20.1.2  Failure To File/Failure To Pay Penalties

Manual Transmittal

July 02, 2013

Purpose

(1) This transmits revised IRM 20.1.2, Penalty Handbook, Failure to File/Failure to Pay Penalties.

Background

This section of IRM 20.1 discusses the penalties under IRC 6651 (for failure to file tax returns or to pay tax), IRC 6698 (for failure to file a complete partnership return as required by IRC 6031), and IRC 6699 (for failure to file a complete return as required by IRC 6037). It also covers the penalty under IRC 6721(a)(2)(A) and IRC 6724(c) (for failure to file a partnership return on electronic media.

Material Changes

(1) Minor editorial changes have been made throughout this IRM. Also, website addresses, form references, and IRM references were reviewed and updated as necessary. Other significant changes are listed below:

IRM Reference Description of Change
IRM 20.1.2.1.1 Added language at end of paragraph (4) to address special conditions.
IRM 20.1.2.1.2.1 Inserted "as designated by the President by executive order" in first line, and inserted "or end of hospitalization" at the end of paragraph (2)c).
IRM 20.1.2.1.2.2 Replaced paragraphs (7) and (8) with new paragraphs (7) through (11).
IRM 20.1.2.1.3.1.3 Added subsection Disposition of 2010 Decedent Property.
IRM 20.1.2.1.3.2 Inserted note at the end of first paragraph.
IRM 20.1.2.1.3.2.1 Added subsection Extension Under Fresh Start Initiative.
IRM 20.1.2.1.3.2.2 Added subsection Extension Under Notice 2012–57 for E-filed Forms 2290.
IRM 20.1.2.1.3.2.3 Renumbered former IRM 20.1.2.1.3.2.1, Extension of Time to Pay Voided.
IRM 20.1.2.1.3.3.1 Added subsection Relief for Certain Spouses of Military Personnel added to provide information with respect to extensions of time to pay provided by Notice 2010– 30 and Notice 2011–16.
IRM 20.1.2.1.4.1 (2) Inserted new sub-paragraph (c) to provide guidance when continued failure to pay is evidence of willful neglect. Renumbered subsequent sub-paragraphs. Deleted redundant information from former sub-paragraph (e).
IRM 20.1.2.1.4.2 Added subsection Notice 2013-24 Penalty Relief.
IRM 20.1.2.2.1.1 Added subsection Tax Decreases to illustrate how tax decreases are applied to tax increases in Last In First Out (LIFO) order.
IRM 20.1.2.2.3 (3) Inserted new paragraph (3) referencing definition of tax shown on the return.
IRM 20.1.2.2.4 (3) Inserted new paragraph (3) to clarify that increases and decreases in refundable credits are to be associated with the tax adjustments with which they post.
IRM 20.1.2.2.5 (5) Inserted new paragraph (5) to clarify that changes in refundable credits resulting from a carryback must be netted with any change in tax resulting from that carryback in determining the net change in tax from the carryback.
IRM 20.1.2.2.6.1 Subsection revised for clarity.
IRM 20.1.2.2.7.5 Complete revision of the instructions for the Fraudulent Failure to File Penalty.
IRM 20.1.2.2.8.5.1 (2) Added IRC 6428, 2008 Recovery Rebate Credit for Individuals, to the list of credits that are treated as tax assessments when the credit is reduced.
IRM 20.1.2.2.8.9 Added subsection Failure to Pay Penalty for Criminal Restitution Assessments to explain special rules that apply to criminal restitution assessments on MFT 31.
IRM 20.1.2.2.8.10 Added subsection Quick and Prompt Assessments to add special processing instructions when a quick or prompt assessment includes FTP penalty.
IRM 20.1.2.3.3.1 Revised to clarify guidance with respect to Rev. Proc. 84-35 abatement requests.
IRM 20.1.2.3.3.1.1 Added subsection Form 8893 and Form 8894 to explain functionality of these forms, and how to recognize when they have been filed.
IRM 20.1.2.4.1 Added subsection Penalty Relief to explain the relief available for the penalty for failure to file a partnership return using electronic media.
IRM 20.1.2.5.3.1 Added subsection Short Termination Year Special Considerations with instructions for proper return due date and penalty computations for short termination year S corporation returns.

Effect on Other Documents

This material supersedes IRM 20.1.2 dated April 19, 2011.

Audience

All operating division employees that work with penalties.

Effective Date

(07-02-2013)

Bradley J. Bouton
Director, Exam Policy
Small Business/Self-Employed

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 7519 Required Payments for Entities Electing Not to Have Required Taxable Year.

20.1.2.1.1  (07-02-2013)
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, IRB 2004-52.

  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. This provision does not change the actual respective due date for the purpose of computing penalties or interest if the return or payment is mailed late.

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

    Note:

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

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

    Exception:

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

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

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

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

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

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

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

    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 one of the following:

    1. 10 calendar days after the date of the notice for any notice dated 12/31/1996 or earlier.

    2. 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.

    3. 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  (07-02-2013)
Combat Zone — IRC 7508

  1. IRC 7508 provides that a certain period relating to duty in a combat zone as designated by the President by executive order (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 as follows:

    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 or end of hospitalization.

    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  (07-02-2013)
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, a terroristic action, 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 on or before 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 generally must call the IRS disaster hotline at 866–562–5227 to request that relief.

