4.71.18  EP Penalties

Manual Transmittal

May 22, 2012

Purpose

(1) This transmits the new text and Table of Contents for IRM 4.71.18, Employee Plans Examination of Returns, EP Penalties

Material Changes

(1) This new IRM 4.71.18 provides guidance and information to assist agents in asserting penalties on EP examinations.

Effect on Other Documents

None.

Audience

TE/GE, Employee Plans

Effective Date

(05-22-2012)


Robert Choi
Director, Employee Plans
Tax Exempt and Government Entities Division

4.71.18.1  (05-22-2012)
Overview

  1. EP penalties involve plans which are subject to the Employee Retirement Income Security Act of 1974 (ERISA).

  2. EP penalties which may be encountered in an EP exam are discussed in this section.

  3. The penalties discussed pertain to:

    1. IRC 6651(a)(1) & IRC 6651(a)(1)(2) - Failure to timely file Form 5330 or Form 990-T and pay the tax;

    2. IRC 6652(d)(1) - Failure to timely file Form 5500 Schedule SSA or Form 8955-SSA;

    3. IRC 6652(d)(2) - Failure to report change in plan status;

    4. IRC 6652(e) - Failure to timely file a Form 5500 series return;

    5. IRC 6652(e) - Failure to timely file Form 5310-A;

    6. IRC 6652(e) - Failure to timely file Form 1096 and IRC 1099-R;

    7. IRC 6652(h) - Failure to give notice to recipients of certain pension distributions;

    8. IRC 6652(i) - Failure to give written explanation to recipients of certain qualifying rollover distributions;

    9. IRC 6662 - Accuracy-related penalty on underpayments;

    10. IRC 6662A - Accuracy-related penalty on understatements with respect to Reportable Transactions;

    11. IRC 6663 - Civil fraud;

    12. IRC 6690 - Fraudulent Statement or Failure to Furnish Statement to Plan Participant;

    13. IRC 6692 - Failure to timely file Form 5500 Schedule SB or MB;

    14. IRC 6693 - Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities;

    15. IRC 6704 - Failure to Keep Records Necessary to Meet Reporting Requirements;

    16. IRC 6707A - Failure to include Reportable Transaction information with the return.

  4. Managerial approval is required on all penalties discussed in this IRM except for IRC 6651(a) penalties.

    1. IRC 6751(b) requires that for the assessments of all Title 26 civil penalties, the immediate supervisor of the individual making the determination (or a higher level official the Secretary may designate) must personally approve the assessment in writing.

      Note:

      IRC 6651(a) penalties are specifically exempted per IRC 6751(b)(2).

    2. When the agent determines that penalties under this IRM (except IRC 6651(a) penalties) should be applied, managerial approval must be secured before the "30-Day letter" package is mailed to the taxpayer or in instances where a "30-Day letter" is not required to be mailed, before the case is closed from the group (unagreed to Mandatory Review or agreed to ESSP). For this purpose, managerial approval should be documented on Form 5464, Case Chronology Record.

  5. Whenever "Form 5500" is used in this IRM, it refers to all Form 5500 series returns.

  6. Penalties under IRC 6651(a), IRC 6662, IRC 6662A, and IRC 6663 are assessed from the Form 5599, TE/GE Examined Closing Record, in the applicable Form 5330, Form 990-T or Form 1040/1120 case file.

  7. All other penalties covered in this IRM will be assessed from Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

    1. Instructions for completion of Form 8278 are provided in each applicable penalty section below.

    2. When Form 8278 is prepared, it will be placed in a separate "Penalty" folder which will accompany the exam file when it is closed to ESSP (EP Closing Unit).

    3. If the assessment is being made on an individual, the MFT Code is 55.

    4. If the assessment is being made on a business, the MFT Code is 13.

    5. See IRM 4.71.18, Exhibit 1 at Employee Plans IRM Exhibits for an example of Form 8278.

  8. When Form 8278 is required to be prepared, Form 3198-A will be completed and attached to the outside of the "Penalty" folder.

    1. Write, "Penalty Case" in red on the top of Form 3198-A.

    2. Input the agent and entity information on the top of the form.

    3. In the Special Features section of the form, check the "Other Instructions" box and provide instructions to assess the penalties that are applicable.

    4. See IRM 4.71.18, Exhibit 2 at Employee Plans IRM Exhibits for an example of Form 3198-A.

  9. IRC 6707A penalty cases are worked differently than other penalties covered in this IRM:

    1. They are established and worked on RCCMS.

    2. They are established as Non-Master File (NMF) returns on AIMS.

    3. Each individual taxpayer and each year must be established on NMF and RCCMS.

    4. They are closed with a complete paper file as discussed in IRM 4.71.18.14 below.

    5. Applicable time is tracked on WebETS.

  10. A separate Penalty File is prepared for penalties under IRC 6652, IRC 6690, IRC 6692, IRC 6693, and IRC 6704.

    1. For these penalties the Penalty File is composed solely of Form 8278 and Form 3198-A, prepared in accordance with paragraph (8) above.

    2. These penalties are not established on RCCMS or AIMS and, time is not tracked on WebETS.

  11. IRC 6651, IRC 6662, IRC 6662A, and IRC 6663 penalties are worked as part of the related Form 5330, 990-T or 1040/1120 case file, and a related Penalty File should not be prepared.

4.71.18.1.1  (05-22-2012)
Penalty Relief

  1. IRM 20.1.1.3, Criteria for Relief from Penalties, discusses penalty relief. Penalty relief falls into separate categories. They are:

    1. Reasonable cause,

    2. Statutory exceptions and administrative waivers, and

    3. Correction of service error.

  2. IRM 20.1.1.3.3.4.3 discusses reliance on the advice of a tax advisor.

    1. Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated.

    2. Penalty relief criteria for erroneous advice from a tax advisor is generally limited to the accuracy-related penalties (IRC 6662 or IRC 6662A).

    3. In United States v. Boyle, 469 U.S. 241 (1985), the court ruled that the responsibility to file, pay, or deposit taxes cannot be excused by reliance on the advice of a tax advisor. Further, the court ruled that it requires no special training or effort on a taxpayer's part to ascertain a deadline and ensure that it is met.

  3. Penalty relief for most penalties must meet the reasonable cause standards found in IRM 20.1.1.3.2.

    1. Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed.

    2. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations.

    3. For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.

4.71.18.2  (05-22-2012)
Failure to File and Failure to Pay - IRC 6651(a)(1) & (2)

  1. When it is determined that a delinquent Form 5330 or Form 990-T is due from a taxpayer during an examination, the EP agent will determine whether the failure to file and/or failure to pay penalties under IRC 6651(a)(1) and (2) should be asserted.

  2. IRC 6651(a)(1) imposes a penalty for failure to file a tax return by the date prescribed for filing (including extensions), unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

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

    2. The maximum penalty is 25 percent of the unpaid tax on the payment due date.

    3. The amount subject to penalty is not reduced by any payment made after the payment due date.

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

  4. IRC 6651(a)(2) provides for a penalty if the tax shown on any return is not paid by the due date for payment, unless the failure to pay is due to reasonable cause and not due to willful neglect.

    1. For each month or part of a month that the tax remains unpaid, the penalty is generally 1/2 percent of the unpaid tax.

    2. The maximum penalty is 25 percent of the unpaid tax on the payment due date.

  5. If both IRC 6651(a)(1) and (2) penalties are being imposed, the maximum penalty is 47.5 percent.

4.71.18.2.1  (05-22-2012)
Assessment of IRC 6651 Penalties

  1. IRC 6651 penalties should be assessed by the Odgen Campus when the delinquent Form 5330 or Form 990-T is processed in accordance with IRM 4.71.5.6.3 (Forms 5330) and IRM 4.71.10.4.3 (Forms 990-T) unless the agent specifically instructs otherwise on Form 13133 for penalties not to be assessed.

  2. If Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, is secured in lieu of Form 5330 or Form 990-T, penalties will be assessed on Form 5599 when the case is closed to EP Examinations, Special Support Processing (EP Closing Unit or ESSP). To prepare the case for penalty assessment:

    1. The agent will enter transaction code 160 and the amount of penalties that are being assessed on Form 5599 Item 12 – Penalties (+).

    2. The agent will enter transaction code 300 and the amount of tax that is being assessed on Form 5599 Item 12 – Tax Liability Adjustment (+).

  3. The agent should secure a BMFOLT print (through IDRS) for the applicable year and MFT (MFT 76 for Form 5330 and MFT 34 for Form 990-T) to determine whether or not penalties were properly assessed on a delinquent Form 5330 or Form 990-T.

