20.1.11  Excise Tax and Estate and Gift Tax Penalties

20.1.11.1  (05-18-2010)
Overview

  1. This section of the consolidated penalty IRM discusses excise tax and estate and gift tax penalties.

20.1.11.1.1  (05-18-2010)
Common Features

  1. Penalties. In general, each penalty discussed in this chapter is unique and will stand alone unless otherwise indicated. Exceptions and additional information are noted in the discussions of the specific penalties; however, some general procedures will apply.

  2. Statute of Limitations. In general, the additions to tax, additional amounts, and assessable penalties in IRC sections 6651-6725 are assessed, collected, and paid in the same manner as taxes. To the extent such an item pertains to a tax return, the assessment is subject to the period of limitation in IRC 6501 (generally, three years from the due date (unextended) or the filing of the return, whichever is later).

  3. Reasonable Cause. Many penalties have a reasonable cause exception. Determination as to whether or not reasonable cause exists must be based on careful consideration of the facts and circumstances of each case prior to the assertion of a penalty. Examiners should consider any reason a taxpayer provides in conjunction with the guidelines, principles, and evaluating factors identified in the IRM 20.1.1 Penalty Handbook, Introduction and Penalty Relief. See IRM 20.1.1.3.2, Reasonable Cause, as well as the applicable Code sections and Treasury Regulations relating to the specific penalty.

    Note:

    Relief from a penalty assessment may also be provided through Statutory Exceptions, Administrative Waivers, and Correction of Service Error. See IRM 20.1.1.3, Criteria for Relief from Penalties.

  4. Abatements. Information on penalty abatements, penalty reason codes, and penalty reference numbers is provided in IRM 20.1.1.3 , Criteria for Relief from Penalties .

  5. Penalty Reason Codes (PRC). A list of penalty reason codes is provided in Exhibit 20.1.1–3 Penalty Reason Code Chart.

  6. Penalty Transaction Codes (TC). A list of penalty transaction codes is provided in Exhibit 20.1.1–4 Penalty Transaction Codes.

  7. Penalty Reference Numbers (PRN). A list of penalty reference numbers are provided in Exhibit 20.1.1–5 Penalty Reference Numbers (500 Series) and 20.1.1–6 Penalty Reference Numbers (600 Series).

20.1.11.1.2  (05-18-2010)
Who Asserts/Assesses

  1. Campus sites and/or Field Compliance (Field) functions determine when a penalty should be imposed.

    1. Campus sites consider penalties based on taxpayer correspondence, taxpayer contact, and systemically generated notices. Computer programming may systemically generate penalties from calculations based on taxpayer filed returns.

    2. Field functions consider penalties during their examinations.

20.1.11.1.3  (05-18-2010)
Assertion/Assessment

  1. Penalty reference numbers (PRN) are generally used to assess non-tax return related penalties (conduct or information returns).

    1. Generally, the "500" series penalty reference numbers are assigned to penalties for computer-matching programs and are used to identify a failure to comply. They are usually asserted by the Campus.

    2. Generally, the "600" series penalty reference numbers are assigned to penalties as the result of an examination or other compliance activity. They are usually assessed by Field examination.

    3. See Exhibit 20.1.1–5 and 20.1.1–6, or Document 6209IRS Processing Codes and Information , or Form 8278Assessment and Abatement of Miscellaneous Civil Penalties for a complete list of the current penalty reference numbers.

20.1.11.2  (05-18-2010)
IRC Section 6653 Failure to Pay Stamp Tax

  1. IRC 6653 provides for a penalty for a willful failure to pay any tax imposed that is payable by stamp, coupons, tickets, books, or other devices or methods prescribed by regulations, or a willful attempt to evade or defeat the stamp tax.

  2. IRC 6653 formerly was for additions to tax for negligence and fraud.

  3. The penalty is administered by the Alcohol and Tobacco Tax and Trade Bureau (TTB).

20.1.11.2.1  (05-18-2010)
Penalty Computation

  1. The penalty is 50% of the total amount of the underpayment of the tax for each failure to pay any tax that is payable by stamp, coupons, tickets, books, or other devices or methods.