    1. Taxpayers who are unable to meet a filing or payment deadline either because their books or other necessary records are located within a disaster area, or because their tax professional who maintains their books or records is located within a disaster area. This applies even if the taxpayer's business (or residence in the case of individuals) is not located in the disaster area.

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

  8. Taxpayers (or their authorized representatives) may call or write to self-identify if they qualify for disaster relief even though their address is outside the covered disaster area. Employees should research their functional IRM for instructions with respect to the input of TC 971 with Action Code 688 when taxpayers self-identify themselves as affected by the disaster. TC 971 with Action Code 688 should only be input after the specific disaster provisions for which the taxpayer qualifies have been verified. Employees without instructions in their functional IRM may contact the Disaster staff for assistance in locating the procedures they should follow. Contact information can be found at http://mysbse.web.irs.gov/supportingsbse/outcomact/outreach/disaster/contacts/21588.aspx.

  9. Employees who do not have the ability to manually input the TC 971 for disaster relief should refer callers to the Disaster Special Services toll-free line at 1-866-562-5227.

  10. IRS employees should not abate or adjust any penalties because of a federally declared disaster unless the appropriate TC 971 with AC 086, 087 or 688 is already 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.

  11. 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, generally not to exceed 6 months from the date fixed for payment. See IRM 20.1.2.1.3.2, Extensions of Time to Pay.

  3. Treas. Reg. 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:

    1. IRC 6163, Extension of Time for Payment of Estate Tax on Value of Reversionary or Remainder Interest in Property. See Treas. Reg. 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.

    2. 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 a NOL Carryback.

    3. IRC 6166, Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business. See Treas. Reg. 20.6166–1 and Treas. Regs. 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.

    4. 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:

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

    2. 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 the amount properly estimated as the tax for the year covered by the extension request.

    1. The payment must be made on or before the due date for payment.

    2. 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 the amount properly estimated as the tax for the year covered by the extension request.

    1. The payment had to be made on or before the due date for payment.

    2. The payment generally would have accompanied Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.

  5. For taxable years ending 12/31/1993 and later, individuals are no longer required to pay the amount they estimate they will owe when they file Form 4868 in order to obtain the automatic extension of time to file; however, they are still required to enter their estimate of their tax liability on the applicable line of the form.

  6. An extension of time to file does not extend the time to pay. However, Treas. Reg. 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.

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

  8. 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.

  9. 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, Required Payment of Refund Under Section 7519, and pay the amount shown on that return. The due date for the return is May 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 May 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 May 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.

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

  11. 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 Treas. Reg. 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  (07-02-2013)
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 evidence of an approved extension of time to file, or

    • The facts of the case support the conclusion that it is more likely than not that a valid, timely request for an automatic extension of time to file was filed. (See note below table.)

    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.

    Note:

    In the case of a corporation, input TC 460 only if payment of the estimated amount due shown on a copy of the allegedly filed extension request was received on a date consistent with a timely filed extension request, AND the estimated tax shown is reasonable given the amount of tax shown on the return. (Failure to pay the amount shown due on a corporate extension request renders that request invalid. See IRM 20.1.2.1.3.1.2 (4).)

    The taxpayer is unable to provide evidence of an approved extension of time to file, and the known facts do not support the conclusion that it is more likely than not that a timely extension request was filed. 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 evidence of an approved extension of time to file, and the known facts do not support the conclusion that it is more likely than not that a timely extension request was filed. TC 460 is not found anywhere. Determine if the taxpayer qualifies for "first time abate" penalty abatement. If the taxpayer does not qualify, determine if the taxpayer qualifies for abatement of the late filing penalty for reasonable cause. See IRM 20.1.1.3.2, Reasonable Cause.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    If all the known facts would lead a reasonable person to presume that it is more likely than not, that a valid, and timely, extension request was submitted, then the "more likely than not" criteria has been met. Examples 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 alone, a mere 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. However, collectively with other facts, such as the reason the taxpayer would have had for filing an extension, the earlier mentioned facts could be sufficient to meet the more likely than not criteria. Additionally, Facts can be used collectively to show that it was reasonable for the taxpayer to believe that an extension had been requested and approved. For example, a list of extensions allegedly filed by a tax professional, where most extensions on the list have not been received and processed, still may be used to show that it was reasonable for the taxpayer to believe that an extension of time to file had been requested and approved.

  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 as follows:

    1. If the penalty is abated, use Reason Code 062 with the appropriate Penalty Reason Code. See IRM Exhibit 20.1.1-2, Penalty Reason Code Chart.

    2. 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.

20.1.2.1.3.1.3  (07-02-2013)
Disposition of 2010 Decedent Property

  1. Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L 111-312, allows the executor of the estate of any decedent who died in 2010 to elect not to have the estate tax rules apply and instead to have a modified basis carryover regime apply. This election can effect the tax basis of property received and disposed of by a beneficiary of a 2010 decedent's estate.

  2. Because the election to forego filing an estate tax return could be made after April 18, 2011, taxpayers who received property from a decedent who died in 2010, and who disposed of that property in 2010, may have requested an extension of time to file while waiting for the estate's executor to determine whether to file an estate tax return, or to elect out.