    1. If penalties were not assessed but should have been assessed on a delinquent return that was processed in accordance with paragraph (1), the agent should prepare Form 5599 in accordance with paragraph (2) to ensure that penalties are assessed by ESSP when the cases is closed.

    2. If penalties were improperly assessed by Ogden Campus on a delinquent return, see IRM 4.71.18.2.2 below for abatement procedures.

4.71.18.2.2  (05-22-2012)
Abatement of IRC 6651 Penalties

  1. If the Ogden Campus mistakenly assesses penalties on a secured delinquent return and the case is still open, penalties can be abated by ESSP (EP Closing Unit). To prepare the case for penalty abatement:

    1. The agent will enter transaction code 161 and the dollar amount of penalties that are to be decreased on Form 5599, Item 12 - Penalties (-), and

    2. The agent will enter transaction code 300 and $0 on Form 5599, Item 12 - Tax Liability Adjustment (+).

  2. If the Ogden Campus mistakenly assesses penalties on a secured delinquent return and the case is already closed when the incorrect assessment is discovered, contact the Manager of ESSP to get penalties abated.

4.71.18.3  (05-22-2012)
Failure to Timely File Form 5500 Schedule SSA or Form 8955-SSA - IRC 6652(d)(1) Penalties

  1. IRC 6652(d)(1) imposes a penalty on a plan administrator (as defined in IRC 414(g)) for the failure to file a registration statement by the due date, as required by IRC 6057(a)(1)).

    1. For plan years beginning after December 31, 2008, the registration statement required to be filed is Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits.

    2. For 2008 plan years and before, the registration statement required to be filed was Form 5500 Schedule SSA.

  2. In order to provide plan administrators with additional time to complete and file the new Form 8955-SSA, the IRS provided an extension of time to file the Form 8955-SSA with respect to the 2009 and 2010 plan years.

    1. Forms related to these plan years have an extended due date to file until the later of January 17, 2012 and the due date that otherwise generally applies for filing the Form 8955-SSA.

    2. A plan sponsor need not file a Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) to take advantage of this extended due date, unless the plan year that began in 2010 ended on or after April 1, 2011 and it is desired to use a due date after January 17, 2012.

    3. The January 17, 2012 deadline therefore applies for 2009 and 2010 plan years where the 2010 plan year ends before April 1, 2011. The January 17, 2012 deadline also applies for 2009 plan years and 2010 plan years where the 2010 plan year ends on or after April 1, 2011 if (1) the last day of the seventh month after the end of the 2010 plan year falls before January 17, 2012, and (2) the filer does not use Form 5558 to extend the due date beyond January 17, 2012.

    4. Plan administrators are granted an automatic extension of time to file Form 8955-SSA (without filing a Form 5558) until the due date of the federal income tax return of the employer if, among other things, the plan year and the employer's tax year are the same.

    5. The 2009 Form 8955-SSA may be used for a 2010 plan year submission.

    6. In addition, plan administrators may combine the information for the 2009 and 2010 plan years on a single 2009 8955-SSA or a single 2010 8955-SSA.

  3. Plans subject to this requirement include plans qualified under IRC 401(a) and annuities under IRC 403(b).

    Note:

    All plans subject to the vesting standards of section 203 of ERISA must file Form 8955-SSA.

  4. Plans not subject to this requirement include:

    1. IRC 414(d), government plans;

    2. IRC 414(e), church plans where no IRC 410(d) election has been made;

    3. Any plan which is established or maintained by a labor organization described in IRC 501(c)(5) and which has not provided employer contributions;

    4. Any plan established and maintained by a society, order, or association described in IRC 501(c)(8) or IRC 501(c)(9), if no part of the contributions is made by employers of participants in such plan;

    5. Any plans exempted pursuant to ERISA section 201, such as top hat or excess benefit plans; and

    6. Plans that cover only owners and their spouses.

  5. In general, IRC 6057(a) requires a plan administrator to file a registration statement (Form 8955-SSA) for the plan year in which a plan participant:

    1. is separated from service covered by the plan during the plan year (if not reported in the year of separation, such separated participant must be reported in the following year);

    2. is entitled to a deferred vested benefit; and

    3. did not receive retirement benefits;

    Note:

    A plan participant is required to be reported on Form 8955-SSA or Schedule SSA only once unless information on a previously reported participant is being revised.

  6. Form 8955-SSA must be filed with the IRS as a stand alone form (it is not filed with Form 5500) at the address listed on the Form 8955-SSA instructions.

  7. This registration statement should include:

    1. The name of the plan;

    2. The name and address of the plan administrator;

    3. The name and social security number of each participant in the plan, who— is separated from service covered by the plan during the plan year (if not reported in the year of separation, such separated participant must be reported in the following year); is entitled to a deferred vested benefit; and did not receive retirement benefits;

    4. The nature, amount and form of deferred vested benefit, and

    5. Other information the Service may require in forms, instructions, and applicable guidance.

  8. Penalties under IRC 6652(d)(1) are assessed on BMF.

  9. The penalty for failing to file Form 8955-SSA by the due date (same due date as Form 5500), is equal to:

    1. $1 for each participant for whom the required information was not filed multiplied by the number of days the failure continues.

    2. The penalty shall not exceed $5,000 for any plan year.

  10. For purpose of the penalty, the failure to report either the participant's name or SSN is considered a failure to report the participant. Exceptions are granted for Foreign Nationals who are not required to have an SSN.

    1. Example 1: Form 8955-SSA contains 10 names, but only eight of which show SSNs. The penalty would be $2 multiplied by the number of days the failure continues.

    2. Example 2: Form 8955-SSA contains 50 names, but it shows 60 SSNs. The penalty would be $10 multiplied by the number of days the failure continues.

  11. IRC 6652(d)(1) provides for non-assertion of the penalty if the plan administrator can show reasonable cause for the failure to timely file.

  12. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury.

  13. Form 8278 must be completed when IRC 6652(d)(1) penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 583, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 5 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.4  (05-22-2012)
Failure to Report Change in Plan Status - IRC 6652(d)(2) Penalties

  1. IRC 6652(d)(2) imposes a penalty on the plan administrator (as defined in IRC 414(g)) for the failure to timely notify the Service, by the due date of Form 5500, of changes in the status of a plan as required in IRC 6057(b).

    1. Notification is accomplished by filing Form 5500 with the required information.

    2. The Service must be notified by the due date of Form 5500.

  2. IRC 6057(b) requires the plan administrator to notify the Service of:

    1. Any change in the name of the plan;

    2. Any change in the name and address of the plan administrator;

    3. Termination of the plan;

    4. Merger or consolidation of the plan with any other plan; or

    5. Division of the plan into two or more plans.

  3. Plans subject to this requirement include plans qualified under IRC 401(a) and annuities under IRC 403(b).

    Note:

    All plans subject to the vesting standards of section 203 of ERISA are subject to these requirements.

  4. Plans not subject to this requirement include:

    1. IRC 414(d) government plan;

    2. IRC 414(e) church plan where no IRC 410(d) election has been made;

    3. Any plan which is established or maintained by a labor organization described in IRC 501(c)(5) and which has not provided employer contributions;

    4. A plan established and maintained by a society, order, or association described in IRC 501(c)(8) or IRC 501(c)((9), if no part of the contributions are made by employers of participants in such plan;

    5. Any plans exempted pursuant to ERISA section 102 such as top hat or excess benefits plans; and

    6. Plans that cover only owners and their spouses.

  5. This penalty is assessed in addition to the IRC 6652(e) penalty for late filing Form 5500. See IRM 4.71.18.5.1 below.

  6. The penalty for failing to file the form on the due date in the prescribed manner is equal to:

    1. $1 for each failure multiplied by the number of days the failure continues.

    2. The penalty shall not exceed $1,000 for failure to file any notification.

      For example : Assume Form 5500 was filed 500 days late and the name of the plan was changed along with the plan administrator. A penalty in amount of $1,000 would be assessed under IRC 6652(d)(2) ($1 times 2 failures times 500 days).

      Note:

      As will be discussed in IRM 4.71.18.5.1 below, there would also be a penalty under IRC 6652(e) in the amount of $12,500 ($25 per day times 500 days).

  7. The penalty is frequently assessed on Master File when the Form 5500 return is filed and processed.

    1. If the EP agent determines that the penalty is applicable, an EMFOLT print should be obtained for the applicable year to determine if the penalty was assessed.