20.1.11.2.2  (05-18-2010)
Assertion/Assessment

  1. The penalty is assessed using PRN 574.

20.1.11.2.3  (05-18-2010)
Penalty Relief

  1. If taxpayers want to contest the penalty assessment, they must fully pay the entire penalty and then file a claim for refund with the IRS.

20.1.11.3  (05-18-2010)
IRC Section 6672 Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax

  1. For excise tax purposes, the IRC 6672 (Trust Fund Recovery Penalty) applies only to the communications tax imposed by IRC 4251 Imposition of tax and the air transportation taxes imposed by IRC 4261Imposition of tax and IRC 4271 Imposition of tax.

  2. For purposes of this penalty, the term "communications services" means:

    1. Local telephone service,

    2. Toll telephone service, and

    3. Teletypewriter exchange service.

  3. See IRM 4.24.9, Excise Tax Penalty Procedures.

20.1.11.4  (05-18-2010)
IRC Section 6675 Excessive Claims with Respect to the Use of Certain Fuels

  1. In addition to any criminal penalty provided by law, IRC 6675 imposes a penalty if a claim is made for an excessive amount under the following Code sections:

    1. IRC 6416(a)(4), Registered ultimate vendors or credit card issuers to administer credits and refunds of gasoline tax;

    2. IRC 6420Gasoline used on farms;

    3. IRC 6421Gasoline used for certain non-highway purposes, used by local transit systems, or sold for certain exempt purposes; and

    4. IRC 6427Fuels not used for taxable purposes.

  2. For more information about excise tax fuels and excise claims, see IRM 4.24.8, Claims for Refund and Abatement , IRM 4.24.9Excise Tax Penalty Procedures, and IRM 21.7.8, Excise Tax.

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20.1.11.4.1  (05-18-2010)
Penalty Computation

  1. The penalty for excessive claims for the use of certain fuels is an amount equal to the greater of:

    1. Two times the excessive amount, or

    2. $10.

20.1.11.4.2  (05-18-2010)
Assertion/Assessment

  1. The penalty is:

    1. Input on IDRS using information provided on Form 8278, and

    2. Assessed with PRN 661.

  2. The amount of an excessive claim, as well as the penalty imposed by IRC 6675 is assessable under IRC 6206Special rules applicable to excessive claims under certain sections.

  3. If the taxpayer filed a quarterly claim, the penalty may apply to any excessive payment on the quarterly claim.

  4. The penalty does not apply to an excessive credit taken for taxes on Form 4136, Credit for Federal Tax Paid on Fuels, on an income tax return.

20.1.11.4.3  (05-18-2010)
Penalty Relief

  1. Penalty relief may be granted when the taxpayer proves the failure is due to reasonable cause.

20.1.11.5  (05-18-2010)
IRC Section 6715 Dyed Fuel Sold for Use or Used in Taxable Use, etc.

  1. An excise tax is imposed on certain removals, entries, and sales of diesel fuel and kerosene. However, tax is not imposed (other than at the Leaking Underground Storage Tank Trust Fund financing rate) on diesel fuel or kerosene that, among other requirements, is indelibly dyed according to Treasury Regulations.

  2. Generally, a penalty is imposed by IRC 6715 if any dyed fuel is used, held for use, sold, or sold for use, for other than a nontaxable use.

  3. For the purposes of this penalty, the term "nontaxable use" means:

    1. Any use that is exempt from the tax imposed by IRC 4041(a)(1) Imposition of tax - Diesel fuel and special motor fuels - Tax on diesel fuel and kerosene in certain cases (such as off-highway business use);

    2. Any use in a train; and

    3. Any use described in IRC 4041(a)(1)(C)(iii)(II) Imposition of tax - Diesel fuel and special motor fuels - Tax on diesel fuel and kerosene in certain cases Rate of tax on certain buses (relating to use in certain school buses and qualified local buses).

