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Part 3. Submission Processing

Chapter 14. Notice Review

Section 1. IMF Notice Review (Cont. 4)

3.14.1  IMF Notice Review (Cont. 4)

3.14.1.6 
Primary Notice Review Procedures

3.14.1.6.20 
Types of Penalties and Interest

3.14.1.6.20.4 
Estimated Tax Penalty

3.14.1.6.20.4.2  (01-01-2008)
High Income Computation for Tax Years 199212 through 199411

  1. Under this rule, the taxpayer may base the first installment on 100% of the prior year’s tax. However, to avoid a penalty, the taxpayer must add the difference between the first payment and the required amount (based on 90% of the current year’s tax) to the second installment payment.

  2. Taxpayers meeting all of the following conditions cannot use 100% of the prior year tax as the basis for the current year installments:

    • The current year Adjusted Gross Income (AGI) exceeds $75,000 (or $37,500 if Married Filing Separate).

    • The current year modified AGI exceeds the prior year AGI by more than $40,000 (or $20,000 if Married Filing Separate).

    • The taxpayer made estimated tax payments or was charged an ES penalty during any of the preceding three years.

    • The prior year tax is less than or equal to 90% of the current year tax.

3.14.1.6.20.4.3  (01-01-2008)
High Income Computation for Tax Years 199412 and Later

  1. Taxpayers may use the prior year tax base with possible variations in the percentage set forth in the table in IRC § 6654(d)(l)(C)(i).

    If the prior year AGI was... Then the taxpayer...
    Greater than $150,000 (or $75,000 if Married Filing Separate) Must use the lesser of 90% of the current year ES Tax Base, or the applicable percentage of the prior year (PY) ES Tax Base as follows.

    • 1994-1997– 110% of PY tax

    • 1998– 100% of PY tax

    • 1999– 105% of PY tax

    • 2000– 108.6% of PY tax

    • 2001– 110% of PY tax

    • 2002– 112% of PY tax

    • 2003 and later– 110% of PY tax
    $150,000 or less ($75,000 if Married Filing Separate) May use the lesser of 90% of the current year ES Tax Base or 100% of the prior year ES Tax Base.
    For additional information, refer to IRM 20.1.3.2, Assertion Criteria.

3.14.1.6.20.4.4  (01-01-2008)
Special Computation for Farmers and Fishermen

  1. Taxpayers deriving at least 2/3 of their gross income from farming or fishing in the current or prior tax year must do one of the following:

    • Make a lump sum estimated tax payment by the 15th of the month following the end of the tax year (January 15, for calendar year returns).

    • File their return and pay the total tax in full by the first day of the third month following the end of the tax year (March 1, for calendar year returns).

  2. The required annual payment is 662/3% of the current year ES Tax Base or 100% of the prior year ES Tax Base, whichever is less.

  3. Taxpayer filing a joint return must include the spouse’s income when determining the2/3 gross income requirement.

  4. When the taxpayer qualifies as a farmer or fisherman, an indicator is placed on the CC PIEST, CC IMFOL, and CC RTVUE response screens.

3.14.1.6.20.4.5  (01-01-2008)
Quarterly Estimated Tax Payments

  1. Taxpayers must make sufficient timely estimated tax payments to prevent the ES penalty from being assessed on a tax module. See the following table for payment due date information:

    Installment Due Date (in tax year) Calendar Year Due Date
    1st 15th day of the 4th month April 15th
    2nd 15th day of the 6th month June 15th
    3rd 15th day of the 9th month September 15th
    4th 15th day of the 1st month after the end of the tax year. January 15th

    Note:

    Consider an ES payment timely if received within ≡ ≡ ≡ ≡ ≡ after the installment due date.

    Note:

    For fiscal year filer due dates, see Notice Review Job Aids.

  2. An ES penalty is not charged for an unpaid fourth quarter installment if the tax return is filed and the tax is paid in full on or before January 31, for calendar year returns.