    2. If the penalty is applicable and the penalty has not been assessed, the EP agent should assert the penalty.

  8. IRC 6652(d)(2) provides for non-assertion of the penalty if the plan administrator can show reasonable cause for the failure to timely file.

  9. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury.

  10. Form 8278 must be completed when IRC 6652(d)(2) penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 584, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 6 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.5  (05-22-2012)
IRC 6652(e) Penalties

  1. IRC 6652(e) imposes a penalty for failure to file annual returns and statements by the due date and in the prescribed manner required under:

    1. IRC 6058(a), relating to a Form 5500 series return,

    2. IRC 6058(b), relating to a Form 5310-A, and

    3. IRC 6047(d), relating to Form 1096 and Form 1099-R.

  2. IRC 6652(e) provides for non-assertion of the penalty if reasonable cause can be shown. See IRM 4.71.18.5.4 below.

4.71.18.5.1  (05-22-2012)
Failure to Timely File Form 5500 - IRC 6652(e) Penalties

  1. In general, IRC 6058(a) requires the plan sponsor of each funded plan of deferred compensation to file a Form 5500 series return (Form 5500 or Form 5500-EZ), Annual Return/Report of Employee Benefit Plan.

  2. IRC 6652(e) imposes a penalty for failure to file a Form 5500 series return by the due date and in the prescribed manner required under IRC 6058(a).

  3. In general, the due date for the Form 5500 (and appropriate schedules) is the last day of the 7th month after the plan year ends.

  4. A one time extension of time (up to 2 1/2 months) to file Form 5500 and its required schedules may be granted by filing Form 5558, Application for Extension of Time to File Certain Employee Plan Returns.

    1. Form 5558 must be filed on or before the original due date of the Form 5500.

    2. A timely filed Form 5558 gives the employer (plan sponsor) up to the 15th day of the 10th month following the last day of the plan year (October 15th for a calendar year plan) to file Form 5500.

  5. Plans are automatically granted extensions of time to file Form 5500 and its required schedules until the extended due date of the Federal income tax return of the employer and are not required to file Form 5558 if all the following conditions are met:

    1. The plan year and the employer's tax year are the same; and

    2. The employer has been granted an extension of time to file its Federal income tax return to a date later than the normal due date for filing the Form 5500.

    3. If not filed electronically (e.g., if Form 5500-EZ is filed), a copy of the extension of time to file the Federal income tax return is attached to the form (Form 5500-EZ).

      Note:

      A copy of the extension of time to file the Federal income tax return is no longer required to be attached to the Form 5500 or Form 5500-SF when filed electronically. However, a copy of the extension should be kept with the plan’s records.

  6. Plans granted an extension under the conditions in paragraph (5) above, cannot further extend the due date by filing a Form 5558.

  7. Beginning January 1, 2010, special extensions which grant up to 1 year for related disaster areas are available to Form 5500 filers.

  8. Per IRC 6652(e), the penalty for failure to file a Form 5500 series return on the due date in the prescribed manner is equal to $25 per day that the return is late, up to a maximum of $15,000.

  9. IRC 6652(e) penalties, related to the late filing of a Form 5500 series return, are assessed on the plan administrator (as defined in IRC 414(g)) or the employer (who may be jointly or severally liable).

  10. Penalties under IRC 6652(e) are normally automatically assessed on Master File when the delinquent return is filed or when the agent files a substitute for return (SFR).

    1. See IRM 4.71.1.21(5) for instructions on processing a Form 5500 SFR.

    2. See IRM 4.71.18.5.4 for procedures to abate IRC 6662(e) penalties that are incorrectly assessed.

  11. If IRC 6662(e) penalties are applicable but were not assessed when the delinquent return or SFR was processed, penalties can be assessed by completing Form 8278.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of item 9, insert the penalty section and description under column 9(a) ("Failure to timely file Form 5500" ), insert Penalty Reference Number 552, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

4.71.18.5.2  (05-22-2012)
Failure to Timely File Form 5310-A - IRC 6652(e) Penalties

  1. In general IRC 6058(b) requires a plan administrator to file an actuarial statement of valuation evidencing compliance with IRC 401(a)(12), in the case of a merger, consolidation or transfer of assets or liabilities from one plan to another.

    1. The Form 5310-A, Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business, was designated by the Service as the form to be used for satisfying the requirements.

    2. The Form 5310-A should be filed when there is a plan merger, consolidation, spinoff, or when there is a transfer of assets or liabilities to another plan.

    3. When meeting this criteria, Form 5310-A should be filed by the plan administrator or plan sponsor for a pension plan, profit-sharing plan, or a deferred compensation plan (except a multi-employer plan covered by PBGC insurance).

    4. The Form 5310-A must be filed at least 30 days prior to a plan merger, consolidation, spinoff, or transfer of liabilities to another plan.

    5. The form is late if not filed at least 30 days before any of these referenced activities.

  2. The instructions to Form 5310-A provide that a Form 5310-A is not to be filed if:

    1. An eligible rollover is paid directly to an eligible retirement plan in a direct rollover as described in IRC 401(a)(31), Optional Direct Transfer of Eligible Rollover Distributions; or

    2. The plan merger or consolidation, spinoff, or transfer of plan assets or liabilities complies with Treas. Reg. 1.414(l)-1(d), Merger of Defined Contribution Plans; Treas. Reg. 1.414(l)-1(h), De Minimis Rule for Merger of Defined Benefit Plan; Treas. Reg. 1.414(I)-1(m), Spinoff of a Defined Contribution Plan; or Treas. Reg. 1.414(I)-1(n)(2), Spinoff of a Defined Benefit Plan, De Minimus Rule.

  3. Per IRC 6652(e), the penalty for failure to file Form 5310-A on the due date in the prescribed manner is equal to $25 per day that the return is late, up to a maximum of $15,000.

  4. IRC 6652(e) penalties are assessed on the plan administrator (as defined in IRC 414(g)).

  5. If IRC 6652(e) penalties are applicable but were not assessed when the delinquent return or SFR was processed, penalties can be assessed by completing Form 8278.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a) ("Failure to timely file Form 5310-A" ), insert Penalty Reference Number 552, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 1 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.5.3  (05-22-2012)
Failure to Timely File Forms 1096 and 1099-R - IRC 6652(e) Penalties

  1. In general, IRC 6047(d) requires Form 1096, Annual Summary and Transmittal of U.S. Information Returns, and Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s, Insurance Contracts, etc., to be filed by:

    1. The employer maintaining the plan from which designated distributions may be made;

    2. The plan administrator of a plan from which designated distributions may be made; or

    3. The issuer of a contract under which such distributions may be made.

  2. Designated distributions are defined in IRC 3405(e)(1) and include, generally, any includible non-wage distributions from an employer deferred compensation plan, an IRA, or a commercial annuity.

  3. A separate Form 1099-R must be made for each payee, but is not required if the aggregate payment to the payee is less than $10.

  4. Form 1099-R is required to be furnished to the payee by January 31 following the year of the distribution.

  5. Form 1096 is required to be filed with the Service by February 28 following the year of the distribution.

  6. Per IRC 6652(e), the penalty for failure to file Forms 1099-R or 1096 on the due date in the prescribed manner is equal to $25 per day that the return is late, up to a maximum of $15,000.

  7. IRC 6652(e) penalties are assessed on:

    1. The plan trustee if payment is made out of a trust;

    2. The account custodian if payment is made from a custodial account; or

    3. The issuer of the payment if payment relates to an annuity contract.

  8. Form 8278 must be completed when IRC 6652(e) penalties are being assessed.

    1. On page 3, complete items 1 through 8; and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a) ("Failure to timely file Form 1099-R" ), insert Penalty Reference Number 552, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 1 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.5.4  (05-22-2012)
IRC 6652(e) Penalty Relief and Abatement

  1. IRC 6652(e) provides for non-assertion of the penalty if reasonable cause can be shown.

    1. The request for penalty relief due to reasonable cause must be made in the form of a written statement providing all the facts to substantiate reasonable cause.

    2. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury.

    3. In Alton OB-Gyn, Ltd. v. United States, 789 F. 2d 515 (7th Circuit 1986), the taxpayer’s reliance on a bank, as plan trustee, to handle ministerial duties of taxpayer’s pension and profit-sharing plans, did not constitute reasonable cause for the failure to timely file the required Form 5500 series return.

