Accessibility Skip to Top Navigation Skip to Main Content Home  |  Change Text Size  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 4. Failure to Deposit Penalty (Cont. 1)

20.1.4  Failure to Deposit Penalty (Cont. 1)

20.1.4.8 
Form 720 Reporting Requirements

20.1.4.8.4  (05-22-2009)
Deposit Rules Form 720

  1. Regular Method (On or After October 1, 2001); Line 1 of Schedule A

    1. The Regular Rule applies to all taxes in Part I of Form 720 unless the taxpayer chooses the Alternative Method by using line 2 of Schedule A.

    2. The deposit of tax for a semi-monthly period is due by the 14th day following the end of the semi-monthly period. Generally, this is the 29th day of the month and the 14th day of the following month.

    3. The net tax liability for each semi-monthly period in the quarter is entered in line 1, boxes A thru F, of Schedule A.

    4. Generally, all taxes are deposited under the rules for regular method taxes. EXCEPTION: Communication and air transportation taxes can be deposited under the rules for alternative method taxes (IRS Nos. 22, 26, 27, and 28).

  2. Alternative Method; Line 2 of Schedule A

    1. The Alternative Method applies only to local telephone service and teletypewriter exchange service tax (IRS No. 22), transportation of persons by air tax (IRS No. 26), use of international air travel facilities tax (IRS No. 27), and transportation of property by air tax (IRS No. 28).

    2. If a person is using the Alternative Method, amounts considered as collected are reported on line 2 of Schedule A.

    3. If line 2 is not used, the Alternative Method does not apply.

    4. See Exhibit 20.1.4-7 for reporting information relating to tax under the alternative method.

  3. Under the Alternative Method:

    1. The tax included in amounts billed or tickets sold during a semi-monthly period is considered as collected during the first seven days of the second semi-monthly period following the semi-monthly period in which the amounts were billed or tickets sold.

    2. For example, the tax included in amounts billed between January 1 and January 15, 1999, is considered as collected during the period February 1 through February 7, 1999.

  4. The amount reported on Schedule A for each semi-monthly period is the tax considered as collected during that period. For example, the tax considered as collected during the period February 1 through February 7, 1999, is the amount reported for the period February 1 through February 15, 1999.

  5. The net tax liability for each semi-monthly period in the quarter is entered in line 2, boxes M thru R, of Schedule A. For example, the tax considered as collected during the period February 1 through February 7, 1999 is reported in box O of Schedule A.

  6. The deposit of tax considered as collected for the first semi-monthly period of the month is due by the third banking day after the day of that month (generally the 10th day of that month).

  7. For example: The deposit for the semi-monthly period beginning on February 1, 1999 is due by February 10, 1999 (this is a deposit of the tax included in amounts billed between January 1 and January 15, 1999), and considered as collected between February 1 and February 7, 1999.

  8. A taxpayer can change to the Regular Rule of computing deposits only at the beginning of a calendar quarter. The taxpayer must notify the IRS before a new choice is made so that proper adjustments may be made in order to properly reflect that person's collections of excise tax.

20.1.4.8.5  (05-22-2009)
De Minimis Exception to Deposit Requirements Form 720

  1. For return periods beginning on or after October 1, 2001— Deposits are not required if the net tax liability for the quarter does not exceed $2,500.

  2. The $2,500 "de minimis exception" applies only to the taxes listed in Part I, Form 720. For example:

    1. A return is filed reporting $1,950 in Part I taxes, and $4,000 in Part II taxes. Therefore, no deposits would be due against the total liability of $5,950. The $4,000 Part II taxes are not subject to deposit requirements, and the $1,950 Part I taxes are below the $2,500 "de minimis exception."

  3. To compute the $2,500 threshold, exclude taxes reported on a one-time filing, which are not subject to deposit. For example, No deposits are required for a one-time filing of:

    • Gas guzzler tax (IRS No. 40), or

    • luxury tax (IRS No. 92).

    • A person has made a one-time filing of Form 720 for gas guzzler tax (IRS No. 40) and/or passenger vehicles luxury tax (IRS No. 92), if the Form 720 is the person’s first Form 720 filed, the "final return block" on the front of Form 720 is marked, and no other taxes are reported.

20.1.4.8.6  (05-22-2009)
Safe Harbor Rules for Deposits Form 720

  1. The safe harbor rules apply separately to deposits under the Regular Method and Alternative Method.

  2. If the conditions of the safe harbor rule are met, a person that has made timely deposits at an authorized U.S. Government depositary of less than the full amount of net tax liability for each semi-monthly period in the quarter is considered to have satisfied the deposit requirement for the quarter.

  3. See IRM 20.1.4.8.7 for special safe harbor rules for deposits in September.

  4. The lookback analysis under Form 720 Safe Harbor Rule is not the same as the lookback analysis for Form 941.

20.1.4.8.6.1  (05-22-2009)
Lookback Quarter Safe Harbor (1/6 Rule) Form 720

  1. The lookback quarter liability safe harbor (1/6 Rule) applies to any entity that filed Form 720 for that class of tax for the second preceding quarter (the lookback quarter). The 1/6 Rule applies without regard to the amount of the liability for the current quarter.

  2. To satisfy the deposit requirements under the 1/6 Rule, the taxpayer must meet the following conditions:

    1. The deposit for each semi-monthly period in the current quarter, must be at least 1/6 of the net tax liability of the lookback quarter, for the same class of tax.

    2. Each deposit must be timely made at an authorized U.S. Government depositary.

    3. Any underpayment of the liability for the current quarter must be paid by the return due date without extension.

  3. In general, the underpayment must be paid with the return. If the return due date is extended under the one-return rule, special rules apply to the underpayment:

    1. A deposit must be made by the last day of the month following the end of the quarter (the date the return would be due without extension).

    2. The deposit cannot be less than the lesser of (1) The amount by which the net tax liability in that class for the current calendar quarter, exceeds the net tax liability for the look-back quarter, or (2) the amount of any underpayment of taxes in that class for the current calendar quarter.

    3. Do not include local telephone service and teletypewriter exchange service tax (IRS No. 22), transportation of persons by air tax (IRS No. 26), use of international air travel facilities tax (IRS No. 27), and transportation of property by air tax (IRS No. 28) when determining the net tax liability for the Regular Method.

  4. If a tax rate increase goes into effect for a quarter, the following additional condition applies.

    1. The 1/6 Rule does not apply for the first and second calendar quarters, beginning on or after the effective date of the increase, unless the deposit of taxes for each semi-monthly period in the calendar quarter is not less than 1/6 of the liability the taxpayer would have had for the look-back quarter, if the increased tax rate had been in effect during the look-back quarter.

    2. Thus, if tax rates are increased, taxpayers must deposit 1/6 of the amount that they would have been liable for in the look-back quarter, had the higher rate applied at that time.