  4. However, the term "nontaxable use" does not include any use of kerosene in an aircraft and any use described in IRC 6421(e)(2)(C) Gasoline used for certain non-highway purposes, used by local transit systems, or sold for certain exempt purposes , (relating to certain mobile machinery equipment).

  5. The term "dyed fuel" means any dyed diesel fuel or kerosene, whether or not the fuel was dyed per IRC 4082.

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    1. After December 31, 2004, see IRC 6717. See IRM 20.1.11.7.2, IRC Section 6717, Penalty for Refusal of Entry.

  6. IRC 6715 imposes an assessable penalty on the four types of misuse of dyed fuel described in the subsections below.

20.1.11.5.1  (05-18-2010)
Misuse

  1. The penalty is assessed for misuse.

20.1.11.5.1.1  (05-18-2010)
Improper Sale of Dyed Fuel

  1. If any dyed fuel is sold or held for sale by any person for any use that such person knows or has reason to know is not a nontaxable use of that fuel, then that person shall pay a penalty.

    Note:

    "Nontaxable use" is defined in IRC 4082(b), Nontaxable use and in (4) above.

20.1.11.5.1.2  (05-18-2010)
Improper Use of Dyed Fuel

  1. If any dyed fuel is held for use or used by any person for a use other than a nontaxable use and that person knew, or had reason to know, the fuel was dyed, then that person shall pay a penalty.

20.1.11.5.1.3  (05-18-2010)
Willful Alteration of Dye Concentration

  1. If any person willfully alters, chemically or otherwise, or attempts to alter, the strength or composition of any dye or marking done per IRC 4082 in any dyed fuel, then such person shall pay a penalty.

    Note:

    Effective for penalties assessed after 10/22/2004, the American Jobs Creation Act amended the penalty to alterations or attempted alterations through chemical or other means.

  2. This penalty does not apply in the following cases:

    1. Diesel fuel that is dyed per the regulations under IRC 4082 and is blended with any undyed liquid, if the final product meets the dyeing requirements of the regulations under IRC 4082.

    2. Diesel fuel that is dyed per the regulations under IRC 4082 and is blended with any other liquid (diesel fuel or kerosene) that contains the type and amount of dye required for diesel fuel dyed according to the regulations under IRC 4082.

    3. Diesel fuel that is not dyed per the regulations under IRC 4082 and is blended with diesel fuel that is dyed per IRC 4082 and the blending occurs as part of a nontaxable use.

    4. The alteration or attempted alteration occurs in an exempt area of Alaska.

20.1.11.5.1.4  (05-18-2010)
Knowledge of Alterations or Attempted Alterations

  1. If any person who has knowledge that a dyed fuel has been altered as described in 20.1.11.5.1.3, sells or holds for sale that fuel for any use that the person knows, or has reason to know, is not a nontaxable use of that fuel, then that person shall pay a penalty.

20.1.11.5.2  (05-18-2010)
Penalty Computation

  1. For the first violation, the amount of the penalty on each act is the greater of:

    1. $1,000, or

    2. $10 for each gallon of the dyed fuel involved.

  2. For additional violations, the amount of the penalty in (1)(a) is multiplied by $1,000 times the number of prior penalties (including the current violation) assessed per IRC 6715 on that person (or any related person or predecessor of that person or related person).

    Example:

    If a person’s first violation involved 50 gallons of dyed fuel, the penalty would be $1,000 because that amount is greater than 50 X $10. If that person’s second violation involved 50 gallons of dyed fuel, the penalty would be $2,000 because that amount ($1,000 X 2 violations) is greater than $1,000 (50 X $10 X 2 violations).