    4. See IRM 20.1.1.3.2 and Exhibit 20.1.8-3 for a discussion of reasonable cause penalty relief.

  2. If the agent discovers that late filing penalties were incorrectly assessed on Forms 5500 and need to be abated, he or she should:

    1. Secure an EMFOLT print for the applicable return,

    2. Contact one of the Points of Contact within EP Exam who are designated to contact the Service Center, and

      Note:

      EP Exam will have at least three Points of Contact, one in ESSP, one in EP Classification and one in EP Mandatory Review.

    3. Email or fax the EMFOLT print for the applicable return to the Point of Contact.

  3. The Point of Contact will review the EMFOLT print and determine if penalties should be abated.

  4. If it is determined that penalties should be abated, the Point of Contact will complete Form 3870 and email it to the designated person in the Ogden Campus to abate the penalties.

    Note:

    The agent should not contact the Ogden Campus directly, but should instead go through a Point of Contact.

4.71.18.6  (05-22-2012)
Failure to Give Notice to Recipients of Certain Pension Distributions - IRC 6652(h) Penalties

  1. IRC 6652(h) imposes a penalty for each failure to give notice concerning withholding to recipients of distributions from an employer’s deferred compensation plan or an Individual Retirement Account (IRA) as required by IRC 3405(e)(10)(B).

  2. The penalty is imposed on the payor.

  3. In general, IRC 3405(e)(10)(B) requires that the payor of:

    1. Any annuity or similar periodic payment to provide the payee a notice of the right to elect not to have withholding made on such payment; or

    2. Any distribution which is not in the form of an annuity or a periodic distribution to provide the payee a notice of the right to elect not to have withholding made on such payment.

  4. The notice of election must be transmitted:

    1. No earlier than six months before the first payment, and

    2. No later than when the first payment is made.

    3. For periodic payments, notice must also be provided at least once in each calendar year of the right to make and revoke the election.

  5. The penalty under IRC 6652(h) is $10 for each failure to give notice, up to a maximum penalty of $5,000 for all such failures per calendar year.

  6. IRC 6652(h) provides for non-assertion of the penalty if the payor can show that the failure was due to reasonable cause and not due to willful neglect.

  7. Form 8278 must be completed when IRC 6652(h) penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8; and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 585, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 3 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.7  (05-22-2012)
Failure to Give Written Explanation to Recipients of Certain Qualifying Rollover Distributions - IRC 6652(i) Penalties

  1. IRC 6652(i) imposes a penalty for each failure to timely provide a written explanation of an eligible rollover distribution as required by IRC 402(f), Written Explanation to Recipients of Distributions Eligible for Rollover Treatment.

  2. In general, IRC 402(f) requires plan administrators of qualified plans to provide a written explanation to recipients of eligible rollover distributions that explains:

    1. The rules under which a recipient may elect a direct rollover to an eligible retirement plan;

    2. Withholding of income tax if there is no direct rollover;

    3. The rules which permit tax deferral on the distribution if it is rolled over into an eligible retirement plan within 60 days of distribution;

    4. If applicable, information regarding IRC 402(d) & IRC 402(e); and

    5. Other rules applicable to exempt trusts.

  3. In general IRC 6652(i) applies to retirement plans under IRC 401(a), IRC 408(a), IRC 408(b), IRC 403(a), and IRC 403(b).

  4. An eligible rollover distribution means any distribution to an employee of all or part of the balance to the credit of the employee in a qualified trust, other than certain periodic payments, hardship distributions, and distributions required by IRC 401(a)(9).

  5. The explanation must be provided no less than 30 days and no more than 180 days before the date of the distribution.

  6. The penalty under IRC 6652(i) is $100 for each failure to provide a written explanation, up to a maximum penalty of $50,000 for all such failures per calendar year.

  7. IRC 6652(i) penalties are assessed on the plan administrator (as defined in IRC 414(g)).

  8. Form 8278 must be completed when IRC 6652(i) penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 586, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 4 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.8  (05-22-2012)
Accuracy-Related Penalty for Forms 1040/1120 Discrepancy Adjustments - IRC 6662

  1. When discrepancy adjustments are made on Forms 1040 or 1120 that are related to a Form 5500 examination, the agent must make a determination as to whether assessment of penalties is appropriate.

  2. The 20% negligence penalty under IRC 6662(a) is the most commonly applied penalty on discrepancy adjustment cases.

  3. When the agent determines that penalties should be imposed on a Form 1040 or Form 1120 discrepancy adjustment, the following requirements must be observed:

    1. Per IRC 6751(b), supervisory approval is required in writing prior to the proposed assessment for any penalty under IRC 6662.

    2. For this purpose, managerial approval should be documented on Form 5464, Case Chronology Record.

    3. Any applicable penalties should be applied through the penalty menu in RGS. The program will automatically compute the penalties and provide an explanation of the penalties being included as part of the Form 4549-E, Income Tax Discrepancy Adjustments, report.

    4. When imposing IRC 6662 penalties, the agent must notify the taxpayer in writing that penalties are being assessed.

    5. When the assessment of penalties under IRC 6662 is being proposed, a penalty write-up should be included as part of the Revenue Agent Report (RAR) issued with the "30-Day letter" (Letter 3605-A).

    6. IRC 6662 penalty calculations should be included in or as an attachment to the RAR.

    7. The workpapers should include a brief discussion on the applicability of penalties and whether or not penalties are being assessed.

  4. To prepare the case for penalty assessment, the agent will enter transaction code 680 and the amount of IRC 6662 penalties that are being assessed on Form 5599, Item 15– Increase in Adjustment Dollars (+) prepared for the Form 1040 or 1120 discrepancy adjustment.

  5. See IRM 4.71.4 for Form 1040/1120 discrepancy adjustment procedures.

4.71.18.9  (05-22-2012)
Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions - IRC 6662A

  1. Per IRC 6662A, if a taxpayer has a Reportable Transaction that was properly disclosed which resulted in an understatement for any tax year there shall be added to the tax an amount equal to 20 percent of the amount of the understatement. Per IRC 6662A(c), if the Reportable Transaction is not properly disclosed, the 20% penalty under IRC 6662A will be increased to 30%.

    Note:

    The term Reportable Transaction is defined below in paragraphs (8) and (9) of IRM 4.71.18.14.

  2. Per IRC 6662A(b)(1), the term Reportable Transaction understatement means the sum of--

    1. The product of-- (i) the amount of the increase (if any) in taxable income which results from a difference between the proper tax treatment of an item to which this section applies and the taxpayer's treatment of such item (as shown on the taxpayer's return of tax), and (ii) the highest rate of tax imposed by section 1 (section 11 in the case of a taxpayer which is a corporation), and

    2. The amount of the decrease (if any) in the aggregate amount of credits determined under subtitle A which results from a difference between the taxpayer's treatment of an item to which this section applies (as shown on the taxpayer's return of tax) and the proper tax treatment of such item.

    3. Any reduction of the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable income in determining the amount in paragraph (2)(a).

  3. IRC 6662A applies to any item which is attributable to:

    1. Any Listed Transaction, and

    2. Any Reportable Transaction (other than a Listed Transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.

  4. If IRS Appeals rejects the proposed assessment of an IRC 6707A penalty based on its determination that the transaction in question was not a Reportable Transaction, then the IRC 6662A penalty will not apply, but the IRC 6662(a) would apply.

  5. IRS Counsel has requested that if the agent determines that both IRC 6662A and IRC 6662(a) penalties apply, that the Revenue Agent Report (RAR) be written where IRC 6662A is the primary issue and IRC 6662(a) is the alternative issue.

  6. IRC 6662A penalties will not apply if the civil fraud penalties under IRC 6663 are applied.

  7. To prepare the case for penalty assessment, the agent will enter transaction code 681 and the amount of IRC 6662A penalties that are being assessed on Form 5599, Item 15– Increase in Adjustment Dollars (+) prepared for the Form 1040 or 1120 discrepancy adjustment.

4.71.18.10  (05-22-2012)
Civil Fraud Penalties - IRC 6663 Penalties

  1. Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud.

    1. Such evidence must show the taxpayer’s intent to evade the assessment of tax which the taxpayer believed to be owing.

    2. Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest difference of opinion, negligence or carelessness.

    3. In the case of a joint return, intent must be established for each spouse separately as required by IRC 6663(c). The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted on one spouse only.

  2. Civil fraud no longer requires a referral to Criminal Investigation (CI).

  3. Determination of this penalty is the shared responsibility of the examiner, his/her group manager and the Fraud Technical Advisor (FTA). If agreement cannot be reached regarding assertion of the civil fraud penalty, the decision will rest with the group manager.