  3. Calculate the ES penalty on the amount underpaid on the due date of each installment.

    Exception:

    Deceased taxpayers are liable for estimated tax payments due prior to the date of death. Calculate the ES penalty from the due date of the payment to the date of the payment or the date of death, whichever is earlier.

3.14.1.6.20.4.6  (01-01-2008)
Applying Estimated Tax Payments

  1. Apply installment payments to the earliest underpaid quarter within a tax period regardless of the actual payment received date.

  2. After satisfying the first installment, apply any excess to the next installment, and so forth, applying all payments or satisfying all liabilities within the tax period, whichever comes first.

  3. Apply prior year Credit Elect (TC 716 or 710) to the earliest underpaid quarter.

  4. Apply withholding (TC 806) equally to each of the four installments unless the taxpayer requests that the withholding be applied to the installment period(s) in which it was withheld.

3.14.1.6.20.4.7  (01-01-2008)
Calculating Installments Amounts

  1. Unless the taxpayer elects to use the Annualized Income Method, the quarterly installment amount due is 221/2% of the current year ES tax base or 25% (271/2% for years prior to 1998 if the prior year AGI is greater than $150,000) of the prior year ES tax base, whichever is less.

    Exception:

    Taxpayers meeting the income levels described in IRM 3.14.1.6.20.4.3, High Income Computation for Tax Years 199412 and Later, may use 25% of the prior year ES tax base as the amount due for the first installment only. The amount due for the remaining installments is 221/2% of the current year ES tax base.

    Exception:

    See the special rule for farmers and fishermen. See IRM 3.14.1.6.20.4.4.

  2. A taxpayer whose income varied throughout the tax year may elect to vary the amount of each installment, instead of making four equal payments. This is known as the Annualized Income Method.

    1. The total of the payments must be the same as in (1) above, i.e., if one or more payments are reduced or eliminated, the taxpayer must increase at least one of the remaining payments to make up the difference.

    2. The taxpayer must check Box C in Part II and complete Schedule AI of Form 2210 to use this method.

    3. If the taxpayer checked the box, a Code & Edit tax examiner should have assigned CCC P to the tax return. See the CP 30 instructions. See IRM 3.14.1.6.18.2.

3.14.1.6.20.4.8  (01-01-2008)
ES Penalty Computation

  1. The ES Penalty rate is the same as the debit interest rate in effect during the penalty time period.

    Note:

    Do not compound the ES penalty.

  2. Base the ES Penalty computation on the amount of tax reported on the original return.

    Exception:

    If there is a math error on the return, calculate the penalty on the amount of tax as corrected if it is less than the tax reported on the return.

  3. Multiply the penalty rate for the underpayment period by the amount of the underpayment to compute the penalty.

  4. The ES penalty will systemically recompute when either of the following occurs:

    • Timely credits are transferred into or out of the module.

    • Withholding is adjusted and the penalty is not restricted by a TC 170 or CCC "P" on the module.

      Note:

      See LEM 20.1.3 for additional information.

3.14.1.6.20.4.9  (01-01-2008)
ES Penalty Command Codes

  1. CC PIEST—This Command Code displays the computer computation of a systemically assessed (TC 176) ES Penalty. It shows the amount of the ES tax base used for the computation and the amount of penalty assessed for each quarterly installment due date. It will display a recomputed penalty amount after a credit transfer or withholding adjustment.

    Caution:

    Use CC PIEST only if a TC 176 (or a TC 170 with the same DLN as the TC 150) has posted on the module.

  2. CC COMPA—Use this Command Code with Definers "E" and "S" to manually compute an ES penalty. CC COMPA S is the response screen resulting from the input of CC COMPAE. It lists the installment due dates in the left column and the RDD beside each date.

    Note:

    CC COMPAS may be manually input, but all dates and amounts must also be manually entered before transmitting the command.

    1. Overlay these dates with the appropriate from and to dates, if necessary, and enter the underpayment amounts.

      Note:

      Base all dates and amounts on the posted and pending ES payments and the installment amounts due.