  5. Use of the safe harbor is not permitted unless a tax was imposed throughout the look-back quarter.

20.1.4.8.6.2  (05-22-2009)
Current Liability Safe Harbor (95 Percent Rule) Form 720

  1. The current liability safe harbor (95 Percent Rule) may be used by any Form 720 filer.

  2. To satisfy the deposit requirements under the 95 Percent Rule, the taxpayer must meet the following conditions:

    1. The deposit for each semi-monthly period must be at least 95 percent of the net liability for the class of tax for the semi-monthly period.

    2. Each deposit must be timely made at an authorized U.S. Government depositary.

    3. Any underpayment of the liability for the current quarter must be paid by the return due date without extension.

  3. In general, the underpayment must be paid with the return. If the return due date is extended under the one-return rule, special rules apply to the underpayment.

    1. A deposit must be made by the last day of the month, following the last month of the quarter (the date the return would be due without extension) of at least five percent of the net tax liability in that class and transportation of persons by air tax (IRS No. 26), use of international air travel facilities tax (IRS No. 27), and transportation of property by air tax (IRS No. 28) for the current quarter, or the amount of the underpayment for the current quarter, whichever is less.

    2. Do not include the local telephone service and teletypewriter exchange service tax (IRS No. 22) and transportation of persons by air tax (IRS No. 26), use of international air travel facilities tax (IRS No. 27), and transportation of property by air tax (IRS No. 28) when determining the net tax liability for the Regular Method.

20.1.4.8.7  (05-22-2009)
Special Rules for Deposits in September Form 720

  1. An additional deposit is required during the third quarter of each year in September for each class of tax.

20.1.4.8.7.1  (05-22-2009)
Alternative Method Form 720

  1. In the case of alternative method taxes charged (that is, included in amounts billed or tickets sold) during the first semimonthly period in September, separate deposits are required for the taxes charged during the period September 1 to 11 (1 to 10 for non-EFTPS depositors) and the period September 12 to 15 (11 to 15 for non-EFTPS depositors).

  2. For taxes charged during the period beginning September 1, the deposit must be made by September 29 (28 for non-EFTPS depositors). If the due date falls on a Saturday, the deposit is due on the preceding Friday. If the due date falls on a Sunday the deposit is due on the following Monday.

  3. For taxes charged during the period September 1 to 11 (1 to 10 for non-EFTPS depositors), the net tax liability is entered on line 3, above box M, of Schedule A for the fourth quarter return.

  4. For taxes charged during the period ending September 15, the deposit must be made by the due date under the Alternative Method for making deposits for the first semimonthly period in October.

  5. For taxes charged during the period September 12 to 15 (11 to 15 for non-EFTPS depositors), the net tax liability is entered in line 3, in box M, of Schedule A for the fourth quarter return.

  6. The amount of each deposit for these periods must be at least the amount of alternative method taxes charged during the periods unless a safe harbor rule applies.

  7. For transportation of persons by air tax (IRS No. 26) and, use of international air travel facilities tax (IRS No. 27), there is delayed deposit for taxes due in September 1997 and 1998. See IRM 20.1.4.8.3 of this handbook.

20.1.4.8.7.2  (05-22-2009)
Special Safe Harbor Rules Form 720

  1. The 1/6 Rule does not apply for the third calendar quarter unless—

    1. The deposit of taxes for the period September 16 to 26 (16 to 25 for non-EFTPS depositors) is not less than 11/90 (10/90 for non-EFTPS depositors) of the net tax liability reported for the same class of tax for the look-back quarter; and

    2. The total deposit of taxes for the second semimonthly period in September is not less than 1/6 of the net tax liability reported for the same class of tax for the lookback quarter.

  2. The 95 Percent Rule does not apply for the third calendar quarter unless—

    1. The deposit of taxes for the period September 16 to 26 (16 to 25 for non-EFTPS depositors) is not less than 69.67 percent (63.33 percent for non-EFTPS depositors) of the net tax liability for the same class of tax for the second semi-monthly period in September; and

    2. The total deposit of taxes for the second semi-monthly period in September is not less than 95 percent of the net tax liability for that class for that semi-monthly period.

20.1.4.8.7.3  (05-22-2009)
Alternate Method Form 720

  1. The 1/6 Rule does not apply for the fourth calendar quarter unless—

    1. The deposit for alternative method taxes charged during the period September 1 to 11 (1 to 10 for non-EFTPS depositors) is not less than 11/90 (10/90 for non-EFTPS depositors) of the net tax liability reported for alternative method taxes for the lookback quarter; and

    2. The total deposit for alternative method taxes charged during the first semimonthly period in September is not less than 1/6 of the net tax liability reported for alternative method taxes for the lookback quarter.

  2. The 95 Percent Rule does not apply for the fourth calendar quarter unless—

    1. The deposit for alternative method taxes charged during the period September 1 to 11 (1 to 10 for non-EFTPS depositors) is not less than 69.67 percent (63.33 percent for non-EFTPS depositors) of the alternative method taxes charged during the first semimonthly period in September; and

    2. The total deposit for alternative method taxes charged during the first semimonthly period in September is not less than 95 percent of the alternative method taxes charged during that semimonthly period.

20.1.4.8.8  (05-22-2009)
Computing the FTD Penalty Form 720

  1. A deposit must be made for each semi-monthly period for which there is an entry in a box on Schedule A. The amount of each deposit for a semi-monthly period must be at least the amount of the net tax liability entered in the appropriate box on Schedule A for that period unless a safe harbor rule applies.

  2. To determine whether a sufficient amount has been deposited, Schedule A must be completed. If Schedule A is complete, compare the amounts entered on Schedule A to the deposits and payments the taxpayer has made.

  3. The taxpayer is instructed to separate any portion of a liability that qualifies for the "Special September Rule" from box F or M, and enter that portion of the September liability in the Special September Rule box. Therefore, a September liability amount entered in box M or F of Schedule A, with no accompanying entry in the "Special September Rule" box, is not an indicator that a "Special September Rule" liability was incurred and needs to be separated from box M or F. See the "Special September Rule" instructions shown below:

    Instructions for Reporting Under the Special September Rule

    • Regular Method: is the period beginning Sept. 16 and ending Sept. 25/26 and should be reported in (line 1) "Special Rule for September" box.

    • Alternative Method: is the period beginning Sept. 1 and ending Sept. 10/11 and should be reported in (line 2) "Special Rule for September" box in the fourth quarter return.

    Instructions for remaining days in September Period

    • Regular Method: enter the liability for the period beginning Sept. 26/27 and ending Sept. 30 in box F.

    • Alternative Method: enter the tax included in the amounts billed or tickets sold for the period beginning Sept. 11/12 and ending Sept. 15 in box M of the 4th quarter return. Enter the tax included in amounts billed or tickets sold during the period beginning Sept. 16 and ending Sept. 30 in box N of the 4th quarter return.

  4. If the deposit is timely made at an authorized U.S. Government depositary and equals or exceeds the amount entered in the Schedule A box for the semi-monthly period, the deposit requirement for that class of tax for the semi-monthly period is satisfied.

  5. If Schedule A is not completed, penalties have to be proposed. Proposing a penalty allows the taxpayer time to provide needed information.