  4. Per IRC 6663(a), if any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75% of the portion of the underpayment which is attributable to fraud.

  5. To prepare the case for penalty assessment, the agent will enter transaction code 320 and the amount of IRC 6663 penalties that are being assessed on Form 5599, Item 12– Penalties (+).

4.71.18.11  (05-22-2012)
Fraudulent Statement or Failure to Furnish Statement to Plan Participant - IRC 6690 Penalties

  1. IRC 6690 imposes a penalty on a plan administrator who:

    1. Willfully fails to furnish a statement to a plan participant showing the information at the time and in the manner required by IRC 6057(e), or

    2. Willfully furnishes a false or fraudulent statement.

  2. In general, the individual statement to a participant required by IRC 6057(e) must include the following:

    1. A description of the participant’s deferred vested retirement benefit;

    2. Information filed with respect to the participant on Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, and

    3. Notice to the participant of any benefits that are forfeitable in the event the participant dies before a certain date. See IRC 6057(a).

  3. The due date for delivering the statement to the individual is no later than the due date (including extensions) for the Form 8955-SSA that reports information with respect to the individual.

  4. The penalty is assessed on Master File (MFT 74).

  5. The penalty is imposed at $50 for each act or failure with no maximum.

  6. IRC 6690 provides a penalty for willfully failing to provide the statement, or willfully furnishing a false or fraudulent statement. Therefore, IRC 6690 penalties are not eligible for reasonable cause consideration.

  7. Form 8278 must be completed when IRC 6690 penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 168, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 7 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.12  (05-22-2012)
Failure to Timely File Form 5500 Schedule SB or Schedule MB - IRC 6692 Penalties

  1. IRC 6692 imposes a penalty on the plan administrator of a defined benefit plan to which IRC 412, Minimum Funding Standard, applies, when the plan administrator fails to file an actuarial report (Form 5500, Schedule SB or MB), in the time and manner as required by IRC 6059.

  2. The penalty under IRC 6692 is imposed if there is a failure to file Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information, or Schedule MB, Multi-employer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information, which must be filed as an attachment to the appropriate Form 5500 (series) return.

  3. The penalty is also applicable if:

    1. An enrolled actuary failed to sign the Schedule SB or MB,

    2. There is a failure to provide a material item of information required by Schedule SB or MB, or

    3. There is a failure to provide base information required by the actuarial report upon an actuarial valuation made in the time and manner required by IRC 412(c)(9).

  4. The penalty is $1,000 for each failure to file with no maximum.

  5. The penalty is imposed on the plan administrator. If more than one plan administrator is responsible for the failure, all are jointly and severally liable.

  6. The penalty is frequently assessed on Master File when the Form 5500 return is filed and processed.

    1. If the EP agent determines that the penalty is applicable, an EMFOLT print should be obtained for the applicable year to determine if the penalty was assessed.

    2. If the penalty is applicable and the penalty has not been assessed, the EP agent should assert the penalty.

  7. IRC 6692 provides for non-assertion of the penalty if the responsible party can show that the failure was due to reasonable cause.

    Note:

    The failure of an actuary to give the plan administrator a complete Schedule SB or MB on time is not reasonable cause.

  8. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury.

  9. Form 8278 must be completed when IRC 6692 penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 169, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 8 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.13  (05-22-2012)
Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities - IRC 6693 Penalties

  1. IRC 6693 provides for penalties related to Individual Retirement Arrangements under IRC 408(a) and IRC 408(b) such as Simplified Employee Pensions (SEPs) under IRC 408(k) and SIMPLE IRA plans under IRC 408(p).

  2. IRC 6693(a) provides for penalties for failure to file reports as required by IRC 408(i) and IIRC 408(l).

  3. IRC 6693(c), provides for penalties relating to SIMPLE IRA plans under IRC 408(p).

  4. Penalties under IRC 6693 are established on Master File either on the trustee or employer as applicable.

  5. Form 8278 is used to assert IRC 6693 penalties.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the 7th line (next to penalty reference number 573), complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 9 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.13.1  (05-22-2012)
Penalties Under IRC 6693(a)

  1. IRC 6693(a) imposes a penalty for the failure to furnish a report required by IRC 408(i) or IRC 408(l) for IRAs including SEPs and SIMPLE IRA plans.

  2. IRC 408(i) requires that:

    1. Annual calendar year reports be made on Form 5498, IRA Contribution Information, concerning the status of the IRA.

    2. Each trustee or issuer required to file Form 5498 is also required to furnish the participant a statement containing the information required to be furnished on Form 5498 plus the value of the IRA at the end of the calendar year.

      Note:

      A copy of the Form 5498 may be used to satisfy this requirement.

    3. The disclosure statements and copies of the governing instruments be provided to benefited individuals. A benefited individual is the individual for whom an IRA is established.

  3. IRC 408(l) requires that an employer who:

    1. Makes contributions to a SEP on behalf of employees make reports to employees upon adoption of the SEP indicating its adoption, contribution requirements, and allocation basis.

    2. Adopts a SEP furnish employees a written statement each calendar year indicating the amount of employer contribution to the employee’s IRA.

      Note:

      This requirement is satisfied if the information is contained on the employee’s W–2 for the calendar year in which the contribution is made.

  4. The due dates of the reports required to be filed by IRC 408(i) and 408(l) are:

    1. The annual report (Form 5498) is to be filed, accompanied by transmittal Form 1096, on or before May 31 following the calendar year for which the Form 5498 is required.

    2. In general, the disclosure statement and a copy of the governing instrument must be received by the benefited individual no later than the date of the establishment of the IRA.

    3. Reports required on the adoption of a SEP are to be furnished to an employee no later than a reasonable time after the later of the time the employee becomes employed or the time of the adoption of the SEP.

    4. The statement of the December 31 value of the IRA must be provided to the IRA owner by the following January 31st. Contribution information for all types of IRAs other than SIMPLE IRAs must be provided no later than May 31st.

  5. The penalty for failure to file a report, as described in IRC 6693(a), at the time and in the manner required, is $50 for each failure to file.

  6. The penalty for failure to satisfy these requirements of IRC 408(i) is imposed on the trustee of an individual retirement account.

  7. The penalty for failure to satisfy these requirements of IRC 408(I) is imposed on the employer maintaining the SEP.

  8. IRC 6693 provides for non-assertion of the penalty if it is shown that the failure is due to reasonable cause.

4.71.18.13.2  (05-22-2012)
Penalties Under IRC 6693(c)

  1. IRC 6693(c) imposes a penalty on the failure to furnish certain information required under IRC 408(i) and IRC 408(l)(2) to participants in SIMPLE IRA plans described in IRC 408(p).

    1. IRC 408(l)(2) requires that the trustee or issuer of an IRA set up to receive contributions under an employer’s SIMPLE IRA plan each calendar year furnish the employer a summary description containing information regarding the SIMPLE IRA plan, the employer maintaining the plan, and the trustee or issuer.

    2. IRC 408(l)(2) also requires that an employer maintaining a SIMPLE IRA plan notify eligible employees of their right to participate in the plan. Such notice must include a copy of the applicable summary description.

    3. IRC 408(i) requires that the trustee or issuer of SIMPLE IRAs provide the SIMPLE IRA owners a statement showing the account balance at the close of the calendar year and the account activity during that calendar year. A copy of the Form 5498 may be used to satisfy this requirement.

  2. The due dates for the items listed in paragraph (1) are as follows:

    1. b. The summary description described in paragraph (1) a) must be provided to the employer by the trustee or issuer in time for the employer to meet its notice requirement, described above. In most cases the summary description will be due the employer shortly before November 2nd of each calendar year.

    2. The employer’s notice to employees described in paragraph (1) b) must be provided before the 60-day election period (during which eligible employees can make or change salary deferral elections) described in IRC 408(p)(5)(C).

    3. The statement from the trustee or issuer described in paragraph (1) c) is due the IRA owner no later than 31 days after the end of the calendar year.

  3. The penalty for failure to satisfy the requirement of IRC 408(i) and IRC 408(l)(2) described above is imposed on:

    1. The trustee or issuer of IRAs set up to receive contributions made under a SIMPLE IRA plan, in the case of the summary description and the statement requirement.

    2. The employer, in the case of the notice requirement.

  4. The penalty for failure to provide one or more notices, statements or summary descriptions described in IRC 6693(c) is $50 for each day such failure continues.

  5. IRC 6693 provides for non-assertion of the penalty if it is shown that the failure is due to reasonable cause.

  6. A penalty imposed on a trustee under IRC 6693(c) does not apply when the trustee timely provides the required information directly to the employee covered by the SIMPLE IRA plan.