    2. Enter more lines if the payments were not received on the installment due date.

    3. Each installment increases the liability and each payment decreases the liability.

  3. Recomputation of ES Penalty:

    1. The computer automatically recomputes ES penalty when an adjustment to TC 806 or 807 is made, or if a TC 43X, 61X, 66X, 67X, 700, 702, 71X, 760, 762, or 97X is present or transferred in, with a transaction date prior to the return due date.

    2. The computer will not automatically recompute ES penalty when there is a CCC "P" or Exception 5 applies, or if there is a TC 170 with one of the following document codes present on the module: 17, 18, 24, 47, 51, 52, or 54.

3.14.1.6.20.5  (01-01-2008)
Computing Normal and Restricted Interest—General Rules and Information

  1. The purpose of recomputing interest is to ensure that all outstanding balances, late posting credits, subsequent assessments, etc., are considered in determining the amount of interest due on a tax module up to the current 23C Date, and to make adjustments, if necessary.

    Note:

    The purpose is not to verify a previous manual computation. Do not recompute the interest on the entire account unless there appears to be an obvious error on a previous manual interest computation.

  2. If the due date for filing a return or making a payment is on a weekend or legal holiday, taxpayers may file or pay on the following workday without penalties or interest.

    Note:

    If the taxpayer pays after the following workday, penalties and interest will accrue from the due date, even though the due date was a weekend or legal holiday.

    Exception:

    Compute interest on Examination cases with a waiver date to the 30th day after the waiver is filed, even if that date falls on a weekend or legal holiday. See IRM 3.14.1.6.20.6.

  3. Effective January 1, 1983, interest is compounded daily on interest. Use December 31, 1982, as the compounded interest start date.

  4. Apply payments in the following order:

    1. Tax

    2. Penalties

    3. Interest

  5. Recompute the module when manually computing interest. Add additional tax assessments to the original tax to arrive at the total corrected balance of tax due on the RDD. Because of the order in which payments are applied, a payment which previously paid penalty and/or interest on an earlier assessment may now pay an additional tax assessment. Any remaining credit will apply to the penalty and interest. This actually reduces the amount of interest assessed on additional tax assessments, and may also reduce or completely eliminate the FTP penalty.

  6. Compute interest on tax at normal interest rates unless the tax assessment is based on a Tax Motivated Transaction (TMT). See IRM 20.2.13.

    Note:

    Always compute interest on penalties at normal interest rates.

    • TMT tax assessments on returns due before January 1, 1990, are subject to an interest rate of 120% of the normal rate.

    • TMT tax assessments (identified by Reference Number 221) must be over $1,000. They are usually made by Examination or Criminal Investigation Function.

    • Compute 120% interest (identified by Reference Number 222) on the Reference Number 221 amount from the later of the return due date or December 31, 1984, to the date of payment.

  7. Interest computations on an account where a refund was previously allowed depend on the amount of interest, if any, allowed on the refund:

    If... Then compute interest on...
    The refund did not include interest The portion of the assessment up to the amount of the refund from the refund date.
    Any portion of the assessment greater than the amount of the refund from the due date of the return.
    The refund did include interest Any additional assessment from the due date of the return until the tax is paid.

3.14.1.6.20.6  (01-01-2008)
Interest and Examination Issues

  1. Compute interest on an Exam deficiency to 30 days after the 870 waiver date. If an assessment is not made within 30 days after the waiver is signed, interest will not accrue from the 30th day until the assessment date of the additional tax. Interest will resume accruing from the date of assessment to the payment date.

    Note:

    The term "deficiency" includes certain penalties related to the Examination assessment. Beginning January 1991, interest on these penalties will also be automatically suspended during the interest free period. See IRM 20.2.8.

    Caution:

    TMT situations:

    • The waiver period applies to interest on penalties if an agreement is secured for penalties.