20.1.11.5.3  (05-18-2010)
Assertion/Assessment

  1. The penalty is:

    1. Input on IDRS using the information provided on Form 8278, and

    2. Assessed using PRN 656.

  2. Penalty notices issued after July 1, 2005, include American Jobs Creation Act section 855 and 856 provisions in the notice language.

20.1.11.5.4  (05-18-2010)
Penalty Relief

  1. There is no reasonable cause exception to this penalty.

  2. In Revenue Procedure 2001–33, Internal Revenue Bulletin 2001–23, 1322, the IRS provided guidance on how taxpayers should request an administrative appeal of this penalty. Basically, the IRS notifies the taxpayer in writing that the IRS intends to impose the IRC 6715 penalty. Within 30 days from the date of the notification, a taxpayer can contest the penalty by completing Form 12009, Request for an Informal Conference and Appeals Review. If, after the conference, the IRS still proposes to assert the penalty and the taxpayer still disagrees with the decision, the taxpayer can request an Appeals review of the case.

  3. Effective for penalties assessed after 10/22/2004, the American Jobs Creation Act applies certain remedies for repeat offenders of the dyed fuel rules. Specifically, any person subject to the IRC 6715 penalty at least twice after 10/22/2004 will be denied the right to an administrative appeal, unless the claim asserts IRC 6715(e) No administrative appeal for third and subsequent violations:

    1. Fraud, or

    2. Mistakes in the chemical analysis, or

    3. Mistakes in the mathematical calculation in the amount of the penalty.

20.1.11.5.5  (05-18-2010)
Joint and Several Liability

  1. If the penalty is assessed on any business, each officer, employee, or agent of the business, who willfully participated in any part of the penalty, is jointly and severally liable with the business for the penalty, per IRC 6715(d) Joint and several liability of certain officers and employees.

  2. For more information about excise tax fuels, see IRM 4.24.9, Excise Tax Penalty Procedures.

20.1.11.6  (05-18-2010)
IRC Section 6715A Tampering With or Failing to Maintain Security Requirements for Mechanical Dye Injection Systems

  1. IRC 6715A imposes a penalty for tampering with or failing to maintain security requirements for mechanical injection systems.

    Note:

    IRS regulations pre-IRC 6715A did not require that mechanical injection be used, although fuel is usually dyed mechanically at a terminal rack. Manual dyeing is inherently difficult to monitor and does not automatically create a reliable record.

  2. The penalty for failure to maintain security requirements for mechanical injection systems is not yet in effect because the required security standards for such systems has not been established. See section 6 of Notice 2005–80.

20.1.11.6.1  (05-18-2010)
Penalty Computation

  1. The penalty for tampering with mechanical dye injection systems is the GREATER of:

    1. $25,000 per act, or

    2. $10 per gallon of fuel involved.

  2. The penalty for failure to maintain security standards is:

    1. $1,000, and

    2. $1,000 per day for each day after the day such violation was discovered or the person should have reasonably known of such violation.

20.1.11.6.2  (05-18-2010)
Assertion/Assessment

  1. The penalty is:

    1. Input on IDRS using the information provided on Form 8278, and

    2. Assessed using PRN 665.

20.1.11.6.3  (05-18-2010)
Penalty Relief

  1. There is no reasonable cause exception for tampering with or failing to maintain security requirements for mechanical dye injection systems.

20.1.11.6.4  (05-18-2010)
Joint and Several Liability

  1. If the penalty is assessed on any business, each officer, employee, or agent of the business, who willfully participated in any part of the penalty is jointly and severally liable with the business, per IRC 6715A(c)(1) Joint and several liability-In general.

  2. If a business described in paragraph (1) above is part of an affiliated group (as defined in IRC 1504(a)), the parent corporation of the business will be jointly and severally liable with the business for the penalty under IRC 6715A(c)(2).

20.1.11.7  (05-18-2010)
Fuel Tax Enforcement

  1. To aid in the enforcement of the fuel tax, the Internal Revenue Code provides penalties for refusing to allow entry to the premises, failing to register (e.g., by terminal operators and vessel operators), failing to display a registration on vessels, and failing to file reports with the IRS.