  7. A penalty imposed on an employer under IRC 6693(c) does not apply when an employee covered by the SIMPLE IRA plan has selected his or her own trustee and the information regarding that trustee is not available at the time the employer is required to provide the notice containing such information to the employee, provided the employer takes steps to ensure the missing information reaches the employee as soon as reasonably possible.

4.71.18.14  (05-22-2012)
Failure to Keep Records Necessary to Meet Reporting Requirements - IRC 6704 Penalties

  1. IRC 6047(d) requires the plan administrator (as defined in IRC 414(g)) and any person issuing any contract under which designated distributions may be made, to make returns and reports regarding such plan or contract to:

    1. The Secretary,

    2. The participants, and

    3. The beneficiaries.

  2. IRC 6704(a) imposes a penalty on any person who:

    1. Has a duty to report or may have duty to report any information under IRC 6047(d), and

    2. Fails to keep such records for the purpose of providing the necessary data base for either current reporting or future reporting.

  3. IRC 6704(b) provides for a penalty of $50, per each calendar year, multiplied by the number of individuals in relation to whom such failure occurred.

  4. The penalty shall not exceed $50,000.

  5. IRC 6704(c)(1) provides for non-assertion of the penalty if it is shown that the failure is due to reasonable cause and not due to willful neglect.

  6. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts to substantiate reasonable cause. The statement must contain a declaration, made by the appropriate individual, that the statement is made under penalties of perjury.

  7. Form 8278 must be completed when IRC 6704 penalties are being assessed.

    1. On page 3, complete items 1 through 5, 7, 8 and items 10 through 13.

    2. On page 3, on the 8th line (next to penalty reference number 639), complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. When prepared, Form 8278 must be placed in a separate "Penalty File" with Form 3198-A stapled on front as described in paragraph (10) of IRM 4.71.18.1 above.

    5. See IRM 4.71.18, Exhibit 10 at Employee Plans IRM Exhibits for an example of Form 8278.

4.71.18.15  (05-22-2012)
Failure to Include Reportable Transaction Information With the Return - IRC 6707A Penalties

  1. IRC 6707A imposes a penalty for the failure to include on any statement or return (including an amended return) any information required to be disclosed under IRC 6011 and associated regulations regarding Reportable Transactions (see paragraphs (8) and (9) below).

  2. The section 6707A penalty is in addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement of tax.

  3. The penalty under IRC 6707A is a stand-alone penalty, meaning it does not require an associated income tax examination.

  4. IRC 6707A(e) further provides that taxpayers that are publicly traded companies are required to disclose their liability for IRC 6707A penalties in public reports filed with the Securities and Exchange Commission.

  5. Unlike most other penalties, the IRC 6707A penalty contains no reasonable cause exception in many instances.

    1. The penalty cannot be rescinded with respect to a Listed Transaction (see paragraph (8) below).

    2. The Commissioner (or his delegate) may rescind the imposition of the penalty with respect to a Reportable Transaction that is not a Listed Transaction if it would promote compliance with the tax laws and effective tax administration.

      Note:

      A decision to rescind must be accompanied by a record describing the facts, reasons for the decision, and the amount rescinded.

    3. While a taxpayer may challenge (through Appeals and/or through tax court) the determination that it engaged in a Reportable Transaction or that it failed to timely and adequately disclose its participation in such a transaction, it cannot seek such review of the Commissioner’s refusal to rescind the penalty.

  6. The IRS is required to submit an annual report to Congress summarizing the application of the IRC 6707A penalty and the rescission provision.

  7. The determination of whether the IRC 6707A penalty applies can impact the determination of the IRC 6662A penalty (“Reportable Transaction Understatement”), which is covered in IRM 4.71.18.11.4.

  8. Definitions of key terms used in this section are as follows:

    1. Reportable Transaction is defined in IRC 6707A(c) as a transaction that the IRS has determined, under regulations prescribed under IRC 6011, is of a type having a potential for tax avoidance or evasion.

    2. Listed Transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a Listed Transaction and are therefore subject to the disclosure requirements pursuant to Treasury Regulations section 1.6011-4.

  9. In addition to the definition in paragraph 8(a) above, a Reportable Transactions is further defined in Treas. Reg. 1.6011-4 to include:

    1. Listed Transactions,

    2. Confidential transactions,

    3. Transactions with contractual protection,

    4. Certain loss transactions, and

    5. Transactions of interest.

  10. The IRC 6707A penalty related to a Listed Transaction is equal to 75 percent of the decrease in tax shown on the return as a result of the Reportable Transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes) with the following maximum and minimum limits :

    1. The maximum penalty is $100,000 for each year in the case of a natural person, and

    2. The maximum penalty is $200,000 for each year in any other case.

    3. The minimum penalty is $5,000 for a natural person and $10,000 for all other taxpayers.

  11. For a Schedule C Business, the IRC 6707A penalty related to a Listed Transaction is on the Form 1040 filer.

    1. The penalty can be applied for each year

    2. If Form 1040 is jointly filed, the penalty is applied to each spouse individually if both spouses "participated" in the transaction.

    3. If only one spouse has "participated" in the transaction, the agent will only propose the penalty against the spouse who participated.

    4. If each spouse was independently involved in the transaction, the agent should propose a maximum $100,000 or a minimum $5,000 penalty against each spouse. A penalty case would be set up in the name and SSN of each spouse.

  12. For a Form 1120, the IRC 6707A penalty related to a Listed Transaction is on the Form 1120 filer only.

  13. For a Form 1065 or Form 1120-S, the IRC 6707A penalty related to a Listed Transaction is:

    1. On the Form 1065 or 1120-S filer and on each partner or shareholder's Form 1040.

    2. The penalty on the Form 1065 or Form 1120-S would be a maximum of $200,000 or a minimum of $10,000 each year.

    3. The penalty on each partner's or shareholder's Form 1040 would be a maximum of $100,000 or a minimum of $5,000. If a joint Form 1040 return is filed, see paragraph (11) above to determine if a penalty should be applied to each spouse.

  14. The penalty for failing to furnish information regarding a Reportable Transaction that is not a Listed Transactions is equal to 75 percent of the decrease in tax shown on the return as a result of the Reportable Transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes) with the following maximum and minimum limits :

    1. The maximum penalty is $10,000 for each year in the case of a natural person (see paragraph (9) for more details), and

    2. The maximum penalty is $50,000 for each year in any other case.

    3. The minimum penalty is $5,000 for a natural person and $10,000 for all other taxpayers.

  15. If a Reportable Transaction exists, IRC 6011 requires that the transaction be reported on the applicable tax returns (e.g. Forms 1040, 1120, 1120-S, or 1065) of the entities involved in the transaction.

    Note:

    Form 5500 is not subject to IRC 6707A penalties.

  16. Treas. Reg. 1.6011-4(e) requires taxpayers to file a disclosure with Office of Tax Shelter Analysis (OTSA).

    1. A taxpayer filing a Form 8886, Reportable Transaction Disclosure Status, with a return for the first time is required to file a duplicate copy of Form 8886 with OTSA at the same time.

    2. The requirement to file Form 8886 arises with respect to a return for the taxable year in which participation in a Reportable Transaction commences.

    3. The requirement to file a duplicate disclosure statement with OTSA applies only with respect to the initial year the Form 8886 is filed.

  17. The following two examples illustrate the application of the IRC 6707A penalty for failure to comply with the requirement to file a Reportable Transaction Disclosure Statement:

    1. Example 1: Taxpayer T is required to attach a Form 8886 to its return for the 2007 taxable year and to send a copy of the Form 8886 to OTSA at the time it files its return. Taxpayer T fails to attach the Form 8886 to its return and fails to send a copy of the Form 8886 to OTSA. Taxpayer T is subject to a single penalty under IRC 6707A for failure to disclose because Taxpayer T failed to comply with the disclosure requirements of IRC 6011. A penalty under IRC 6707A also would apply if Taxpayer T had failed to comply with only one of the two requirements.

    2. Example 2: Assume the same facts as Example 1, except that Taxpayer T also subsequently files an amended return for 2007 that reflects Taxpayer T's participation in the Reportable Transaction. Taxpayer T fails to attach a Form 8886 to the amended return as required by Reg. 1.6011-4(e)(1) of this chapter. Taxpayer T is subject to an additional penalty under IRC 6707A for failing to disclose a Reportable Transaction.