  3. Taxpayers who filed an extension request for this reason may not have been able to properly estimate the tax that would be due when their return is finally filed. Therefore, failure to pay sufficient tax by the original return due date will be deemed to be due to reasonable cause if all of the following are met:

    1. The taxpayer timely paid the amount he estimated would be due.

    2. The taxpayer paid the remaining tax with the return.

    3. The taxpayer can show that the estimate was based on a reasonable interpretation of the law.

    4. The taxpayer filed the return by the extended due date (or as soon as possible, if the taxpayer had reasonable cause for filing late).

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20.1.2.1.3.2  (07-02-2013)
Extensions of Time to Pay - IRC 6161

  1. Taxpayers may use Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, 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).

    Note:

    The extension may exceed 6 months in the case of a taxpayer who is abroad.

  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 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  (07-02-2013)
Extension Under Fresh Start Initiative

  1. In order to provide relief to taxpayers who were significantly impacted by the economic downturn in 2011, IRS initiated Fresh Start. As part of this initiative, Form 1127–A was created to allow for a streamlined process for obtaining and processing an extension of time to pay for qualifying taxpayers.

  2. The streamlined extension of time to pay is limited to Form 1040, U.S. Individual Income Tax Return, filers who meet the following requirements:

    1. 2011 AGI must be less than $100,000 ($200,000 if married filing jointly).

    2. "Amount you owe" shown on the return must be less than $50,000.

    3. The taxpayer (or the spouse if filing jointly) must have been unemployed for at least 30 consecutive days between 1/1/2011 and 4/15/2012, OR the taxpayer is self-employed and experienced a reduction in business income of at least 25% relative to 2010.

    4. The taxpayer must file his or her return on or before the due date for filing, including any extension of time to file.

    5. The taxpayer must fully pay the amount owed by the extended payment due date, including interest and any penalty assessed and payable prior to the extended payment due date.

  3. Taxpayers must file Form 1127–A by the return due date of their 2011 return, determined without regard to extensions of time to file.

  4. Form 1127–A filed within a time period to be disregarded under IRC 7508 (related to service in a combat zone) or IRC 7508A (related to federally declared disaster areas), are to be treated as though filed by the return due date. See IRM 20.1.2.1.2.1 and IRM 20.1.2.1.2.2.

  5. When Form 1127–A is approved, TC 971 with Action Code 468 is input on the module with a transaction date equal to the extended payment due date.

  6. When Form 1127–A is denied (e.g., because it is not signed, postmarked after the due date, etc.), TC 971 with Action Code 468 is input on the module with a transaction date equal to the original return due date.

  7. TC 972 with Action Code 468 will reverse TC 971 with Action Code 468 with a matching transaction date. TC 972 should only be used if a denied extension is superseded by an approved extension, or if a payment extension request was posted to the module in error.

  8. The extension of time to pay will be disregarded by Master File if the taxpayer fails to fully pay his tax by the extended payment due date.

    Note:

    Master File uses the lesser of TC 150 amount and "tax per taxpayer" when determining whether or not the taxpayer paid in full by the extended payment due date. If the taxpayer requested the extension of time to pay after receiving a math error notice increasing the amount owed, the extension of time to pay may need to be manually reversed if the amount shown in the notice is not paid by the extended payment due date. Reverse the extension with TC 972 with Action Code 468.

20.1.2.1.3.2.2  (07-02-2013)
Extension Under Notice 2012–57 for E-filed Form 2290

  1. IRS suspended the availability of its modernized e-file (MeF) system for filing Form 2290, Heavy Highway Vehicle Use Tax Return, from August 31, 2012, through September 4, 2012, per Notice 2012-57, IRB 2012-40. To minimize the impact on affected taxpayers, the IRS granted an extension of time under IRC 6081(a) to electronically file Form 2290 to affected taxpayers whose due date for the return was August 31, 2012. The extended due date is September 7, 2012. The extension applies only to taxpayers that file Form 2290 electronically. Taxpayers filing a paper Form 2290 have not been granted an extension of time to file.

  2. The IRS also granted an extension of time under IRC 6161(a)(1) to pay the tax imposed by IRC 4481 for taxpayers that file Form 2290 electronically. Because this tax is due when a taxpayer files its Form 2290, affected taxpayers that take advantage of the September 7, 2012, electronic filing deadline and pay the tax owed under IRC 4481 by that date will be considered to have timely paid such tax. Taxpayers filing a paper Form 2290 have not been granted an extension of time to pay.

  3. A TC 460 reflecting the extended return due date should be present on affected modules. If not present, it should be input.

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

    IF THEN
    The tax was paid on time (based on the extension of time to pay). Abate the FTP penalty in full. Use Reason Code 062 with penalty Reason Code 046.
    The tax is paid in full, but was paid late. Recompute the FTP penalty based on the extended payment due date. Determine any excess total penalty by comparing total FTP per BMFOLT with the recomputed FTP penalty. Abate any excess penalty using Reason Code 062 with Penalty Reason Code 046. Input the abatement even if the total FTP penalty has not yet been assessed.
    The tax has not yet been paid in full. Recompute the FTP penalty based on the extended payment due date. Compute to the date of notice and demand (adjustment 23C date), or to the penalty computation date given in your letter or other communication with the taxpayer.
    • If the recomputed FTP penalty amount is greater than the assessed amount, assess the difference with TC 270.