  2. For more information about excise tax fuels, see IRM 4.24.9, Excise Tax Penalty Procedures.

20.1.11.7.1  (05-18-2010)
IRC Section 7342 Penalty for Refusal to Permit Entry or Examination

  1. IRC 7342 penalizes any owner of a building or place, or any person managing or controlling the building, who refuses entry to the IRS under IRC 7606. IRC 7606Entry of premises for examination of taxable objects provides that the IRS may enter, for the purpose of examining the articles, any building or place where anything subject to tax is made, produced, or kept.

20.1.11.7.1.1  (05-18-2010)
Computation for IRC 7342

  1. The penalty is $500 for each refusal to permit entry or permit examination.

20.1.11.7.1.2  (05-18-2010)
Refusing Entry Authorized by IRC Section 4083(d)(1)

  1. The IRC 7342 penalty is increased when the IRS is refused entry for purposes of:

    1. Examining the equipment used to determine the amount or composition of fuel, and the equipment used to store the fuel,

    2. Taking and removing samples of such fuel, or

    3. Inspecting books and records as authorized by IRC 4083(d)(1) Definitions; special rule; administrative authority- Administrative authority.

      Note:

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

20.1.11.7.1.3  (05-18-2010)
Computation for Penalty with IRC Section 4083(d)(1)

  1. For refusing entry (or not permitting an action) authorized by IRC 4083(d)(1), the IRC 7342 penalty is applied by substituting $1,000 for the $500 for each refusal.

  2. Effective after 12/31/2004 by the American Jobs Creation Act, IRC 4083(c)(1) was renumbered to IRC 4083(d)(1) for removals, entries or sales.

  3. For an additional penalty for the refusal to admit entry or other refusal to permit an action, see IRC 6717. See IRM 20.1.11.7.2.

20.1.11.7.2  (05-18-2010)
IRC Section 6717 Penalty for Refusal of Entry

  1. IRC 6717, enacted by the American Jobs Creation Act, adds an assessable penalty for refusing entry (or not permitting an action) per IRC 4083(d)(1). See IRM 20.1.11.7.1.4 regarding IRC 4083(d)(1).

  2. This penalty is effective for penalties assessed after December 31, 2004.

20.1.11.7.2.1  (05-18-2010)
Penalty Computation

  1. The penalty is $1,000 for each refusal (or for not permitting an action) authorized by IRC 4083(d)(1).

20.1.11.7.2.2  (05-18-2010)
Assertion/Assessment

  1. This penalty is:

    1. Input on IDRS using the information provided in Form 8278, and

    2. Assessed using PRN 655.

  2. Penalty notices issued after July 1, 2005, include American Jobs Creation Act section 859 provisions.

20.1.11.7.2.3  (05-18-2010)
Penalty Relief

  1. Penalty relief may be granted when the taxpayer proves the failure is due to reasonable cause.

20.1.11.7.2.4  (05-18-2010)
Joint and Several Liability

  1. If the penalty is imposed on any business, each officer, employee, or agent of the business, who willfully participated in any part of the penalty, is jointly and severally liable with the business for the penalty, per IRC 6717(b)(1).

  2. If the business described in paragraph (1) above, is part of an affiliated group (as defined in IRC 1504(a)), the parent corporation of the business shall be jointly and severally liable with the business for the penalty under this section, IRC 6717(b)(2).

20.1.11.7.3  (05-18-2010)
IRC Section 7272 Penalty for Failure to Register

  1. IRC 7272 (civil) provides for a penalty for failing to register or reregister under IRC 4101Registration and bond.

20.1.11.7.3.1  (05-18-2010)
Penalty Computation

  1. After December 31, 2004, the penalty for failing to register or reregister increased to $10,000 per section 862 of the American Jobs Creation Act.