    1. Attempt to contact the taxpayer by telephone to request a completed Schedule A.

    2. If unable to secure the Schedule A by telephone then correspond with the taxpayer using Letter 313C.

    3. If a new Schedule A is received for the review quarter, determine whether a failure to deposit penalty applies.

    4. If a new Schedule A is not received, compute and assess an averaged penalty.

  6. A penalty may be imposed if the taxpayer has not made timely deposits in sufficient amounts at an authorized U.S. Government depositary. Therefore, the taxpayer must meet the following three conditions:

    1. Timeliness,

    2. sufficient amount, and

    3. authorized depositary.

20.1.4.8.8.1  (05-22-2009)
Timeliness Form 720

  1. If the deposit is received by the deposit due date for each rule, the deposit is timely. See Exhibit 20.1.4-7 and LEM 20.1.4.2.2.

20.1.4.8.8.2  (05-22-2009)
Sufficient Amount Form 720

  1. If the deposit is timely made at an authorized U.S. Government depositary, but is less than the amount entered in the Schedule A box for the semi-monthly period, determine the following: Check to see if the 1/6 Rule is satisfied.

    1. The lookback quarter liability is the net tax liability amount entered on line 1b, 2b, 3b, or 4b, whichever applies, of the Schedule A for the lookback quarter. Divide that amount by six to determine the amount required to be deposited in each semi-monthly period for the current quarter under the 1/6 Rule.

    2. Compare each deposit (including any credits from prior quarters or semi-monthly periods) with the amount required to be deposited in each semi-monthly period.

    3. If the amounts deposited are sufficient and the amount of any underpayment is paid by the due date of the return, then the 1/6 Rule is satisfied and no penalty is appropriate. An underpayment is the difference between the amount entered on line 1b, 2b, 3b, or 4b, whichever applies, of the current quarter Schedule A, and the same line of the Schedule A for the lookback quarter.

    4. If the 1/6 Rule is not satisfied for any semi-monthly period within the quarter, the 1/6 Rule does not apply for that quarter. For example: Even if five of the six semi-monthly periods within the quarter are satisfied, and only one semi-monthly period is not satisfied, then the 1/6 Rule cannot be used for any of the liability periods during the quarter. However, no taxpayer has to pay more than they actually owe. For example: If the deposit for the sixth semi-monthly liability period is less than the 1/6 Rule amount, but the total deposits fully pay the liability for the entire quarter, no penalty applies.

  2. If the 1/6 Rule is not satisfied, check to see if the 95 Percent Rule is satisfied.

    1. Compare each deposit (including any credits from prior quarters or semi-monthly periods) with the amount reported in the Schedule A box for each semi-monthly period. The deposit must be at least 95 percent of the amount reported on Schedule A.

    2. If the amounts deposited are sufficient and the amount of the underpayment is paid by the due date of the return, then the 95 Percent Rule is satisfied and no penalty is appropriate. An underpayment is the difference between the amount entered on Schedule A and the amount deposited.

    3. If the 95 Percent Rule is not satisfied for any semi-monthly period within the quarter, the 95 Percent Rule does not apply for that quarter. For example: Even if five of the six semi-monthly periods within the quarter are satisfied, and only one semi-monthly period is not satisfied, then the 95 Percent Rule cannot be used for any of the liability periods during the quarter. However, no taxpayer has to pay more than they actually owe. For example: If the deposit for the sixth semi-monthly liability period is less than the 95 Percent Rule safe harbor amount, but the total deposits fully pay the liability for the entire quarter, no penalty applies.

  3. If the 95 Percent Rule is also not satisfied, compute the penalty. For each semi-monthly period, subtract the amount deposited from the amount entered in the Schedule A box and compute the penalty based on the difference.

  4. If the underpayment, for either safe harbor (1/6 Rule or 95 Percent Rule), is not paid by the due date of the return, then the safe harbor does not apply for the entire quarter. For each semi-monthly period, subtract the amount deposited from the amount entered in the Schedule A box and compute the penalty based on the difference.

20.1.4.8.8.2.1  (05-22-2009)
Authorized Depositary Form 720

  1. If the deposit is timely and in the correct amount, but is not made at an authorized depositary as required, the 10 percent penalty applies. If the taxpayer was using a safe harbor rule and failed to use an authorized depositary, the safe harbor (1/6 Rule or 95 Percent Rule) does not apply for the entire quarter.

20.1.4.8.8.3  (05-22-2009)
Averaged Penalty Form 720

  1. Whenever Schedule A is missing and a Schedule A is not received after contact with the taxpayer, determine whether a penalty applies by computing a separate averaged semi-monthly liability for 9-Day and 30-Day Rule taxes.

  2. See LEM 20.1.4.4.1.

  3. Add the liabilities for all Part I taxes listed on the transcript except for Ozone-Depleting Chemicals (ODC) tax (IRS No. 98) and ODC tax on imported products (IRS No. 19). Divide the total by six. Use the result as the net liability for 9–Day Rule taxes for each semi-monthly period.

  4. Add the liabilities listed on the transcript for ODC tax (IRS No. 98) and ODC tax on imported products (IRS No. 19). Divide the total by six. Use the result as the net liability for 30–Day Rule taxes for each semi-monthly period.

20.1.4.8.8.4  (05-22-2009)
Transitional Rule for the Alternative Method Form 720

  1. The Alternative Method applies only to local telephone service and teletypewriter exchange service tax (IRS No. 22), transportation of persons by air tax (IRS No. 26), use of international air travel facilities tax (IRS No. 27), and transportation of property by air tax (IRS No. 28). If a person is using the Alternative Method, amounts considered as collected are reported on Schedule A.

  2. There is a special Transitional Rule which applies and can be used by any person who has been making deposits under the Alternative Method, and appears to have reported tax too soon on Form 720 and Schedule A.

    1. This early reporting of tax makes otherwise timely deposits appear to be late.

    2. For detailed information, refer to Notice 1009, Information on the Alternative Method of Reporting on Form 720, Schedule A.

  3. If it appears the taxpayer reported tax too soon, call or send Letter 313C (enclosing Notice 1009 and Schedule A) to inform the taxpayer about the problem. Allow the taxpayer time to respond (30 days).

20.1.4.8.8.5  (05-22-2009)
Quarter in Question Form 720

  1. If the taxpayer sends in a corrected Schedule A, with

    1. The first two semi-monthly periods blank,

    2. any of the other four semi-monthly periods showing a liability amount, and

    3. the amounts in the boxes match the deposits timely received, then

    4. there is no penalty.

    5. Disregard the first two semi-monthly (blank) periods. These were reported on the previous Schedule A.

  2. The taxpayer has only one opportunity to "transition" to the correct reporting period.

20.1.4.9  (05-22-2009)
Form 1042

  1. Taxpayers file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, to report and pay tax due on income derived from sources in the United States. Currently, Form 1042 is processed only at the Philadelphia Campus.