    • If the assessed FTP penalty amount is greater than the recomputed amount, abate the difference with TC 271 using Penalty Reason Code 045.

    Use a refile blocking series and attach a copy of the penalty computation to the adjustment source document.

20.1.2.1.3.2.3  (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 following:

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

    2. 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. Treas. Reg. 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 the following:

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

    2. Domestic corporations that transact their business and keep their records and books of account outside the United States and Puerto Rico;

    3. Foreign corporations that maintain an office or place of business within the United States;

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

    5. 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

    6. 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 entity must attach a statement to their return stating that it qualifies for this extension of time to file.

  3. If one of the above entities qualifies for this automatic extension but needs additional time to file, then that entity must file the appropriate application for an extension on or before the due date as extended under Treas. Reg. 1.6081−5. A statement must be attached to the extension request stating that the entity qualifies 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.

20.1.2.1.3.3.1  (07-02-2013)
Relief for Certain Spouses of Military Personnel

  1. Notice 2010-30, IRB 2010-18, grants an extension of time to pay to 10/15/2010 to certain qualifying spouses of military personnel. The extension is with respect to tax shown or required to be shown on a return for any taxable year that includes 11/11/2009.

  2. Notice 2011–16, IRB 2011–17, grants an extension of time to pay to 10/17/2011 to certain qualifying spouses of military personnel. The extension is with respect to tax shown or required to be shown on a return for the first taxable year that begins after 11/11/2009.

  3. The purpose of the extension listed above is to mitigate any hardship a qualifying spouse may experience as a result of the Military Spouses Residency Relief Act of 2009 (MSRRA).

  4. Under MSRRA, a taxpayer's income remains taxable in the US if the taxpayer is absent from the US solely to be with his/her service-member spouse serving in compliance with military orders at a military duty station in a US Territory. This situation can create a hardship if the civilian spouse made estimated tax payments to the US territory's taxing authority, or if he/she had income tax withheld by a payer that was then paid over to the US territory's taxing authority.

  5. A taxpayer is a qualifying spouse of military personnel if he or she accompanied his or her military spouse to an assigned duty station in a US territory solely to be with his or her spouse, and he or she does not fall into one of the two exceptions listed below:

    1. The taxpayer is a federal employee in American Samoa, Guam, or the US Virgin Islands.

    2. The taxpayer worked in Guam or the Northern Marianne Islands, and is able to claim credit for amounts paid to Guam or the Northern Marianne Islands on his/her U.S. individual income tax return pursuant to Treas. Reg. 1.935-1.

  6. IRM 21.8.1.4.7, Military Spouses Residency Relief Act, contains procedural instructions for granting relief pursuant to the extensions of time to pay granted under either Notice 2010–30, Notice 2011–16, and Notice 2012–41.

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.

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

    2. 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  (07-02-2013)
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 IRM Exhibit 20.1.1-2 in 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. Continued failure to file or pay (beyond the effect of the "reasonable cause" ) may be evidence that the underlying reason for the failure to file or pay is willful neglect and not the "reasonable cause" claimed by the taxpayer.

    4. 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.

    5. 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.

    6. Generally, the penalty for failure to pay should not be abated until the underlying tax has been paid in full. 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 has reasonable cause for the failure to pay, and there is no evidence of willful neglect. However, if the FTP penalty was abated for reasonable cause, and a subsequent review of the account shows that the taxpayer willfully continued in the failure to pay, then the penalty may be reasserted in full, computed from the original penalty start date.

    7. 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. However, a prolonged failure to file beyond the effect of the "reasonable cause" , or the failure to file other required returns, may be evidence that the underlying reason for the failure to file is willful neglect, and not the reasonable cause claimed by the taxpayer.

  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.

    1. 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.

    2. 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:

    IF the taxpayer THEN
    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.

    Has agreed to pay the balance owed upon receipt of notice of abatement of the penalty. Use PRC 043 when abating FTP penalty for reasonable cause without using RC 062.

    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.

  10. An abatement of the penalty for failure to pay (or TC 270 for zero amount) without the use of RC 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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 20.1.1.3.2, Reasonable Cause, and IRM 20.1.1.3.6.1, First Time Abate (FTA).

  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.

20.1.2.1.4.2  (07-02-2013)
Notice 2013-24 Penalty Relief

  1. A taxpayer may write in to request a waiver of FTP penalties based on relief granted under Notice 2013-24. The relief applies only to returns for tax periods ended 12/31/2012 or later, with a return due date before June 2013, without regard to extensions. This relief should be applied before applying "first time abate" (FTA) provisions.

  2. Before granting the relief, verify that the taxpayer has met all of the requirements for relief:

    1. The taxpayer's return included one of the forms listed in the table at the end of this IRM subsection.

    2. The amount of tax paid by the return due date (without regard to extensions) is a reasonable estimate of the amount due, considering the impact of the form(s) referenced above that are included in the return.

    3. The taxpayer paid the balance of the tax shown on the return no later than the extended return due date, and any additional amount (math error assessment) no later than the 21st day following notice and demand for payment ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Any additional amount must have been paid within 10 business days of notice and demand for payment ≡ ≡ ≡ ≡ ≡ ≡ ≡ if the amount due in the notice was $100,000 or more.

      Note:

      If the taxpayer paid the amount shown on the return by the extended return due date, but failed to pay any additional amount as required, abate only so much of the FTP penalty as is attributable to the tax shown on the return.