  2. When computing restricted interest on an Examination assessment case, it may be necessary to request the documents to verify the interest computation. If the case is still open on the Audit Information Management System (AIMS), contact the appropriate area and request that they send a copy of the interest computation.

  3. TC 300 for zero with a TC 340 for a non-zero amount usually involves a Form 2285 figured by the Examination Function. If so, request the document to verify the interest computation and update the accruals.

  4. When a payment is made before the additional tax assessment, apply the payment to the deficiency on its received date. Continue to compute interest on the balance due remaining after the payment is applied.

  5. When an Examination assessment is made on an account, apply payments as the taxpayer designates, to an extent:

    If the Examination is... Then the taxpayer can...
    AGREED Pre-pay interest without paying tax and penalty first.
    NOT AGREED Only pay a percentage of the interest due as compared to the tax.

    Example:

    If the taxpayer wants to make a payment that will pay 50 percent of the additional tax.

  6. Apply partial non-designated payments on Examination TMT cases in the following order:

    1. Any tax that is normal tax (not motivated).

    2. Any tax that is tax motivated.

    3. All penalties.

    4. Any normal interest (including interest on penalties).

    5. Any interest that is tax motivated.

      Note:

      For payment purposes, tax motivated interest is all of the interest on the TMT tax, including the normal interest computed prior to December 31, 1984.

  7. When a payment is made on an Examination deficiency before the interest free period begins (the waiver date plus 30 days), apply the payment on its received date.

    Note:

    A payment or credit received during the interest free period will not affect the interest computation. The balance due on the 23C Date is reduced by the payment or credit. Additional interest on the remaining balance due will begin to accrue on the 23C Date.

3.14.1.6.21  (01-01-2008)
Reprocessing Returns

  1. A reprocessable return is a return that posted to an incorrect tax period or SSN and needs to be corrected and re-entered through the processing system.

  2. Definitions:

    • Receiving module—The module to which the return belongs and to which it will be reprocessed.

    • Losing module—The module from which the return will be moved.

    • Zeroing-out the module—Adjusting the TC 150, withholding, EIC, TC 766, Reference Numbers, and certain penalties to zero.

  3. If the return is an Electronically Filed (ELF) return, follow ELF reprocessing procedures. See IRM 3.14.1.6.21.1.

  4. Certain circumstances prevent a return from being reprocessed:

    If... Then...
    A TC 150 has posted to the receiving module

    1. Request both returns.

    2. Do not zero-out the posted tax and reference amounts. Adjust them on both modules to agree with the information from the proper return.

    3. Transfer the TC 610 payments if necessary.

    4. Pull all current cycle notices for both modules.

    5. Follow normal notice disposition procedures. See IRM 3.14.1.7.7.

    Either module has:

    1. A pending or posted Doc Code 47, 51, or 54 transaction

    2. A posted TC 976 or TC 977

    3. An erroneous refund

    1. Void the notice.

    2. Route the case to the Adjustments Function.

  5. If the Assessment Statute Expiration Date (ASED) is within six months of expiring, do not use Form 3893 to reprocess the return. The Statute Function must clear and stamp the case to avoid barred assessments. Do not abate tax on the incorrect module before referring the case to the Statute Unit.

    Caution:

    Hand-carry returns with an ASED that has expired, or will expire within 120 days to the Statute Function immediately.

  6. If the return is reprocessable, make the necessary corrections using local editing procedures and stop any erroneous refund.

    Caution:

    Document Perfection has the final responsibility for editing reprocessed returns. Do not change green or red pencil edit marks entered by previous tax examiners.

    1. Determine whether the return is timely filed for the tax period to which it is being processed:

      If the return And Then
      Is timely filed based on the due date of the correct tax period Is being processed with a Julian Date of 155 (June 3) or later Enter the return due date as the received date in center of the return.
      There is no date stamp on the return Do not edit the received date.
      Was received after the due date of the correct tax period The received date is stamped or edited on the return Do not edit the received date.
      There is no date stamp on the return Determine the received date to be entered in the center of page one of the return. See IRM 3.14.1.6.1.1.7.