  2. This form is filed by a withholding agent (who could be an individual, Indian tribal governments, a trust, estate, partnership, corporation, nominee (under section 1446), government agency, association, or tax-exempt foundation) that may be domestic or foreign who receives, controls, has custody or disposes of, or pays income from sources within the United States.

  3. Taxpayers may file Form 2758, Application for Extension to File Certain Excise, Income, Information, and Other Returns. Approval of the extension allows additional time to file the return.

  4. Form 2758 DOES NOT provide additional time to pay the taxes.

20.1.4.9.1  (05-22-2009)
Deposit Requirements Form 1042

  1. For deposit purposes, divide each month into four periods ending on the 7th, 15th, 22nd, and last day of the month. These periods are called quarter-monthly periods. The quarter-monthly periods and the monthly totals are labeled 1 through 60 on the tax return.

  2. The taxpayer must list the tax liability in the ROFT section, if the yearly tax is at least $200.

  3. Deposit requirements are based on the amount of undeposited taxes at the end of the deposit period. Exceptions may apply due to Foreign Tax Treaties.

  4. See Exhibit 20.1.4-8.

    1. If the taxes at the end of a month (other than December) are under $200, they are carried to the next month.

    2. If taxes at the end of December are under $200, they may be paid with the return or deposited by the return due date.

    3. If the taxes at the end of a month are $200 or more, but less than $2,000, the deposits must be made by the 15th of the following month.

    4. If an earlier quarter-monthly deposit was made and taxes are $200 or more but less than $2,000 in a month other than December, the taxes are carried to the next month. For December, the deposits must be made by the return due date.

    5. If undeposited taxes at the end of a quarter-monthly period are $2,000 or more, the deposits must be made within 3 banking days after the quarterly-monthly period.

20.1.4.9.2  (05-22-2009)
Special Deposit Requirements Form 1042

  1. 90 Percent/Safe Harbor Rule—Taxpayers are considered to have met the $2,000 deposit requirement in the above, if they comply with all of the following:

    1. At least 90 percent of the liability is paid timely.

    2. The remaining balance for each month is paid as follows:
      i. The taxpayer deposits underpayments from a month (other than December) with or before the first deposit due after the 15th day of the following month. If there are no deposits due after that date, the taxpayer deposits underpayments of $200 or more by January 31. The taxpayer pays underpayment amounts under $200 with the return or deposits them by the return due date.
      ii. The taxpayer deposits December underpayments of $200 or more by January 31.
      iii. The taxpayer pays December underpayment amounts under $200 with the return or deposits them by the return due date.
      iv. For periods ending after March 31, 1991, see LEM 20.1.4.3.3.

  2. Apply deposits made after the 15th day of the following month as follows:

    1. Satisfy any Safe Harbor underpayment from the prior month.

    2. If the deposit does not satisfy the full amount, apply in the order in which they accrued.

  3. See Exhibit 20.1.4-8 and LEM.20.1.4.2.2 to determine if the taxpayer made timely deposits.

  4. Taxpayers do not have to apply the Safe Harbor provisions to all deposits in a specific tax period. They may apply the provisions to certain deposits, while paying 100 percent of the others.

20.1.4.9.3  (05-22-2009)
Computing the FTD Penalty Form 1042

  1. Refer to Form 1042 deposit requirements to determine if sufficient deposits were made. See Exhibit 20.1.4-8.

  2. Compare the tax liability on the Record of Federal Tax (ROFT) with the deposits made. If the ROFT is incomplete, blank, or has a negative amount, then average the total tax.

  3. There is a time sensitive four-tier penalty system for late deposits. The penalty rate assessed depends on the number of days a deposit is late. See IRM 20.1.4.2.1.

  4. Remember that exceptions apply only to the last month of the reporting period (December). They do not apply to the last month of each quarter (March, June and September).

20.1.4.9.4  (05-22-2009)
Averaged Penalty Form 1042

  1. If the ROFT is incomplete, blank, or has a negative amount, then average the total tax as shown below:

    1. Divide the tax liability by 24.

    2. Consider the results as the tax liability for ROFT periods 2nd, 4th, 6th, 8th, 10th. 12th, 14th, 16th, 18th, 20th, 22nd, 24th, 26th, 28th, 30th, 32nd, 34th, 36th, 38, 40th, 42nd, 44th, 46th, and 48th.

    3. Compute the penalty.

    4. See LEM 20.1.4.9.4.

20.1.4.9.5  (05-22-2009)
Deficiency Procedures Form 1042

  1. The determination of whether a penalty will be subject to a statutory notice of deficiency procedure usually depends on whether the underlying tax is subject to the deficiency procedure.

  2. IRC section 1441, Withholding of Income Tax on Nonresident Aliens, is subject to deficiency procedures. IRC section 6665, Applicable Rules, does not exclude IRC section 6656, Federal Tax Deposit penalties.

  3. The statutory notice of deficiency procedures will apply to a Federal Tax Deposit penalty as well as any underpayment of tax. Even if there is not an underpayment of tax, statutory notice of deficiency procedures apply to the Federal Tax Deposit penalty as it relates to the Form 1042.

  4. See IRM 20.1 for additional information regarding deficiency vs. non-deficiency procedures.

20.1.4.10  (05-22-2009)
Form CT–1

  1. The federally administered railroad retirement system covers railroad employees and provides benefits similar to those under the social security system (Tier 1 benefits) as well as benefits similar to those under a private pension (Tier 2 benefits).

  2. Forms CT-1 are processed at Cincinnati Submission Processing Campus. Penalty adjustments on Forms CT–1 should be made only after contacting the Cincinnati Campus.

    1. Forms, claims or correspondence received at other campuses must be routed or coordinated with: IRS Large Corp./Technical Unit Stop 537G 201 W. Rivercenter Blvd. Covington, KY 41011

    2. For inquiries received via the toll-free line, prepare Form 4442 and fax to the Technical Unit at : 859-669-5018, Team 401, or 859-669-4776, Team 402.

20.1.4.10.1  (05-22-2009)
Filing Requirements Form CT-1

  1. Form CT–1 (Employer’s Annual Railroad Retirement Tax Return) is an annual return due the last day of February of the following year. The Form CT–1 is used to report and pay Railroad Retirement Tax (RRTA) (including Supplemental Annuity tax and Special Supplemental Annuity tax. For rail wages paid prior to June 1, 1993, rail employers also reported and paid Railroad Unemployment Repayment Tax (RURT) on Form CT–1). The Railroad Retirement and Survivors' Improvement Act of 2001 (Act), Pub. L. 107-90, 115 Stat. 878, Act section 203(b), repealed the supplemental annuity work-hour tax and the special supplemental annuity tax ( IRC sections 3221(c) and (d)), effective for years beginning after December 31, 2001.

  2. Taxpayers must complete Part II (Record of Railroad Retirement Tax Liability) if they are monthly depositors.

  3. Taxpayers must complete Form 945–A, Annual Record of Federal Tax Liability, if they

    1. are semi-weekly depositors, or

    2. accumulate $100,000 or more on any day during a deposit period. See IRM 20.1.4.3.2.3.