  3. If the taxpayer qualifies for relief under this provision, abate the FTP penalty with TC 271, Reason Code 062, Penalty Reason Code 030. Include unassessed FTP penalty accruals in the abatement.

    Form Title
    Form 3800 General Business Credit
    Form 4136 Credit for Federal Tax Paid on Fuels
    Form 4562 Depreciation and Amortization (Including Information on Listed Property)
    Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
    Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
    Form 5695 Residential Energy Credits
    Form 5735 American Samoa Economic Development Credit
    Form 5884 Work Opportunity Credit
    Form 6478 Alcohol and Cellulosic Biofuels Credit
    Form 6765 Credit for Increasing Research Activities
    Form 8396 Mortgage Interest Credit
    Form 8582 Passive Activity Loss Limitations
    Form 8820 Orphan Drug Credit
    Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
    Form 8839 Qualified Adoption Expenses
    Form 8844 Empowerment Zone and Renewal Community Employment Credit
    Form 8845 Indian Employment Credit
    Form 8859 District of Columbia First-Time Homebuyer Credit
    Form 8863 Education Credits (American Opportunity and Lifetime Learning Credits)
    Form 8864 Biodiesel and Renewable Diesel Fuels Credit
    Form 8874 New Markets Credits
    Form 8900 Qualified Railroad Track Maintenance Credit
    Form 8903 Domestic Production Activities Deduction
    Form 8908 Energy Efficient Home Credit
    Form 8909 Energy Efficient Appliance Credit
    Form 8910 Alternative Motor Vehicle Credit
    Form 8911 Alternative Fuel Vehicle Refueling Property Credit
    Form 8912 Credit to Holders of Tax Credit Bonds
    Form 8923 Mine Rescue Team Training Credit
    Form 8932 Credit for Employer Differential Wage Payments
    Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

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:

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

    2. 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).

    3. 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 that 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:

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

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

    3. 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.

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

    5. 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 as follows:

    • 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.

    1. 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.

    2. 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.

    3. 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.

    4. 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, Treas. Reg. 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:

    1. 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.

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

    3. 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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20.1.2.1.6.1.3  (04-19-2011)
Problems Involving Refundable Credits/Payments

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  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 (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 3.12.3.75.5.9, 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 that 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 20-2 (Formerly P 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, IRB 2007-14.

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 IRC 6651(a):

    • IRC 6651(b) prescribes how to determine the amount subject to this penalty.

    • IRC 6651(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.

    • IRC 6651(d) provides for an increase in the failure to pay (FTP) penalty rate in certain cases.

    • IRC 6651(e) excepts estimated tax installments from the FTP penalty.

    • IRC 6651(f) provides for an increase in the failure to file (FTF) penalty when the failure to file is due to fraud.

    • IRC 6651(g) provides rules for the treatment of returns prepared under IRC 6020(b).

    • IRC 6651(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:

    1. 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).

    2. 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.

    3. 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).

20.1.2.2.1.1  (07-02-2013)
Tax Decreases

  1. When the tax required to be shown on a return is less than the tax shown on the return (or less than the tax previously assessed), the FTP penalty is computed on the lesser amount. See IRC 6651(c)(2).

  2. Net tax decreases are applied against tax increases, and against tax shown on the return, in last in, first out (LIFO) order, in determining the amounts subject to the FTP penalty under either IRC 6651(a) paragraph (2) or (3).

  3. The examples in paragraphs (4) and (5) illustrate the mechanics of this process.

  4. Taxpayer files an original return reflecting $10,000 tax. IRS corrects a math error during processing of the return, and decreases tax to $8,000. During a subsequent examination it is determined that the correct tax is $13,000, and the additional tax is assessed.

    • At time of processing of the return, tax determined as required to be shown is less than tax shown. Therefore, amount subject to FTP penalty under IRC 6651(a)(2) is the lesser amount of $8,000, and this amount becomes tax shown on the return.

    • After the examination the amount subject to FTP penalty under IRC 6651(a)(3) is the excess of $13,000 over $8,000.

  5. Taxpayer files an original return reflecting $8,000 tax. IRS corrects a math error during processing of the return, and increases tax to $13,000. During a subsequent examination it is determined that the correct tax is $10,000, and the excess $3,000 is abated.

    • At the time of processing of the return, tax shown on the return is less than tax required to be shown as determined during processing. Therefore, the amount subject to the FTP penalty under IRC 6651(a)(2) is $8,000.

    • After the math error assessment the amount subject to the FTP penalty under IRC 6651(a)(3) is the excess of amount ultimately determined to be the correct tax ($10,000) over the amount shown on the original return ($8,000).

  6. Remember that certain refundable credits must be taken into consideration when determining tax shown and required to be shown on a return. See IRM 20.1.2.2.8.4.1 (2) and IRM 20.1.2.2.8.5.1 (2).

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 IRS 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. In summary:

    • 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.

  3. See IRM 20.1.2.2.8.4.1 for the definition of total tax shown on the return.

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 20.1.2.2.8.5.1 (2). 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 20.1.2.2.8.4.1 (2) and IRM 20.1.2.2.8.5.1 (2) list 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. When refundable credits referenced in IRM 20.1.2.2.8.4.1 (2) and IRM 20.1.2.2.8.5.1 (2) are adjusted, the adjustment in credit must be combined with any increase or decrease in tax.

