carryback claim was processed.

    Example:

    A 2008 Form 1120, U.S. Corporation Income Tax Return, was due March 15, 2009, but was filed four months late on June 27, 2009. The return reflected total tax of $50,000, and estimated tax paid in the amount of $43,000. The balance due of $7,000 was paid in full with the return. IRS assessed a penalty for paying late of $140, and a penalty for filing late of $1,260 computed as follows:

      Amount used in the computation of:
    Penalty for paying late Penalty for filing late
    a) Tax shown on the original return, or tax required to be shown if less 50,000  
    b) Tax required to be shown   50,000
    c) Tax paid on or before the due date 43,000 43,000
    d) Unpaid tax on 3/15/2009 7,000 7,000
    e) Monthly penalty rate 0.5% 5%
    f) Months late 4 4
    g) Penalty (d x e x f) 140 1,400
    h) IRC 6651(c)(1) reduction   –140
    i) Net penalty 140 1,260

    A carryback adjustment originating on the 2009 return subsequently decreased 2008 tax by $12,000. The penalties for filing and paying late are not affected because for the purpose of computing interest and penalty, the $12,000 tax decrease is treated the same as a $12,000 payment or credit applied to the 2008 account on the due date of the 2009 return, which is 3/15/2010.

  3. For rules and case law supporting this position see Rev. Rul. 72-484,1972-2 C.B. 638, and Blanton Coal Co. v. Commissioner, T.C. Memo 1984-397.

  4. While a decrease in tax resulting from a carryback adjustment does not change the amount of tax required to be shown on a return as of the return due date, it does change the amount of tax shown on that return. Therefore if subsequent to a carryback adjustment it is determined that the adjustment should not have been allowed, and all or part of the previously allowed decrease is reassessed, then the penalty for paying late will apply if the assessment is not paid within 21 days from the date of the notice (10 business days if the amount in the notice is $100,000 or more). However, again because tax changes resulting from a carryback do not change the amount required to be shown on a return on the return due date, the penalty for filing late is not affected by the reassessment.

    Note:

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

  5. Net operating losses and unused credits that are carried forward (meaning that the due date of the return that gives rise to the carryover is earlier than the date prescribed for payment for the tax year to which the loss or credit is carried) are used in computing the tax required to be shown on the due date of the return. Therefore, these amounts are used to determine the amounts subject to the penalty for failure to pay the tax shown on the return, and for failure to file.

    Example:

    As in the previous example, a 2008 Form 1120 was due March 15, 2009, but was filed four months late on June 27, 2009. The return reflected total tax of $50,000, and estimated tax paid in the amount of $43,000. The balance due of $7,000 was paid in full with the return. And, as in the previous example, IRS assessed a penalty for paying late of $140, and a penalty for filing late. However, in this case the corporation's 2007 return is examined, and it is determined that the corporation has unused credits in the amount of $12,000 that can be carried forward to the late-filed 2008 return. Because the due date of the 2007 return is earlier than the due date of the 2008 return, tax required to be shown on the 2008 return is now less than the amount originally shown. Pursuant to IRC 6651(b)(1) and (c)(2), the revised penalties for filing late and paying late are now computed as follows:

      Amount used in the computation of:
    Penalty for paying late Penalty for filing late
    a) Tax shown on the original return, or tax required to be shown if less 38,000  
    b) Tax required to be shown   38,000
    c) Tax paid on or before the due date 43,000 43,000
    d) Unpaid tax on 3/15/2009 0 0
    e) Monthly penalty rate 0.5% 5%
    f) Months late 4 4
    g) Penalty (d x e x f) 0 0
    h) IRC 6651(c)(1) reduction   0
    i) Net penalty 0 0

20.1.2.2.6  (04-19-2011)
Assessment/Abatement Procedures

  1. Delinquent returns. Examiners securing delinquent returns will solicit any explanation the taxpayer may provide that will help determine if the penalty for failure to file and/or pay should be applied. Remember: The penalty does not apply if the failure to file or pay was due to reasonable cause, and not due to willful neglect.

  2. When adjusting tax or credits on a return that was filed late, determine if a penalty for filing or paying late was previously assessed or abated, and consider any factors that would apply to these penalties on a proposed tax adjustment:

    1. If the examination of a return results in an overall decrease, any penalty for filing or paying late should be recomputed and reduced based on the revised lower tax liability.

      Note:

      If the penalty for filing late or paying late is not restricted, the computer (Master File) will automatically recompute both the penalty for filing late and paying late when a tax decrease and/or credit increase is posted. The tax module should not be unnecessarily restricted with a manual penalty adjustment. (AMCLS may require manual input of penalty decrease. Do not enter TC 160 .00 to bypass requirement to address FTF penalty on a late filed return if penalty was previously assessed.)