  4. Both Part II and Form 945–A are used to report tax liabilities reported on Form CT–1. This should be a summary of tax liability, NOT a summary of deposits.

  5. Form CT–1 consists of two major parts (Part I and II).

    1. Part I—Railroad Retirement Taxes. The adjusted total of supplemental annuity tax, and the adjusted total of employer and employee railroad retirement taxes based on compensation, are combined and should equal the total for year of Part II.

    2. Part II—Record of Railroad Retirement Tax Liability. For deposit purposes, deposits are made as described below even though the return is an annual return. Compute the penalty for each deposit separately and combine the deposit penalty amounts.

    3. If RURT taxes for the year are more than $100, the tax liability must be listed in the ROFT section of Part III.

    4. For deposit purposes, divide each year into quarters.

  6. If the accumulated tax liability (undeposited taxes) at the end of the first, second, or third quarter is $100 or less, the taxpayer carries it to the next quarter.

  7. If the accumulated tax liability (undeposited taxes) is more than $100 at the end of any quarter, the taxpayer must deposit it by the last day of the following month.

  8. If the accumulated tax liability (undeposited taxes) at the end of the last quarter of the year is $100 or less, the taxpayer may submit the payment with the return or deposit it by the return due date.

20.1.4.10.2  (05-22-2009)
Deposit Requirements RRTA Part II

  1. For periods after December 31, 1994:

    1. The taxpayer must deposit by EFT if a taxpayer’s total deposits of taxes, during the determination period, exceed a prescribed dollar threshold.

    2. See Exhibit 20.1.4-2 for threshold amounts, determinations periods and applicable effective dates.

  2. When depositing RRTA (other than Supplemental Taxes and RURT) the taxpayer will be either a monthly or semi-weekly depositor based on the lookback period.

  3. The deposit requirements for Form CT–1 are generally the same as the deposit requirements for Form 941.

  4. If the total tax liability for the year is less than $500, no deposits are required. The taxpayer may pay those taxes with the return.

  5. A taxpayer must follow the monthly deposit schedule if the total RRTA taxes for the lookback period is $50,000 or less. The lookback period is the second calendar year preceding the current calendar year.

    1. Tax liability for a calendar month must be deposited by the 15th day of the following month.

    2. Any safe harbor shortfall (make-up) amount is due on the filing due date for the return period in which the underpayment occurs. Payment may accompany the return.

  6. A taxpayer must follow the semi-weekly deposit schedule if the total RRTA taxes during the lookback period is more than $50,000.

    1. Tax liabilities for payments made on Wednesday, Thursday, and/or Friday must be deposited by the following Wednesday.

    2. Tax liabilities for payments made on Saturday, Sunday, Monday, and/or Tuesday must be deposited by the following Friday.

    3. The shortfall make-up date for semi-weekly/one-day depositors is the first Wednesday or Friday (whichever is earlier) falling on or after the 15th day of the month following the month in which the deposit was required to be made, or if earlier, the due date for the return period.

  7. Form CT–1 filers, whose tax liability was $1 million or more in the second preceding taxable year, must deposit via electronic funds transfer (FEDWIRE) payments. For example, for tax year 2006, the second preceding taxable year would be 2004.

20.1.4.10.3  (05-22-2009)
Special Deposit Rules RRTA

  1. Safe Harbor/95 percent/98 percent— See IRM 20.1.4.3.3.

20.1.4.10.4  (05-22-2009)
Computing the FTD Penalty RRTA

  1. Refer to Form CT–1 deposit requirements. See IRM 20.1.4.10.2.

  2. See Exhibit 20.1.4-4 to determine timely deposits.

  3. Compare the taxpayer’s liability, using the information from the Record of Railroad Retirement Tax Liability (RRTA) and Record of Railroad Unemployment Repayment Tax Liability (RURT), with the deposits made. If the information is unavailable, use the averaging method.

  4. If there is an overstatement on the RRTA tax liability, due to a line adjustment, adjust the last liability regardless of the dollar amount.

  5. See IRM 20.1.4.3.2.3 if the return indicates a monthly or semi-weekly liability of $100,000 or more.

20.1.4.10.4.1  (05-22-2009)
Averaged Penalty RRTA

  1. Average the tax settlement amount when the Record of Railroad Retirement Tax Liability (RRTA-Part II) and/or Record of Railroad Unemployment Repayment Tax Liability (RURT-Part III) is incomplete, blank, or has a negative amount.

  2. See LEM 20.1.4.4.1.

  3. The method of averaging Part II will depend on the type of depositor and the information available. To compute an averaged liability:

    1. for a monthly depositor who has not provided any liability breakdown, divide the tax liability by 12, and assign that amount to each of the monthly totals.

    2. for a semi-weekly depositor who has not provided any liability breakdown, divide the tax liability by four to arrive at a quarterly amount, then divide the resulting amount by 12, and assign to the first 4 Wednesdays of each month.

    3. for a semi-weekly depositor who provided the monthly RRTA, divide each month’s tax liability by four, and assign the four liabilities to the first four Wednesdays in that month.

  4. When the averaged liability equals $100,000 or more, assign the liability to the first day of the first semi-weekly period ending Friday. This applies to both the monthly and semi-weekly depositor. (For example, Jan. 9703 would be Jan. 1.)

20.1.4.11  (05-22-2009)
Overview of Manual (Restricted TC 180/181) and Systemic (Computer Generated TC 186/187)

  1. The following transactions codes (TC) identify assessment, abatement, or no change of the FTD Penalty:

    1. TC 186—computer generated assessment,

    2. TC 187—computer generated abatement,

    3. TC 180—manual assessment (systemic penalty recalculation restricted),

    4. TC 180 for "zero" —penalty recalculation results in a no change (systemic penalty recalculation restricted), and

    5. TC 181—manual abatement (systemic penalty recalculation restricted).

  2. Computer generated assessments result from a Master File analysis of the account information.

  3. Manual adjustments (TC 180/181) restrict Master File from systemically recalculating the penalty. Credits transferred in or out of a module that is restricted, will not cause a systemic recalculation of the penalty because the original or corrected ROFT information is not accessible to Master File. See IRM 20.1.4.12.

  4. Manual assessments are input through IDRS. Employees who cannot directly input the penalty assessment to IDRS need to prepare an appropriate document to request input of the assessment. Various documents are available for this purpose, such as:

    • The preprinted penalty and interest block found on some tax forms,

    • Form 4844, Request for Terminal Action,

    • Form 4364, Delinquency Computations,

    • Form 4907, TDA Posting Voucher,

    • Form 3870, Request for Adjustment,

    • Form 8485, Assessment Adjustment Case Record,

    • Form 2859, Request for Quick or Prompt Assessment,

    • Form 5599, TE/GE Examined Closing Record.

  5. Various codes are used to identify conditions regarding the penalty assessment, e.g., penalty computation codes, condition codes, and schedule indicator codes.