    • If the result is a net increase, the FTP penalty under IRC 6651(a)(3) is computed on that net increase, and the computation starts 21 days following the notice date of the adjustment (10 business days following the notice date if the amount in the notice was $100,000 or more).

    • If the result is a net decrease, the net decrease is applied to reduce the most recent net increase. See IRM 20.1.2.2.1.1, Tax Decreases, for more information.

  4. For case-specific instructions covering failure to pay (FTP) penalty computations involving adjustments to the regulated investment credit from box 2 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:

    Amounts used in the computation:

    Computational lines Amounts used in FTP penalty computation Amounts used in FTF penalty computation
    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:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 20.1.2.2.2 (4) through (7).

  5. When refundable credits listed in IRM 20.1.2.2.8.4.1 (2) and IRM 20.1.2.2.8.5.1 (2) are increased or decreased as a result of a carryback adjustment, that increase or decrease must be netted against any increase or decrease in net tax (TC 298, 299, 308 or 309) resulting from the carryback adjustment. The net result is the net increase or decrease for the purpose of computing any FTP penalty.

  6. 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:

    Amounts used in the computation:

    Computational lines Amounts used in FTP penalty computation Amounts used in FTF penalty computation
    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. 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.

    Reminder:

    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 will require manual input of penalty decrease if a delinquent return indicator is present on AMDIS. Do not enter TC 160 .00 to bypass requirement to address FTF penalty on a late filed return if the FTF 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. 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, RDP have 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 joint returns.)

  2. In some cases the penalty for failure to pay the tax shown on the original return is generated because the amended return filed by an RDP is decreasing the withholding credit originally claimed. If the tax shown due on such an amended return filed by a RDP is paid in full at the time it is processed, 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, if the tax 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), 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. 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 the tax required to be shown on the return, reduced by the following:

    1. 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.

    2. The amount of any credit against the tax that 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, unless paid during a period that is to be disregarded in determining if the payment is late. See IRM 20.1.2.1.2

    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).

  2. The minimum penalty applies only to income tax returns. It does not apply to employment tax, excise tax, gift tax, or estate tax returns. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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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  (07-02-2013)
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 fraudulent failure to file (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 that 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.

  3. 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 that are business receipts; and

    6. The taxpayer is aware of the filing requirement.

    Reminder:

    Factor f above should not be used as the sole factor for determining the penalty, but should be used in conjunction with the above factors a - e.

  4. When a return was filed late due to fraud, and the return reflects a deficiency due to fraud, Area Counsel should be consulted in deciding whether to propose the civil fraud penalty under IRC 6663, or the fraudulent failure to file penalty under IRC 6651(f).

    Note:

    The FFTF penalty generally should not be proposed if the late filed return reflected a refund as originally filed.

  5. The FFTF penalty and the civil fraud penalty can be determined with respect to 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 determination of both penalties unless compelling facts support the Service’s position. Area Counsel should be consulted before determining both penalties on the same return. See IRM 20.1.5.14.2, Penalty Assertion, for a discussion of civil fraud under IRC 6663.

  6. A criminal conviction under IRC 7203 does not prevent the taxpayer from disputing the FFTF penalty under IRC 6651(f); however, the taxpayer is collaterally estopped from challenging the regular FTF penalty under IRC 6651(a). Only a criminal conviction under IRC 7201 collaterally estops the taxpayer from disputing fraud penalties. See IRM 4.8.9.16.4, Civil Fraud Penalty, and IRM 4.8.9.16.5, 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.

20.1.2.2.7.5.1  (07-02-2013)
FFTF Penalty Assessment—Procedural Requirements

  1. The FFTF penalty is computed based on the entire tax required to be shown on the taxpayer’s return. However, the penalty generally must be assessed in two parts:

    • FFTF penalty attributable to tax shown on the return (or as previously corrected.

    • FFTF penalty attributable to any deficiency.

  2. All FFTF penalty proposals must be approved by Area Counsel.

  3. Unless the taxpayer signed a waiver and agreed to the assessment of FFTF penalty with respect to tax shown on his return, a 30-day letter package proposing the penalty based on tax shown on the return (or as previously adjusted) must generally be prepared, approved by Area Counsel, and sent to the taxpayer (e.g., Letter 2777, Pre-Assessment appeals letter for the fraudulent failure to file penalty, Form 4549, Income Tax Examination Changes, and Form 886-A, Explanation of Items.) Unless already assessed, the proposal should always include the regular FTF penalty as an alternative position in case the FFTF penalty is not sustained on appeal or in litigation.

  4. If a deficiency is not being proposed, then deficiency procedures are not required for the assessment of the FFTF penalty, and the 30 day letter package will be the Examiner’s Report that will be referenced in the assessment notice. Therefore, the 30-day letter package must include information regarding the taxpayer’s appeal rights with respect to the penalty determination:

    • If the assessment statute is not in jeopardy (not within 6 months or less), the taxpayer may request a conference with Appeals prior to assessment of the penalty. If Appeals sustains the penalty, the penalty will be assessed, and the taxpayer will need to pay the penalty and then file a claim for refund in the U.S. Court of Claims in order to gain judicial review of the penalty.