    2. If the examination of a return results in a deficiency, any penalty for filing late attributable to the deficiency must be included in the Notice of Deficiency, and must be assessed as part of the deficiency. The penalty for paying late on tax assessed prior to the deficiency does not need to be addressed. The penalty for failure to pay the deficiency is automatically addressed by Master File, and does not need to be addressed as part of the deficiency.

    3. Anytime that tax or timely credits are adjusted on a return with a restrictive failure to file (FTF) penalty assessment posted in the module (Transaction Code (TC) 160), the FTF penalty must either be manually recomputed and adjusted, or the penalty restriction must be removed with TC 162 for zero amount. (This does not apply to the FTF penalties under IRC 6698 or under IRC 6699.)

  3. When a partnership audit results in an additional tax liability for a partner—whether or not it relates to a partner-level determination—and the partner's return was delinquent, the penalty for filing late is recomputed based on the partner's increased tax liability. The increase in tax attributable to the partnership audit, and any corresponding increase in penalty for filing late, does not follow deficiency procedures and is directly assessed. See IRC 6230(a), IRC 6665(a)(1) and Treas. Reg. §301.6231(a)(6)-1. To contest this assessment in court, the partner must first pay the full amount of the penalty and file a claim for refund of the penalty paid. See IRC 6230(a)(1), IRC 6230(c)(4), IRC 7422, and IRC 6532. However, this does not preclude the taxpayer from seeking administrative abatement of the penalty prior to payment based on reasonable cause for filing late.

20.1.2.2.6.1  (04-19-2011)
California's Registered Domestic Partners

  1. Chief Counsel Advice (CCA) 201021050, issued in May of 2010, determined that California's "registered domestic partners" (RDP) are required to report their income in accordance with the community property laws of the State of California. Further, it gives RDP the option of filing amended returns for 2007 through 2009 in order to apply community property laws in reporting their income. (Federal law prohibits them from filing jointly.)

  2. In some cases the amended returns filed in response to this CCA are resulting in the assessment of the penalty for failure to pay the tax shown on the return because of adjustments in the withholding credit. If the tax shown due on an amended return filed under this CCA is paid in full at the time it is processed, or if it has been paid within 21 days of notice and demand for payment (10 business days, if the amount in the notice was $100,000 or more), reasonable cause for paying late should be presumed, and any penalty for paying late should be restricted with Transaction Code (TC) 270 for zero amount at the time the amended return is processed. Otherwise abate any penalty attributable to the amended return using TC 271 with Reason Code (RC) 062 and Penalty Reason Code (PRC) 030 if it was assessed after the amended return was processed.

  3. If one partner in the RDP did not previously file a return to report his or her share of California community property income, abate any penalty for filing late assessed against that partner, provided that the one partner was not otherwise required to file, and the other partner previously filed a timely return that reported 100 percent of the community property income of both partners. Use TC 161 with Reason Code 062, and PRC 030.

  4. California changed its community property laws to encompass RDPs effective 1/1/2007. The CCA provides that, although RDPs are not permitted to file joint Federal income tax returns, they are nonetheless required to each report half of the community income on their separate return.

  5. Absent any of the criteria identified above, normal penalty relief criteria apply.

20.1.2.2.7  (04-19-2011)
Failure to File a Tax Return — IRC 6651(a)(1)

  1. IRC 6651(a)(1) imposes a penalty for failure to file a tax return by the date prescribed for filing (including extensions), unless it is shown that the failure 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.

  2. For each month or part of a month that the return is late, the penalty is 5 percent of the amount subject to the penalty.

    • See IRM 20.1.2.2.7.1 for determining the months that the return is late.

    • See IRM 20.1.2.2.7.2 for determining the amount subject to the penalty.

  3. The maximum penalty is 25 percent of the unpaid tax on the payment due date, unless the minimum penalty applies. See IRM 20.1.2.2.7.4.

20.1.2.2.7.1  (04-19-2011)
Period Subject to IRC 6651(a)(1)

  1. The period subject to the penalty for filing late under IRC 6651(a)(1) begins on the day following the latest of the following dates:

    • The normal return due date.

    • The extended return due date in the case of an approved extension of time to file under IRC 6081 or related regulations (see IRM 20.1.2.1.3.1 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. Each month subject to the penalty ends on the day of the month that corresponds with the day of the month of the latest return due date as determined above, and each new month subject to the penalty shall begin the next 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 (i.e., if the day of the month is the 29th or the 30th), the new month subject to penalty shall begin on the first day of March.