20.1.4.11.1  (05-22-2009)
Computer Codes

  1. The Base Period Code (BASE–PD) indicates which deposit schedule was used for FTD Penalty analysis.

  2. The State Code Indicator (STATE) indicates the state in which the taxpayer made FTD deposits.

20.1.4.11.2  (05-22-2009)
Base Period Codes

  1. The Base Period (BASE–PD) codes are:

    1. 0 = FTD Penalty Bypassed [Tax Years 2000 and Prior] A base period code of zero indicates that the FTD Penalty computation was bypassed at the time the return posted, based on the presence of certain exception criteria. Examples of exception criteria are: The input return record contains Computer Condition Code J. The Entity Employment Code is S (Foreign Subsidiary)— Forms 940/941/943/945.

    2. 1 = Monthly Depositor

    3. 2 = Semi-weekly Depositor

    4. 3 = Monthly/Daily/Semi-weekly Depositor— A monthly depositor who must make a $100,000 or more (daily) deposit immediately becomes a semi-weekly depositor for the remainder of the current year and for the following calendar year.

    5. 4 = Semi-weekly/Daily/Semi-weekly Depositor—Semi-weekly depositors who incur a $100,000 or more (daily) deposit requirement return to a semi-weekly deposit schedule after the daily deposit is made.

  2. The BASE-PD codes are displayed on TXMOD, BMFOLK, BMFOLR, and FTDPN.

  3. You can manually override the posted BASE-PD codes of 1, 2, 3, or 4 at Master File using CC REQ77, TC 971 and action code, for the quarter affected. The TC 971 will not change the actual BASE-PD code displayed on TXMOD, BMFOLK, FTDPN, and BMFOLR, but will cause master fie to recognize the new deposit requirement and adjust the penalty accordingly. The TC 971 and action code will be the established audit trail.

    1. Action code 040 will recompute the penalty using BASE-PD code 1. [TC971/151-CD] Overlay CD with 040.

    2. Action code 041 will recompute the penalty using BASE-PD code 2. [TC971/151-CD] Overlay CD with 041.

    3. The TC 971 with action code 040 or 041 will be displayed on TXMOD and all transcripts.

  4. The purpose of allowing a change to the BASE–PD is to establish an audit trail on a particular account. The BASE–PD should be changed only in limited situations. For example:

    1. The Service may determine that the employer should not be allowed to continue as a monthly depositor.

    2. The employer may submit information that would warrant a change to the account.

    3. The TC 150 belongs on another TIN or tax period.

20.1.4.11.2.1  (05-22-2009)
State Code Indicator

  1. The STATE Code Indicator is entered on Forms, 941, 943, 944, and 945 by the taxpayer to show the state in which deposits are made. If the taxpayer deposits in more than one state, the multiple state depositor (MU) code is entered. The State Code Indicator is displayed on TXMOD, FTDPN, and transcripts.

    1. Observed state banking holidays are considered non-banking days in the determination of deposit due dates..

    2. If the state code is MU, Master File will not use any state banking holidays, as there is no way to match the corresponding deposits and liability amounts that belong to any given state. The systemic computation of the penalty will be done using Federal holidays only.

    3. Manually recalculate the penalty (using the applicable state banking holidays), if the taxpayer provides a breakdown of the deposits and liability amounts that correspond to each state.

  2. See IRM 2.3.28 Terminal Responses, for CC FTDPN guidelines and a list of the observed state banking holidays.

20.1.4.11.2.2  (05-22-2009)
Penalty Computation Codes (PCC)

  1. Penalty Computation Codes (PCC) identify conditions which affect the penalty computation. This information is useful when responding to taxpayer inquiries or when making subsequent adjustments.

  2. Computer assessed (TC 186) FTD penalties generate the applicable PCC’s.

    • The computer generated PCC is displayed with the TC 186 on IDRS/TXMOD and is listed with the literal FTD-PNL-CD>.

    • Master File Transcripts (MFTRA), BMFOLT, and balance due notices also display the computer generated PCC.

  3. Manually assessed (TC 180) FTD penalties require manual input of the applicable PCC. The PCC should be entered on the FTD penalty assessment or adjustment document.

    • The manual PCC is displayed with the literal ADJ-RSN-CD> on IDRS/TXMOD and is listed with the TC 290 transaction code carrying the same DLN as the TC 180 assessment.

    • Master File Transcripts (MFTRA), BMFOLA, and balance due notices also display the manual PCC.

  4. Definitions for the various PCCs are as follows:

    1. PCC 003 applies when assessing the FTD penalty with specific liability and payment information (e.g., computing with a complete ROFT), and NO avoidance credits (TC 640/670 or marked TC 610) are present.

    2. PCC 011 applies when assessing the FTD penalty on averaged tax liability information.

    3. PCC 018 applies when charging the FTD penalty on a CAWR or FUTA assessment.

    4. PCC 041 applies when assessing the FTD penalty for avoiding the deposit system and the following conditions exist: ONLY avoidance credits (non-EFTPS TCs 610/640/670) are posted, and the taxpayer provided good liability information.

    5. PCC 042 applies when assessing the FTD penalty for avoiding the deposit system and the following conditions exist: A COMBINATION of one or more, unreversed non-avoidance credits (TC 650/700/710/716/760), are posted with either one or more, unreversed avoidance credits (non EFTPS TC 640/670 or a 'marked' TC 610) and the taxpayer provided good liability information.

    6. PCC 043 applies when assessing the FTD penalty for avoiding the deposit system and the following conditions exist: FTD’s were made and the tax liability is averaged.

    7. PCC 044 applies when assessing the FTD penalty for avoiding the deposit system and the following conditions exist: The taxpayer made both deposits (TC 650) and unauthorized payments (TC 670/610), and the tax liability is averaged.

    8. PCC 054 applies when assessing the FTD penalty on averaged tax liability information and the following conditions exist: A semi-weekly depositor provided a monthly ROFT and the taxpayer made insufficient or late deposits (TC 650).

    9. PCC 055 applies when assessing the FTD penalty on averaged tax liability information and the following conditions exist: A semi-weekly depositor provided a monthly ROFT and the taxpayer made unauthorized payments (TC 670/610).

    10. PCC 056 applies when assessing the FTD penalty on averaged tax liability information and the following conditions exist: A semi-weekly depositor provided a monthly ROFT and the taxpayer made insufficient or late deposits (TC 650) and unauthorized payments (TC 670/610).

    11. PCC 057 applies when assessing the FTD penalty on averaged tax liability information and the following conditions exist: An averaged monthly tax liability of $100,000 or more, and the taxpayer made insufficient or late deposits for tax periods beginning on or after January 1, 1993 ( Forms 941, 943, and CT–1).

  5. PCC’s 054, 055, 056, and 057 are available for use to address penalty assessments based on averaged computations related to 1993 and later deposit rules and $100,000 or more liabilities. Although PCC 054, 055, 056, and 057 appear on Master File records, they default to PCC 011 on notices.