  18. Under the current regulations, filing an amended return with a disclosure (Form 8886) will not cure the failure to file a disclosure with the original return unless the amended return is filed before the due date of the original return (whether extended or not).

    1. Example 3: Assume Taxpayer T’s extended due date is August 15th. On June 1, he files a return but fails to include the required disclosure. On September 1 (after the due date of the return), he files an amended return with the disclosure. He is still liable for the penalty. It doesn’t matter that he attempted to cure the problem or whether he attempted to do so before or after the IRS discovered his participation.

    2. Example 4: Assume the same facts as Example 3 except that Taxpayer T filed the amended return before August 15th. The amended return would be considered a "superseding return" that is treated as the original return. Because this "superseding return" was filed with the required disclosure before the due date (as extended), Taxpayer T is not liable for the IRC 6707A penalty.

  19. The IRC 6707A penalty will not be imposed until a taxpayer files a return and fails to provide the required disclosure statement.

    1. The IRC 6707A penalty will not be imposed where a taxpayer has not yet filed a return, even if the due date for that return has already passed.

    2. The IRC 6707A penalty will not be imposed where a taxpayer has failed to timely file a return (or required disclosure statement)) but subsequently files a late return with the required disclosure statement.

  20. Whether a taxpayer was required to disclose under the IRC 6011 regulations depends on what version of those regulations was in effect when the taxpayer entered into the transaction.

    1. The version of the regulations that applies to a transaction at the time the transaction was entered into by the taxpayer will remain applicable to the taxpayer, even if the regulations subsequently were modified.

    2. When the IRC 6011 regulations do not impose a disclosure requirement, the IRC 6707A penalty cannot apply.

    3. Therefore, even if a taxpayer files a tax return after October 22, 2004, reflecting participation in a listed or non-listed Reportable Transaction and fails to file a Form 8886, he or she may not be subject to the Section 6707A penalty.

    4. If a taxpayer entered into the transaction before 2001, it would be subject to the disclosure regulations only if it was a corporation and the taxpayer reasonably estimated that the transaction would reduce the taxpayer's Federal income tax liability by more than $1 million in any single taxable year or by a total of more than $2 million for any combination of taxable years. This rule is often referred to as the "old rule" .

    5. If the taxpayer entered into the transaction on or after January 1, 2001, but before January 1, 2003 and filed its tax return reporting the transaction (i.e. reflecting the tax impact of that transaction) on or before June 14, 2002, the taxpayer is subject to the provisions listed in paragraph d) above ("the old rule" ). In other words, the taxpayer is subject to the disclosure rules only if it was a corporation and the transaction reduced the taxpayer’s Federal income tax liability by the threshold amounts listed under the “old rule” above.

    6. If the taxpayer entered into the transaction on or after January 1, 2001 and did not file its tax return reporting the transaction (i.e. reflecting the tax impact of that transaction) on or before June 14, 2002, the taxpayer is subject to the disclosure rules if it was a corporation, individual, trust, partnership, or S corporation. However, taxpayers other than corporations were only subject to the disclosure rules with respect to Listed Transactions. Listed Transactions no longer had to meet the projected tax effect test.

    7. All taxpayers who are required to file a tax return are subject to the disclosure rules with respect to all Reportable Transactions, including Listed Transactions if the transaction is entered into on or after January 1, 2003.

  21. If Form 8886 is not filed with the applicable tax return(s) and OTSA, and the applicable transaction is a Listed Transaction, IRC 6501(c)(10) will control the statute of limitations of assessment.

    1. Generally, the statute of limitations period for purposes of IRC 6707A is determined by the statute of limitations for the applicable tax return(s) (Forms 1040, 1120 1120-S or 1065), which is the later of three years from the date the return is filed or due.

    2. If the normal statute has expired, Counsel must be contacted to see if they will support an extended statute under IRC 6501(c)(10). This will be pursued only with Counsel’s written concurrence. An email or memo from Counsel with their approval must be included in the penalty case file.

  22. Taxpayers have pre-assessment appeal rights for IRC 6707A penalties.

    1. To secure pre-assessment appeal rights, the taxpayer must file a timely, written protest to the 30-Day letter.

    2. Unlike other cases that EP Exam sends to Appeals, the IRC 6707A penalty case remains open in the examination group while Appeals considers the penalty.

4.71.18.15.1  (05-22-2012)
Processing IRC 6707A Penalties

  1. A taxpayer’s liability for the IRC 6707A penalty may be determined through examination of the taxpayer’s return or through the investigation of a promoter or preparer.

    1. In the latter situation, a taxpayer’s liability for the penalty may be determined without opening an examination of the taxpayer.

    2. Pursuit of the IRC 6707A penalty neither constitutes an examination of the tax return to which it is being applied, nor does it prevent the subsequent opening of an examination of a return.

  2. The IRC 6707A penalty may be imposed even if an income tax examination (i.e., discrepancy adjustment) results in no change in tax liability or if no income tax examination is opened, as long as sufficient evidence is obtained to support the conclusion that the taxpayer participated in a Reportable Transaction, had a duty to disclose that participation, and failed to properly disclose. There must also be sufficient factual information to support the calculation of the penalty amount.

  3. If EP is involved in a concurrent examination with SB/SE or LB&I, then the penalty case file will be under the jurisdiction of the SB/SE or LB&I agent; otherwise EP has jurisdiction.

  4. When there is a concurrent examination with SB/SE or LB&I, the EP agent will:

    1. Analyze and write up whether a transaction is substantially similar to a Listed Transaction.

    2. Contact the SB/SE or LB&I agent and provide any information that will help develop the penalty case.

    3. If the decision is made that IRC 6707A penalty case will be worked by SB/SE or LB&I, see IRM 4.71.18.14.2 below for the applicable procedures.

  5. When working a penalty case, the EP agent must first determine whether the applicable taxpayer has timely reported the Reportable Transaction (e.g., Listed Transaction) on Form 8886, Reportable Transaction Disclosure Statement, with the applicable tax return and with OTSA.

    1. The agent is responsible for obtaining the original tax returns to determine if the Form 8886 was attached to the returns.

    2. The EP agent must also verify the filing of the Form 8886 with OTSA.

    3. If Form 8886 was filed with the return(s) and OTSA, the agent will document the 5500 file accordingly (detailing the steps taken to verify the filing) and a penalty case will not be opened.

    4. If Form 8886 was not filed with the return(s) and OTSA, the agent will document the 5500 file accordingly (detailing the steps taken to verify the filing) and a IRC 6707A penalty case will be opened.

  6. Once the EP agent determines that a taxpayer either has failed to properly disclose a Reportable Transaction on Form 8886 or has not timely filed the Form 8886, the agent must obtain written approval from both the group manager and the Area Manager before opening an IRC 6707A penalty examination.

    1. For this purpose the "Case Overview and Record of Approval of IRC 6707A Penalty" should be completed.

    2. The agent will submit the case file and the approval form to his or her group manager for written approval of the imposition of the penalty within 10 calendar days of the determination that the penalty applies.

    3. The group manager will review the case development and if approved, the group manager will electronically sign and date the approval form.

    4. If the IRC 6707A penalty will be pursued by SBSE or LB&I, the group manager will return the case file to the agent to process.

    5. If the IRC 6707A penalty is being pursued solely by EP, the group manager will forward the package to his or her Area Manager.

    6. If the IRC 6707A penalty is the maximum penalty allowable under §6707A (i.e., the penalty was determined under IRC 6707A(b)(2), the group manager should forward the file to the Director, EP Examinations for approval.

    7. The EP Area Manager or Director, EP Examinations, as appropriate, will review the case development and approve in writing the assertion of the penalty on the approval form.

    8. See IRM 4.71.18, Exhibit 11 at Employee Plans IRM Exhibits for a copy of the approval form.

  7. Once approval is obtained, the agent will:

    1. Prepare a separate case file for the IRC 6707A penalty for each affected taxpayer and each affected year.

    2. Establish each individual taxpayer and each year on Non-Master File (NMF) AIMS and RCCMS.

      Note:

      Unlike other penalty cases, IRC 6707A penalty cases are worked as Non-Return Units (NRU) and are established on NMF AIMS in accordance with IRM 4.71.17.

  8. IRC 6707A penalty case files will contain the same components of other types of EP exams like a case chronology record, Form 5772, workpapers and correspondence between the agent and the taxpayer or POA.

  9. If only one spouse has participated in a Reportable Transaction (e.g., only one spouse is subject to the IRC 6707A penalty), the agent should propose the penalty against the participant-spouse. The agent should:

    1. Determine the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes) and determine the penalty amount under IRC 6707A(b)(1).