  3. Because the penalty cannot exceed 25 percent, it is not charged for more than 5 months.

20.1.2.2.7.2  (04-19-2011)
Amount Subject to IRC 6651(a)(1)

  1. The amount subject to the penalty is—

    1. The tax required to be shown on the return, reduced by

    2. The amount paid on or before the date prescribed for payment of the tax without regard to any extensions of time to file or pay, and reduced by

    3. The amount of any credit against the tax which may be claimed on the return. See IRC 6651(b)(1).

    Note:

    When periods to be disregarded for filing are also disregarded for paying, the amount paid on or before the due date for filing is to include any amounts paid by the due date for payment as determined with regard to IRC 7508 or IRC 7508A. See IRM 20.1.2.1.2.

  2. The amount subject to penalty is not reduced by any payment made after the payment due date (including periods to be disregarded).

    Reminder:

    An extension of time to file or pay does not change the date prescribed for payment for the purpose of computing interest or for computing the penalty for filing late.

20.1.2.2.7.3  (04-19-2011)
Limitation Under IRC 6651(c)(1)

  1. IRC 6651(c)(1) provides that the penalty for filing late under IRC 6651(a)(1) is to be reduced by the amount of any penalty for paying late imposed under IRC 6651(a)(2) for any month during which both penalties apply.

  2. The above reduction does not reduce the total penalty for filing late below the minimum penalty, if applicable. See IRM 20.1.2.2.7.4.

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20.1.2.2.7.4  (04-19-2011)
Minimum Penalty

  1. If the return is 60 days or more late, a minimum penalty applies:

    • For returns due (without regard to extensions) after 12/31/2008, the minimum penalty is the lesser of $135 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date (without regard to extensions).

    • For returns due (without regard to extensions) before 1/1/2009, the minimum penalty is the lesser of $100 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date (without regard to extensions).

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  3. Abate any excessive minimum penalty amount using Transaction Code (TC) 161 with Penalty Reason Code (PRC) 045.

20.1.2.2.7.5  (04-19-2011)
Fraudulent Failure to File — IRC 6651(f)

  1. IRC 6651(f) provides for an increase in the penalty rate for failure to file if the failure to file is fraudulent. The penalty rate is increased from 5 percent per month to 15 percent for each month or part of a month the return is late, and the maximum penalty is increased from 25 percent of the amount subject to IRC 6651(a)(1) (see IRM 20.1.2.2.7.2) to 75 percent of that amount.

  2. The penalty for fraudulent failure to file (FFTF) is assessed in two parts:

    1. The FFTF penalty attributable to tax and credits originally shown on the return is assessed using Transaction Code (TC) 240 with penalty reference number (PRN) 635. This portion of the penalty is subject to any limitation provided for under IRC 6651(c)(1), meaning that it must be reduced by the amount of any late payment penalty imposed for any penalty month during which both penalties apply.

    2. Any FFTF penalty attributable to a deficiency is assessed using TC 240 with PRN 686. See IRM 25.1.7, Fraud Handbook, Failure to File.

    .

  3. The FFTF penalty is a counterpart of the civil fraud penalty under IRC 6663 and should be investigated and asserted in the same manner.

    1. The burden of proof is on the government to establish FFTF.

    2. The fraud components of the FFTF penalty and the civil fraud penalties are generally similar. The civil fraud penalty requires an underpayment which is attributable to the willful and knowing intent to defraud. The FFTF penalty requires that all or part of the tax required to be shown on the return was unpaid on the due date for payment.

    3. The intent element of the civil fraud and the FFTF penalties are the same.

    4. The FFTF penalty is asserted on a case-by-case basis after considering all the facts and circumstances surrounding the failure to file. There must be clear and convincing evidence that the failure to file was done with the intent to evade taxes.

  4. The following factors should be considered when developing a FFTF case:

    1. The taxpayer refuses to, or is unable to, explain the failure to file;

    2. The taxpayer’s statement does not agree with the facts of the case;

    3. There is a history of failing to file or late filing, but an apparent ability to pay;

    4. The taxpayer fails to reveal or tries to conceal assets;

    5. The taxpayer pays personal and business expenses in cash when cash payments are not usual, or cashes rather than deposits checks which are business receipts; and

    6. The taxpayer is aware of the filing requirement.

      Reminder:

      Factor 6 above should not be used as the sole factor for asserting the penalty, but should be used in conjunction with the above factors 1 - 5.

  5. The FFTF penalty and the civil fraud penalty can be asserted on the same return, if failure to file is due to fraud and the taxpayer files a return with a deficiency attributable to fraud. However, the court is not likely to sustain the assertion of both penalties unless compelling facts support the Service's position. Area Counsel should be consulted before asserting both penalties on the same return. See IRM 20.1.5.12.2, Penalty Assertion, for a discussion of civil fraud under IRC 6663.