  6. See Exhibit 20.1.4-10.

20.1.4.11.2.3  (05-22-2009)
15 Percent Rate Penalty Indicator Codes (PIC)

  1. Penalty indicator codes (PIC) systemically identify the status of the penalty assessment related to the 15 percent penalty rate. Under the four-tier penalty system, the 15 percent penalty rate is applied to the balance due (tax only) that remains unpaid after notice and demand for the FTD penalty (e.g., 23–C date plus 10 days). The fourth tier is not systemically marked or assessed, if the FTD penalty (systemic TC 186) was not previously assessed.

  2. See LEM 20.1.4.11.7.1.

  3. A PIC of 000 or 001 will be listed with the initial TC 186 and will appear just below the penalty computation code.

    1. PIC 000 - applies when the 15 percent penalty rate is not applicable,

    2. PIC 001 - applies when the account is marked as a potential 15 percent penalty assessment. The systemic analysis on whether to assess the additional 5 percent penalty (total penalty is limited to 15 percent, of which 10 percent has already been assessed), is held 5 cycles to allow enough time for processing of the taxpayers subsequent payment. After the 5 cycle hold expires, the account is analyzed and an additional 5 percent penalty is assessed if a payment (dated within 10 days of the prior notification of tax due) hasn't posted to full pay the balance of tax.

      Caution:

      If a PIC 001 is present, check to be sure that the systemic potential 15 percent fourth tier penalty amount is not pending.

  4. A PIC of 002 will be listed when the 15 percent rate is assessed (shown as a separate TC 186) and will appear just below the penalty computation code.

    1. PIC 002 - applies when the systemic 15 percent rate is assessed.

    Note:

    See IRM 20.1.4.11.7 for information regarding the possible systemic restriction of the potential 4th tier penalty rate when a PIC of 001 is listed.

20.1.4.11.2.4  (05-22-2009)
Computer Condition Codes (CCC)

  1. Computer condition codes are assigned by tax examiners or are computer generated during the processing of the return. They identify a special condition or computation for the computer. Computer condition codes post to the Master File.

  2. Returns processed with Computer Condition Code (CCC) " J" are excluded from FTD penalty processing. The CCC " J" is used in limited situations and only when authorized by the Office of Servicewide Penalties.

20.1.4.11.2.5  (05-22-2009)
Schedule Indicator Codes (SIC)

  1. Schedule indicator codes (SIC) identify conditions that may affect FTD penalty computations.

  2. Because no more than one SIC can be entered on any one return, a return with a SIC other than "1" or " 0" could have more than one applicable condition.

  3. The presence of some SIC’s prevent the computer from determining a penalty amount. Instead, Master File generates a CP 194, Possible FTD Penalty Notice. The Campus manually reviews all CP 194 accounts.

  4. The literal "SIC" displays numeric "0" through "7" in the return record and on all transcripts for returns. The number indicates which condition applies.

  5. See Exhibit 20.1.4-11 for SIC code definitions.

20.1.4.11.2.5.1  (05-22-2009)
Schedule Indicator Code (SIC) "0"

  1. SIC "0" — Master File may generate a CP 194 notice on an account with a SIC "0 " . This means conditions exist, other than those identified by SIC’s "1" through" 7" , that require manual review of the account.

  2. The reason Master File generates a CP 194 with a SIC "0 " may not be clearly evident, since SIC "0" means the return has a valid ROFT for computing the penalty.

    1. If the tax return shows valid ROFT information, use the ROFT figures to compute and assess the penalty.

    2. If the tax return shows invalid ROFT information, compute the averaged liability and propose the penalty.

    3. If the return is not available: use the ROFT figures from the account transcripts, TXMOD, BMFOLR, or BRTVU, when valid.

    4. If the figures are not valid or if the ROFT information is not available, then average the liability.

    5. Send Letter 313C and the appropriate form or schedule to the taxpayer.

20.1.4.11.2.5.2  (05-22-2009)
Schedule Indicator Code (SIC) "1"

  1. SIC "1" — The original tax return is not required because SIC "1" indicates that the return does not have a complete and accurate ROFT.

  2. When a SIC "1" is input to a return, the ROFT is not transcribed because it has been deemed as invalid. Master File computes a proposed penalty by averaging the tax and generates a CP 207/207L notice (Proposed Averaged Penalty) to the taxpayer, as a means to secure a valid ROFT.

  3. The systemic proposed averaged penalty is held by Master File for 15 cycles to allow ample time for

    • the taxpayer to return the requested ROFT information,

    • recalculate the FTD penalty using the corrected ROFT,

    • manually input the related penalty adjustment (based on the valid ROFT), thereby

    • overriding the systemic penalty assessment calculated using the averaged ROFT.

20.1.4.11.2.5.3  (05-22-2009)
Schedule Indicator Codes (SIC) "2" & "3"

  1. SIC "2" — If Master File generated the CP 194 because a reasonable cause statement is attached to the return, follow procedures for processing reasonable cause requests.

    1. See IRM 20.1.4.16.1, Reasonable Cause.

    2. If the taxpayer does not meet reasonable cause criteria, then assess the penalty.

    3. If the return is not available, then use ROFT figures from the account transcript.

    4. If those figures are not valid or if the ROFT information is not available, then average the liability.

  2. SIC "3" — "Church FICA Issue" or "Church Social Security Issue" notated on return.

    1. See IRM 3.11.13.14.5.

20.1.4.11.2.5.4  (05-22-2009)
Schedule Indicator Codes (SIC) "6" & "7"

  1. SIC "6" — Good ROFT provided, penalty is calculated on a liability amount of $100,000 or more.

  2. SIC "7" — The original tax return is not required because SIC "7" indicates that the return does not have a complete and accurate ROFT and the liability amount(s) when averaged are $100,000 or more.

    SIC "7" indicates that the ROFT was missing or not transcribed because it was invalid. Master File computes a proposed penalty by averaging the tax and generates a CP 207/207L notice (Proposed Averaged Penalty) to the taxpayer, as a means to secure a valid ROFT.

    The systemic proposed averaged penalty is held by Master File for 15 cycles to allow ample time for

    • the taxpayer to return the requested ROFT information,

    • recalculate the FTD penalty using the corrected ROFT,

    • manually input the related penalty adjustment (based on the valid ROFT), thereby

    • overriding the systemic penalty assessment calculated using the averaged ROFT.

20.1.4.11.2.6  (05-22-2009)
Employment Codes "A" & "F "

  1. Employment Code "A"

    1. Beginning 01/01/2009 the FTD penalty computation is systemically bypassed when the employment code "A" is present on the entity module.

    2. An employment code "A" is assigned to State and local government Health and Welfare agencies, acting as agents under IRC section 3504 with respect to employers for in-home domestic services for recipients of public assistance.

    3. These agencies assume responsibility for reporting and paying FICA and FUTA and any withheld income tax with respect to individuals furnished by the agency, or hired directly by the recipients of public assistance, to provide domestic services (Chore Workers) for recipients on public assistance.

    4. These agencies are not required to supply a Record of Federal Tax Liability.(ROFT) and need only to make payment(s) by the due date of the return.