    • If the assessment statute will expire within 6 months or less, the penalty will be assessed immediately (without waiting for a response to the 30 day letter), and the taxpayer can appeal the penalty by requesting a Collection Due Process hearing, and challenge the penalty at that time; or, the taxpayer can pay the penalty and then file a claim for refund in the U.S. Court of Claims.

    Note:

    The taxpayer will be able to gain judicial review without first paying the penalty if an IRS official abused his/her discretion in applying or sustaining the penalty.

  5. If a 6020(b) return has been prepared, and a subsequently valid return is filed, the period of limitations within which to assess the FFTF penalty is 3 years from the date that the valid return is filed, regardless of any previous fraudulent failure to file.

  6. If a deficiency is being proposed, and the FFTF penalty was proposed and sustained with respect to tax shown on the return, then the FFTF penalty with respect to the deficiency must be included in the 30 day letter proposing the deficiency, and in any notice of deficiency. The civil fraud penalty should not be proposed in lieu of the FFTF penalty in that case.

  7. If Area Counsel reviewed and approved the FFTF penalty with respect to tax shown on the original return, further review and approval of the penalty with respect to any deficiency is still required.

  8. 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) should not be treated as included in this exception, and written managerial approval should be obtained on the current penalty approval form (e.g., the lead sheet "Penalty Approval Form" in RGS).

20.1.2.2.7.5.1.1  (07-02-2013)
FFTF Penalty Assessment — Joint Returns

  1. The FFTF penalty should be considered separately with respect to each spouse when a joint return was filed. The IRS’s default position is that both spouses are equally culpable in the case of a failure to file due to fraud that involves a joint return. However, if one spouse is able to provide evidence that, with respect to that spouse, the failure was not due to fraud, then the FFTF penalty should be proposed only with respect to the other spouse.

  2. If the FFTF penalty is being proposed with respect to only one spouse on a joint return, the assessment should be treated as an innocent spouse case with respect to at least the FFTF penalty, and processed accordingly.

  3. If the FFTF penalty is being assessed against only one spouse on a joint return, the regular FTF penalty should be assessed against the other spouse, unless that spouse can show that, with respect to that spouse, the failure to file was due to reasonable cause, and not due to willful neglect.

    Example:

    H & W filed a joint return after being investigated by CI. After proposing the FFTF penalty, W provides a copy of a check register listing a check allegedly payable to IRS for the amount shown due on the return, as well as a bank statement showing the check as having cleared the bank. W states that she prepared the return and check in good faith, and turned them over to her husband to sign and mail. She was not aware that her husband had changed the payee on the check, and deposited it in another account, and that the return had never been mailed. While IRS might propose the FFTF penalty against H in this case, W has demonstrated that her failure to file was due to reasonable cause, and not willful neglect.

20.1.2.2.7.5.1.2  (07-02-2013)
FFTF Penalty Assessment Process

  1. Do NOT use Form 8485, Assessment Adjustment Case Record, to abate any FTF penalty (IRC 6651(a)(1)) previously assessed with Transaction Code 160 or 166. This practice is discontinued immediately.

  2. IRC 6651(f) provides for an increase in the penalty rate at which the penalty under IRC 6651(a)(1) is assessed. So much of the FFTF penalty as exceeds any FTF penalty previously assessed via TC 160 or TC 166 is to be assessed via penalty reference number (PRN) 686.

    Note:

    If no FTF penalty was previously assessed, the regular FTF penalty should be computed and assessed via TC 160 when assessing the FFTF penalty. This protects the interest of the service in case the FFTF penalty is not sustained on appeal.

  3. The FTF and FFTF penalties are assessed on the MFT where the taxpayer’s return is posted, unless innocent spouse procedures apply with respect to the penalties, in which case they are assessed on MFT 31 as applicable.

  4. With respect to tax shown on the return (or as previously corrected) assess the penalty using PRN 686 as a partial assessment. Remember: This amount must be assessed prior to the expiration of the normal assessment statute expiration date (ASED).

  5. With respect to a deficiency, assess the FFTF penalty using PRN 686 as part of the deficiency assessment.

  6. Assess the FFTF penalty on MFT 31 with respect to each spouse separately (as applicable), in the case of a joint return where —

    • Only one spouse agrees to the deficiency (or to the proposed FFTF penalty if there is no deficiency.

    • The penalty is proposed with respect to only one spouse.

    • Only one spouse files a petition in tax court, or each spouse files a separate petition in tax court.

    • One spouse files an innocent spouse claim.

    See IRM 21.6.8, Split Spousal Assessment.

  7. Do NOT assess the FFTF penalty on MFT 55 via PRN 635 using Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. This practice is discontinued effective immediately.

  8. For fraudulent failure to file Form 5329, Additional Tax on Qualified Plans, (other than 10% additional tax for premature distributions), assess the FFTF penalty on MFT 29 for the taxpayer required to file Form 5329.

20.1.2.2.7.5.1.3  (07-02-2013)
Abatement of the FFTF Penalty

  1. After the FFTF penalty has been assessed it may be determined (e.g., on appeal) that the penalty does not apply. Additionally, IRS employees may find cases where the amount of the FFTF penalty assessed was in excess of the amount allowed by law. Under either circumstance the FFTF penalty may need to be abated. The abatement process depends on the methodology that was used when the penalty was assessed. Follow the IF/Then chart below for listed scenarios. Contact the applicable analyst in the Office of Servicewide Penalties for case-specific instructions not covered in the chart below.