  6. The examining officer determines the amount of the FFTF penalty and reflects it on the audit report. If the taxpayer does not agree with the assertion of the FFTF penalty, the examiner should prepare an unagreed report. The report should include the regular penalty for filing late as an alternative position in the event that the FFTF penalty is not sustained upon appeal or in litigation.

  7. When the FFTF penalty is asserted on a deficiency, any regular penalty for filing late as originally assessed (TC 160 or 166) must be reversed with TC 161, and the FFTF penalty must be assessed in its place. This adjustment does not follow deficiency procedures defined under IRC 6211. The statute of limitations for assessment of the FFTF penalty in relation to amounts shown on the return as originally filed is not suspended by the statutory notice, and must be assessed immediately.

    1. To abate the original penalty for filing late, complete Form 8485, Assessment Adjustment Case Record:

      • Enter "Hold Code 04" in Box 8 to prevent the issuance of a refund and to suppress any notice to the taxpayer. This also prevents any resulting credit from being offset against any other outstanding liabilities. (The FFTF penalty asserted on the exam deficiency may not be sustained on appeal or in litigation. If this happens, the original penalty for filing late may have to be re-instated and the FFTF penalty reversed).

      • Enter "TC 161" in Box 17.

      • Enter the amount of the original penalty for filing late in Box 18.

      • Under "Explanation" state: "Input FTF abatement in full for TC 166 in amount of $XXX dated XX-XX-XXXX. Do not issue refund. Do not issue notice of overpayment to taxpayer. Do not allow offset of credit amount. Note: Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is submitted to assess FFTF penalty in place of FTF penalty."

      • Provide other information as required and route accordingly.

    2. To assess the FFTF penalty based on the amount shown as tax on the delinquent return as originally filed, complete Form 8278.

      • On Form 8278, page 1, section "A" , complete the line for "6651(f)" / "Fraudulent failure to file" / Reference Number 635, and insert the dollar amount: For each month or part of a month that the return was late, the penalty is 15 percent of the amount shown as tax on the return (or previously assessed) that was not paid by the due date for payment. This amount is reduced by the amount of any penalty for failure to pay tax shown on the return for any month during which both penalties apply. See IRM 20.1.2.2.7.3.

      • Interest on the FFTF penalty begins to accrue on the return due date (including extensions). Unfortunately, the due date is not recorded on MFT 13 or MFT 55, and the computer is programmed to compute interest on TC 240 with PRN 635 beginning on the 23C date of the assessment. Therefore, interest has to be manually computed and included on Form 8485 attached to Form 8278.

      • Under "Remarks" enter:" Form 8485 sent XX-XX-XXXX to reverse original FTF penalty TC 166 (or 160) dated XX-XX-XXXX in amount of $XXX. Do not issue notice and demand for payment to the taxpayer for the FFTF penalty."

    3. To assess the FFTF penalty on the subsequent assessment (deficiency), enter the amount of the penalty in section 15 of Form 5344, Examination Closing Record, using Reference Number 686. Reference number 686 will generate the TC 240 penalty assessment.

    4. Per IRM 4.4.9.5.11.1, Penalties, an "R" entered on Form 13133, Expedite Processing Cycle, eliminates the need to use Form 8485, Assessment Adjustment Case Record, to abate a previously assessed FTF penalty, as it prevents the automatic assessment of that penalty during return processing.

  8. To ensure that the facts of a particular case support fraud, and because the assessment of a penalty for fraudulent failure to file that is attributable to the amount of tax originally shown due on a return is not reviewable by the Tax Court, all 30-day letters proposing a penalty for fraudulent failure to file as part of a deficiency must be reviewed and approved by Area Counsel prior to issuance.

  9. IRC 6751(b)(2)(A) in general excludes IRC 6651 from the requirement of written approval by the immediate supervisor prior to assessment. However, the penalty for fraudulent failure to file under IRC 6651(f) is not included in this exception, and written managerial approval is required.

  10. A criminal conviction under IRC 7203 does not prevent the taxpayer from disputing the penalty under IRC 6651(f); however, the taxpayer is collaterally estopped from challenging the penalty under IRC 6651(a). Only a criminal conviction under IRC 7201 collaterally estops the taxpayer from disputing fraud penalties. (See IRM 4.8.9.13.4, Civil Fraud Penalty, and IRM 4.8.9.13.5, Alternative to Civil Fraud Penalty, for the parallel consideration with respect to the civil fraud penalty under IRC 6663 and the criminal sanction with respect to tax evasion under IRC 7201. See also IRM 25.1.7.8, Civil Closure, on the same issue).


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