      Note:

      All prior year returns must have a received date stamped or edited on the return.

    2. If the DLN is not valid for the type of document or is out-of-area, line through (one single line) the DLN. Use a routing slip to send the return to Receipt and Control Function for complete processing and a new DLN. Do not attach Form 3893.

    3. If a remittance amount (TC 610) is present, circle out the money amount.

      Reminder:

      Use IDRS to transfer the TC 610 to the receiving module.

    4. Correct any other necessary information:

      Caution:

      Never erase, line through, or in any way obscure taxpayer entries. Any editing on the return should always be done in red ink only.

      Editing a Tax Return To Be Reprocessed
      Tax Period Circle the incorrect tax period. Enter the correct year in YYYYMM format.

      Note:

      Edit the period on prior year returns even if the return clearly shows the period to which the document will be reprocessed.
      Name, Address, TIN Change the name and/or address if applicable. Circle-out an incorrect TIN and enter the correct TIN directly above it.
      Income, Tax, and Credits Enter any changes to the tax information and credits by placing an "X" to the left of the incorrect amounts. Enter the correct amounts to the left of the "X" .
      Preparer Information Circle out this information to prevent duplication.

  7. Prepare Form 3893. See Figure 3.14.1-9a.

    Figure 3.14.1-9a
    Item Item Description Required Entry
    1 Master File Type Check the "IMF" box
    2 Document Locator Number Enter the first 11 digits of the DLN
    3 Document Count Always enter a "1"
    4 Reinput Source Code Check the "R" box
    5 DLN Year Digit Enter the 14th (last) digit of the DLN
    6 Remarks Enter a description of the required action

    Example:

    "Reprocess to 200612"

    7 Process As Check the "Non-Remittance" box.

    Note:

    Use IDRS to transfer any TC 610 payment to the appropriate module. If the payment is attached to the return, take the case to your work or Team Leader.

    8 Serial Number Enter the 12th and 13th Digits of the DLN
    9 Prepared By enter the name and 10-digit employee IDRS number
    10 Telephone Extension Enter a 4 or 5 digit telephone extension
    11 Date Enter the current date
    12 Reprocessable Document Check the box showing the reason the return is being reprocessed.
    13 Area Prepared By Always check the "Other" box. Write in "Notice Review"
    • Staple the completed Form 3893 to the front of the return just below the entity section.
    • Staple a completed routing slip ( Form 3210 or equivalent) to the Form 3893 and return.
    • Use local procedures to route the case for reprocessing.

    Figure 3.14.1-9b
    This image is too large to be displayed in the current screen. Please click the link to view the image.

    Form 3893 Re-Entry Document Control

  8. Use the CC REQ54 checklist to ensure the input of all necessary adjustments to zero out the incorrect module. See Figure 3.14.1-10.

    Figure 3.14.1-10
    CC REQ54 / ADJ54 Check List for IMF Return Reprocessing
    ▸ To zero-out an account, the dollars and cents amounts input on CC REQ54/ADJ54 must have a trailing minus (−) sign. Do not reduce any other reference item below $.00.

    Caution:

    A difference of even one cent can cause the adjustment to go unpostable. Listed below are input items that may be necessary, to accurately complete a CC REQ54/ADJ54 reprocessing adjustment.

    ▸ Input TC 291 for the amount of the TC150 to zero-out the tax.

    Note:

    If any secondary tax adjustments have already posted prior to the input of CC REQ54 make sure the TC291 zeroes-out the total tax amount.

    ▸ Input TC 171 to zero-out any manually assessed TC 170 or TC 176 ES Penalty (the computer will not reverse the TC 176 when the tax is zeroed-out).

    Note:

    On the CC ADJ54 screen in the fourth position of the Reason Codes, input 002.