    Note:

    Functional areas without a centralized case processing area do NOT need to prepare the Form 3870, Request for Adjustment, and/or Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, referenced in the table below. The adjustments can be made via direct IDRS input using command code ADJ54.

    IF THEN
    • It is determined that the FFTF penalty does not apply; and

    • The FFTF penalty was assessed at least in part on MFT 55 under the old procedures; and

    • The regular FTF penalty was previously abated on MFT 30 (or 31); and

    • The period of limitations on assessments has not yet expired with respect to tax shown on the return.

    Note:

    If the entire penalty was assessed on MFT 30 or 31 see "The entire penalty was assessed on MFT 30 …" later in this table.

    • Prepare Form 8278 with penalty reference number (PRN) 635 for the amount to be abated on MFT 55. The amount to be entered on Form 8278 is the amount of TC 240 with PRN 635 posted on MFT 55.

    • Prepare Form 3870, Request for Adjustment, to assess the total regular FTF penalty in the return module with TC 160.

    • Include PRN 686 for a negative amount on Form 3870 for any unreversed FFTF penalty posted in the module with TC 240 with PRN 686.

    • It is determined that the FFTF penalty does not apply; and

    • The penalty was assessed in part on MFT 55 under the old procedures; and

    • The regular FTF penalty was not previously abated on MFT 30 (or 31); and

    • The statute of limitations on assessments has not yet expired.

    Note:

    If the entire penalty was assessed on MFT 30 or 31 see "The entire penalty was assessed on MFT 30 …" later in this table.

    • Prepare Form 8278 with penalty reference number (PRN) 635 for the amount to be abated on MFT 55. The amount to be entered on Form 8278 is the amount of TC 240 with PRN 635 posted on MFT 55.

    • Prepare Form 3870 with PRN 686 for a negative amount to abate any unreversed FFTF penalty posted in the return module.

    • Include on Form 3870 a TC 160 for any regular FTF that is due that was not previously assessed.

    • It is determined that the FFTF penalty does not apply; and

    • The penalty was assessed at least in part on MFT 55 under the old procedures;

    • The period of limitations on assessments has expired with respect to tax shown on the return.

    Note:

    NOTE: If the entire penalty was assessed on MFT 30 or 31 see “The entire penalty was assessed on MFT 30 …” later in this table.

    • Prepare Form 8278 with penalty reference number (PRN) 635 for the amount to be abated on MFT 55. The amount to be entered on Form 8278 is the amount of TC 240 with PRN 635 posted on MFT 55 that is in excess of the regular FTF penalty that is not attributable to a deficiency.

    • Prepare Form 3870 with PRN 686 for a negative amount equal to any excess FFTF penalty posted in the return module. The excess FFTF penalty is the excess of the sum of the TC 240 with PRN 686 amount plus any regular FTF penalty assessed with TC 160 or TC 166, over the regular FTF penalty legally assessable for the module; but not more than the amount of the posted TC 240 with PRN 686.

    • If the total regular FTF penalty assessed in the module also exceeds the legally assessable amount, include TC 161 on Form 3870 with a negative amount equal to the excess.

    • It is determined that the FFTF penalty does not apply, and

    • No part of the penalty was assessed on MFT 55; and

    • The period of limitations on assessment with respect to tax shown on the return has expired.

    • Prepare Form 3870 with PRN 686 for a negative amount to abate the excess FFTF penalty posted in the module, but not more than posted with TC 240 with PRN 686.

    • If the excess FFTF penalty exceeds the amount assessed with TC 240 with PRN 686, abate the additional excess using TC 161.

    • The excess FFTF penalty in this case is the amount of the TC 240 with PRN 686, plus any regular FTF penalty posted in the module with TC 160 or TC 166, minus the FTF penalty that is legally assessable.

    • It is determined that the FFTF penalty does not apply; and

    • No part of the penalty was assessed on MFT 55; and

    • The period of limitations on assessment with respect to tax shown on the return has not expired.

    • Prepare Form 3870 with PRN 686 for a negative amount to abate the entire FFTF penalty posted in the module with TC 240 with PRN 686.

    • Include on Form 3870 a TC 160 for so much of the legally assessable regular FTF penalty as is not already posted in the module as a TC 160 or TC 166.

    • It is determined that the FFTF penalty applies; but

    • The sum of the FFTF penalty assessed on MFT 55 as TC 240 with PRN 635, plus the FFTF penalty assessed on MFT 30 (or 31) as TC 240 with PRN 686, plus the regular FTF penalty assessed on MFT 30 (or 31) as TC 160 or TC 166, exceeds the legally assessable amount.

    • Prepare Form 8278 with PRN 635 for a negative amount. Use the lesser of the amount of the TC 240 with PRN 635 posted on MFT 55, and the computed excess FFTF penalty.

    • If the excess FFTF penalty has not been eliminated by the step above, prepare Form 3870 with TC 161 for a negative amount. Use the lesser of the net regular FTF penalty assessed in the return module with TC 160 or TC 166, or any remaining excess FFTF penalty.

    • If the excess FFTF penalty has not been eliminated by the step above, include on Form 3870 PRN 686 for a negative amount equal to any remaining excess FFTF penalty.


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