    Caution:

    Do not assess any failure to deposit penalty on these entities. In addition, abate the penalty, on modules (for all years) with an unreversed failure to deposit penalty, when working on other issues on these modules.

  2. Employment Code "F"

    1. An employment code "F" is assigned on the entity module to identify Federal Agencies.

    2. When the employment code "F" is present on the entity module the FTD penalty computation is systemically bypassed. See IRM 1.2.20.1.2 for Policy Statement 2–4 as it relates to Federal Agencies.

20.1.4.11.3  (05-22-2009)
Computer Paragraph (CP) 194 Notices (Possible FTD Penalty)

  1. Master File generates a Possible FTD Penalty Notice, Computer Paragraph (CP) 194, for the following:

    1. Returns with Schedule Indicator Codes (SIC) input during the code and edit phase of return processing.

    2. Certain 941, 943, 944, 945, 940, 720 and 1042 filers.

    3. Form CT–1.

    4. Form 941M, if the filing requirement is 10.

    5. Forms 941PR, 941SS, 943PR, and 940PR for the Philadelphia Campus only, when they meet the conditions in (a) and (b) above.

  2. Issuance of the CP 194 means the Campus must review the account and manually calculate the penalty. Whenever possible, telephone contact with the taxpayer should be used to resolve the CP 194 issue.

  3. The Campus must process CP 194 notices within 75 calendar days of the IRS Received Date. This includes issuing Letter 313C to the taxpayer.

  4. Master File generates 2 copies of the CP 194 notice. The Campus Files area receives the notices and secures the original related return. One copy of the notice is attached to the tax return and the other is used as the return charge out. If the Files area does not send the original return, proceed as follows:

    1. Form 720, Check Command Code(CC) BRTVU — The original Schedule A, Excise Tax Liability section of the Form 720 return is transcribed, when valid, and can be viewed using CC BRTVU.

    2. If Files attaches an incorrect tax return, send the return (with the CP 194) back to Files and request the correct return.

    3. If Files did not attach a return, review the charge out information or on IDRS to determine if the tax return is in another function. If so, contact that area to secure a copy of the return.

    4. If neither the original return (ROFT) nor a copy is available, follow instructions for averaging the tax liability. (Refer to computation procedures for the applicable return).

  5. If the case has other freeze conditions, coordinate with the appropriate area for resolution.

20.1.4.11.3.1  (05-22-2009)
Working Computer Paragraph (CP) 194 Notices

  1. On Computer Paragraph (CP) 194 notice accounts that show a balance due, conduct the following IDRS research. This helps ensure that credit posting problems are identified and corrected before computing the penalty.

    1. Review the account transcript (TXMOD) to see if any timely deposits posted after the generation of CP 194 notice.

    2. Review TXMOD for other tax periods to see if there is a misapplied deposit intended for the period in question.

    3. Review CFOL, IDRS, etc. for the FTD Credit Module (01 0000), to see if it has a deposit intended for the current period.

    4. Review UPTIN for the EIN to see if any deposits are unpostable.

    5. Review URINQ/XSINQ for the name control to see if any credits are in the Unidentified or Excess Collections accounts.

    6. Review FINDE/NAMEE for any other TINs assigned to this employer.

  2. On CP 194 notice accounts with a credit balance, conduct the following IDRS research.

    1. Check for any pending assessments. If a TC 976 is present, a duplicate return (or amended return) has posted. Hold the CP 194 notice until the CP 193 notice generates. (Master File generates a CP 193 when a duplicate or amended return posts to an account.) Follow local procedures for associating multiple cases.

    2. Check for other control bases. If one is present, coordinate with the other area.

    3. Check for debit balances on other account periods to see if the credit posted in error. If so, transfer the payment(s).

  3. No penalty due, tax $2,500 or more on CP 194

    1. Use blocking series 000–099 to indicate a refile DLN (original return or mag tape facsimile is available), or

    2. Use blocking series 150–159 to indicate a non-refile DLN.

    3. Input TC 180 $.00 as a source doc (SD).

    4. Attach CP 194 and page 1 of FTDPN.


    Exception:

    See LEM 20.1.4.11.3.1 for the use of PRC 021 when LEM criteria it met.

20.1.4.11.3.2  (05-22-2009)
Computing the FTD Penalty Computer Paragraph (CP) 194

  1. Each return type has its own format for capturing the information needed to determine if the tax reported on the return has been captured correctly and deposited/paid timely. Refer to the "Computing the FTD Penalty" section under the appropriate tax form for which the Computer Paragraph (CP) 194 generated.

20.1.4.11.3.3  (05-22-2009)
Proposing the Averaged FTD Penalty Computer Paragraph (CP) 194

  1. Propose an averaged FTD penalty when the ROFT or Record of Net Tax (RONT) information is missing or invalid.

  2. To propose the averaged FTD penalty, correspond with the taxpayer using Letter 313C. See Exhibit 20.1.4-12 for the appropriate enclosure form.

  3. EXCEPTION: Assess the 10 percent avoidance penalty on the total tax amount if the penalty is entirely due to:

    1. Avoidance payments (TC 610, TC 670).

    2. Non EFT deposits when required to use EFTPS and/or

    3. Unpaid tax.

  4. The corrected ROFT information, in this case, would not decrease the amount of the penalty.

    1. Send Letter 2782C or CP 568.

    2. Close the case.

20.1.4.11.4  (05-22-2009)
Issuing Averaged FTD Penalty Proposals—Letter 313C

  1. When proposing an averaged penalty, send Letter 313C.

    1. Enclose the appropriate form ( See Exhibit 20.1.4-12) with the two copies mailed to the taxpayer. Include the appropriate Supplemental Record of Federal Tax Liability.

20.1.4.11.4.1  (05-22-2009)
Replies to 313C Letters

  1. Associate the taxpayer’s reply with the suspense copy. If not located, the averaged FTD penalty may have already been assessed and the case previously closed as a"No Reply" .

    Note:

    If the reply is received late (after the averaged FTD penalty assessment), the new ROFT information should be considered and the FTD penalty adjusted per item number (2) below.

  2. If taxpayer provides a completed Record of Federal Tax (ROFT) liability schedule.

    1. Recompute the penalty.

    2. Assess or adjust the penalty, if required.

    3. Send CP 568 or appropriate correspondex letter to inform the taxpayer of the correct penalty amount, the reason for the adjustment and the correct balance due.

  3. Taxpayer provides an unacceptable ROFT or other correspondence.

  4. If the reply is received late (after the averaged FTD penalty assessment), follow the steps in (a) and (b) below.

    1. Contact the taxpayer to explain why the information provided by the taxpayer is unacceptable.

    2. Include the appropriate Schedule of Tax Liability. Highlight pertinent areas if it would help the taxpayer.

    3. Advise the taxpayer that if we do not receive acceptable information within 20 days, the proposed penalty amount will be assessed.

    4. Suspend the case for 30 days.


Prev Next

More Internal Revenue Manual