    ▸ If there is not a TC176 on the module, and credits (including payments, withholding and other refundable tax credits) are transferred out or reversed, input TC 170 for zero (.00) to prevent the computer from assessing TC 176.
    ▸ Input TC 161, TC 271, and/or TC 341 to zero-out any manually assessed TC 160, TC 270, and TC 340, respectively.

    Note:

    On the CC ADJ54 screen in the fourth position of the Reason Codes, input 002.

    ▸ Input Blocking Series "05" , Source Code "2" or "4" , Reason Code "099" , and Hold Code "4" (or Hold Code "1" where appropriate).
    ▸ Input TC 888 and TC 886 to zero-out AGI and TXI, respectively.

    Caution:

    If the taxpayer filed the return with a negative AGI, increase the TC 888 to zero it out.
    ▸ Input TC 887 to zero-out the exemptions, using a trailing minus (−) sign. In the ADJ54 screen, Exemptions are expressed as cents (e.g. One exemption = .01, two exemptions = .02, etc.) Use the number of exemptions on TXMOD as a guide for the TC 887 entry.
    ▸ Input TC 807 to zero-out any posted TC 806 withholding credit.

    • Note:

      For returns processed prior to cycle 200704, the TC 807 should include any Excess FICA.
    ▸ Input a single TC 765 to zero-out the total of all EIC TC 768 & TC 764 transactions.
    ▸ Input TC 767 to zero-out any TC 766 refundable credits that post without a Credit Reference Number (CRN).
    ▸ Input Credit Reference Numbers with a trailing minus (–) sign to reverse TC 766 credits that post with CRN(s). Master File will generate the appropriate TC 767:

    • CRN 336 with a trailing minus (–) sign reverses Additional Child Tax Credit.

    • CRN 252 with a trailing minus (–) sign reverses Excess FICA for returns processed after cycle 200704.

    • CRN 253 with a trailing minus (–) sign reverses Telephone Excise Tax Refund (TETR).

    • CRN 254 with a trailing minus (–) sign reverses credit interest issued with the Telephone Excise Tax Refund (TETR). This credit interest is identified by a TC 776 with a Julian date of 997.

    ▸ Input TC 885 to zero-out any Advanced Earned Income Credit.
    ▸ Input TC 889 to zero-out the Self–Employment (SE) Tax.
    ▸ Input TC 878 and TC 879 to zero-out the Primary and Secondary Self Employment Incomes, respectively.
    ▸ Input TC 895 and TC 896 to zero-out the Primary and Secondary Medicare Incomes, respectively (tax year 1991 and subsequent). See the Note below.
    ▸ Input TC 891 and TC 892 to zero-out the Primary and Secondary Unreported Tip Incomes, respectively.
    ▸ Input TC 898 and TC 899 to zero-out the Primary and Secondary Medicare Tip Incomes, respectively (tax year 1991 and subsequent). See the Note below.
    ▸ Input Remarks (e.g. "Reprocess from 200512 to 200612" ).
    ▸

    Note:

    When Medicare SE or Medicare Tip Income field on TXMOD displays all 9's, the amount is too large for the TXMOD field. Use CC IMFOLR or RTVUE to verify the actual amount.

    CC REQ54 / ADJ54 Check List for IMF Return Reprocessing

  9. Transfer the credits claimed on the return to the correct SSN or Tax Period.

    Note:

    If the module being zeroed out has other credits that are correctly posted and should not be refunded, input a TC 570 on the debit side of the credit transfer. Use only one TC 570 when transferring multiple credits.

  10. Use CC REQ77 to input a TC 971 on the losing module to identify a cross-reference TIN or tax period when an original, amended, or duplicate return posted to an incorrect TIN or tax period and is being reprocessed. See Figure 3.14.1-11a.

    1. TC 971 requires an Action Code. Always use Action Code 001 to indicate that the TC 150 posted to the wrong TIN or tax period.

    2. The transaction date of the TC 150 being reprocessed is the return received date from the "RET-RECD-DT" field shown on CC TXMOD screen.

    Figure 3.14.1-11a
    This image is too large to be displayed in the current screen.