  2. Prior to January 1, 2005, the penalty for failing to register was $50.

20.1.11.7.3.2  (05-18-2010)
Assertion/Assessment

  1. The penalty is:

    1. Input on IDRS using the information provided on Form 8278, and

    2. Assessed with PRN 594.

20.1.11.7.3.3  (05-18-2010)
Penalty Relief

  1. Reserved.

20.1.11.7.4  (05-18-2010)
IRC Section 6718 Failure to Display Tax Registration on Vessels

  1. Beginning on January 1, 2005, the American Jobs Creation Act provided for a penalty for any operator of a vessel who is required to register under IRC 4101 and who does not display proof of registration using an identification device as defined by the IRS on vessels transporting taxable fuel per IRC 4101(a)(3).

20.1.11.7.4.1  (05-18-2010)
Penalty Computation

  1. The penalty for failure to display tax registration on vessels is $500 per vessel for the first month the proof is not displayed. Only one penalty can be assessed per month.

  2. In the case of multiple monthly violations, the penalty is $500, plus the total from multiplying $500 times the number of monthly penalties previously imposed.

20.1.11.7.4.2  (05-18-2010)
Assertion/Assessment

  1. This penalty is:

    1. Input on IDRS using the information provided on Form 8278, and

    2. Assessed using PRN 657.

  2. Notice 2005–4, 2005–2 Internal Revenue Bulletin 289, provides at section 6 that no penalty will be imposed until after the IRS provides guidance on the identification device and the manner of its display.

20.1.11.7.4.3  (05-18-2010)
Penalty Relief

  1. Penalty relief is permitted when the failure is due to reasonable cause.

20.1.11.7.5  (05-18-2010)
IRC Section 6719 Penalty for Failure to Register or Reregister

  1. IRC 6719 provides that every person who is required to register or reregister under IRC 4101, Registration and bond and fails to do so shall pay an assessable penalty.

20.1.11.7.5.1  (05-18-2010)
Penalty Computation

  1. The penalty is:

    1. $10,000 for each failure to register or reregister, and

    2. $1,000 for each day the failure continues.

20.1.11.7.5.2  (05-18-2010)
Assertion/Assessment

  1. This penalty is:

    1. Input on IDRS using the information provided on Form 8278,

    2. Assessed using PRN 670, and

    3. Not subject to deficiency procedures.

20.1.11.7.5.3  (05-18-2010)
Penalty Relief

  1. Penalty relief may be granted when the failure to register or reregister is due to reasonable cause.

20.1.11.7.6  (05-18-2010)
IRC Section 6720A Penalty with Respect to Certain Adulterated Fuels

  1. IRC 6720A(a) provides for a penalty for any person who knowingly transfers for sale or resale, sells for resale, or holds out for sale or resale any liquid for use in a diesel-powered highway vehicle or a diesel-powered train which does not meet applicable Environmental Protection Agency (EPA) regulations (as defined in IRC 45H(c)(3) Credit for production of low sulfur diesel fuel - Definitions and special rule - Applicable EPA regulations).

  2. IRC 6720A(b) provides for a penalty for retailers who knowingly hold out for sale any liquid for use in a diesel-powered highway vehicle or a diesel-powered train, which does not meet EPA regulations (as defined in IRC 45H(c)(3)).

  3. For purposes of this penalty, the term "applicable EPA regulations" means the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency.

  4. This section became effective on August 10, 2005.

20.1.11.7.6.1  (05-18-2010)
Penalty Computation

  1. The penalty is $10,000 for each transfer, sale, or holding out for sale.

  2. The penalty for retailers who knowingly hold out for sale any liquid is $10,000.

20.1.11.7.6.2  (05-18-2010)
Assessment/Assertion

  1. The penalty is:

    1. Input on IDRS using information provided on Form 8278, and

    2. Assessed using PRN 673.

20.1.11.7.6.3  (05-18-2010)
Penalty Relief

  1. Penalty relief may be granted if the taxpayer proves the failure was due to reasonable cause.


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