    2. Apply the minimum and maximum penalty amounts as listed above and in IRC 6707A(b)(2) and (3).

  10. If both spouses participated in a Reportable Transaction (e.g., both spouses are subject to the IRC 6707A penalty), the agent should propose the penalty against each spouse (the agent should open separate IRC 6707A cases for the husband and wife). The agent should:

    1. Determine the decrease in tax shown on the return as a result of the transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes) and determine the penalty under IRC 6707A(b)(1).

    2. Allocate the penalty determined under paragraph (a), 50% to each spouse, unless the taxpayers provide clear evidence supporting an alternative allocation (e.g., the taxpayers provide a K-1 indicating ownership percentage).

    3. Apply the minimum and maximum provisions of IRC 6707A(b)(2) and (3) to each spouse separately.

  11. A form letter has been developed to notify the taxpayer that the Service is opening an IRC 6707A investigation. See IRM 4.71.18, Exhibit 12 at Employee Plans IRM Exhibits for a copy of the letter.

    1. If the EP agent is pursuing the penalty, this letter is to be sent by the EP agent.

    2. If SBSE or LB&I is pursuing the penalty, this letter will be sent by SBSE or LB&I.

  12. The penalty case file will contain:

    1. All relevant documents or other evidence that demonstrates that the transaction was a Reportable Transaction (e.g., transactional documents), e-mail, other correspondence, opinions about whether the transaction is a Reportable Transaction or promotional material.

    2. Where applicable, any evidence about why a disclosure is deficient, including the Form 8886 and any other evidence about the time or manner of filing the Form 8886.

  13. When Form 2848, Power of Attorney and Declaration of Representative, is secured for an IRC 6707A penalty case, item 3 of the form must reflect "Income Tax and Civil Penalties" in order for the Service to recognize the individual as a representative for both the income tax return and the penalty.

    Note:

    If "Civil Penalties" is not reflected on the form, the individual will not be recognized as having the proper authority to represent the taxpayer on the penalty case.

  14. After all the written approvals are obtained to assert the IRC 6707A penalty (see paragraph (6)), the agent will prepare and mail (via certified mail) the 30-Day letter (Letter 4143) and the appropriate forms and publications as follows:

    1. Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment with the amount of the IRC 6707A penalty listed;

    2. Revenue Agent Report (RAR);

    3. Computation Workpapers (Form 4549-E used to determine the "tax effect" from participating in the transaction);

      Note:

      This Form 4549-E should be clearly marked in red at the top of the first page: "For IRC 6707A penalty computation purposes only" .

      )

    4. Publication 1, Your Rights As A Taxpayer ;

    5. Publication 5, Your Appeal Rights & How to Prepare a Protest If You Don’t Agree ;

    6. Publication 594, What You Should Know About the IRS Collection Process.

  15. In general, the 30-Day letter (Letter 4143) for the penalty case should be issued with at least 270 days remaining on the period of limitations on assessment.

    1. This will allow sufficient time for the taxpayer to respond to the 30-Day letter and the agent to send the unagreed case to Mandatory Review with at least 210 days remaining on the period of limitations on assessment, giving Mandatory Review sufficient time to process the case and forward to Appeals for consideration and assess the penalty as appropriate.

    2. If the 30-Day letter cannot be issued with at least 270 days remaining on the period of limitations, the agent should request an extension of the time to make the assessment from the taxpayer on Form 872, Consent to Extend the Time to Assess Tax.

    3. If the taxpayer refuses to extend the statute and all relevant facts to support the penalty are established, the agent should send the unagreed case to Mandatory Review with at least 210 days remaining on the period of limitations on assessment.

  16. The statute of limitations for assessing IRC 6707A penalties is as follows

    1. Generally, the statute of limitations period for purposes of IRC 6707A is determined by the statute of limitations for the applicable tax return(s) (Forms 1040, 1120 1120-S or 1065), which is the later of three years from the date the return is filed or due.

    2. If Form 8886, Reportable Transaction Disclosure Statement, is not filed with the applicable tax return(s) and the Office of Tax Shelter Analysis (OTSA), IRC 6501(c)(10) will control the statute of limitations of assessment.

      Note:

      IRC 6501(c)(10) will be pursued only with Counsel’s written concurrence. The email from Counsel with their approval must be included in the penalty case file.

    3. See IRM 4.71.9.8 for more detailed information on statute of limitations procedures related to IRC 6707A.

  17. When securing an extension on a Form 1120, Form 1120-S, Form 1065, or Form 1040 return (the return for the taxpayer for which the penalty is being applied), the agent should prepare Form 872, Consent to Extend the Time to Assess Tax, in accordance with IRM 4.71.9.8.

    1. If the agent is extending both the income tax statute and IRC 6707A penalty statute, list "Income and IRC 6707A Penalty" on the "Kind of tax" line of Form 872.

    2. If the agent is extending the IRC 6707A penalty statute only, list "IRC 6707A Penalty " on the "Kind of tax" line of Form 872.

    3. The consent should include an additional paragraph (6) that reads as follows: "Without otherwise limiting the applicability of this agreement, this agreement also extends to the expiration date identified in paragraph (1) above, the period of limitations for assessing any penalty pursuant to IRC 6707A, Penalty For Failure to Include Reportable Transaction Information with the Return, with respect to the taxpayers, kind of tax and tax periods identified above."

  18. When an IRC 6707A penalty case is developed in conjunction with an income tax examination (i.e., discrepancy adjustment):

    1. The agent does not need to conclude the income tax examination before issuing the 30-Day letter for the IRC 6707A penalty, provided all relevant facts to support the penalty are established.

    2. Likewise, an agent does not need to conclude the IRC 6707A penalty investigation before issuing the 30-Day letter for the income tax examination.

    3. In other words, the agent should not arbitrarily hold one case to allow the other case to "catch up" .

    4. However, the penalty case should be developed enough to determine whether IRC 6662A is applicable before issuing the 30-Day letter on the income tax exam.

    5. If the timing is appropriate for the income tax and IRC 6707A penalty case(s), the 30-Day letters for both should be issued at the same time.

  19. If, after opening an IRC 6707A penalty investigation and contacting the taxpayer, it is determined that the IRC 6707A penalty does not apply:

    1. The agent will issue a no-change letter specifically addressing this penalty. See IRM 4.71.18, Exhibit 13 at Employee Plans IRM Exhibits for a copy of the letter.

    2. The EP agent will prepare the Form 3198-A and in the "Other Instructions" section of the form, include the following comment: "IRC 6707A penalty closed No Change. Closing letter has been issued to taxpayer by Group Manager."

    3. The EP agent will then make the following comment in RCCMS Closing Record: "It has been determined that the 6707A penalty does not apply. No assessment is to be made. Case is closed as a No Change. A hard copy of the case file will follow. Case is on NMF AIMS."

    4. The EP agent will prepare Form 5599 in accordance with paragraph (23) for the NMF AIMS controls and save a copy in the Office Docs folder in RCCMS. The disposal code is 02 in item 13 and there should be no entry in item 15.

    5. The agent will close the case in accordance with paragraphs (24) and (25).

  20. The penalty is "agreed" if the taxpayer signs Form 870 with the penalty amount listed.

  21. If the taxpayer makes a payment for penalties due, the agent will follow the instructions listed under IRM 4.71.4.5.1 paragraphs (5) through (7) with the following exceptions:

    1. Form 3244-A will reflect the proper MFT as 13 (if the entity is a business) or 55 (for an individual taxpayer) and use TC 640 advance payment code. See IRM 4.71.18, Exhibit 14 at Employee Plans IRM Exhibits for an example of Form 3244-A.

    2. Form 3210 will be completed to include "Reference Number 648" next to the MFT and the appropriate statement: "This check is for payment of a CIVIL PENALTY - IRC 6707A - to be posted to the BMFOL" or "This check is for payment of a CIVIL PENALTY - IRC 6707A - to be posted to the IMFOL" . See IRM 4.71.18, Exhibit 15 at Employee Plans IRM Exhibits for an example of Form 3210.

  22. Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is used to assert IRC 6707A penalties.

    1. On page 1, complete items 1 through 5; items 9(c) and 9(d) for the corresponding penalty; and items 10 through 13.

    2. On page 8, complete Name, TIN, Year, and MFT listed at bottom of the page.

    3. The agent and manager must sign and date the form.

    4. See IRM 4.71.18, Exhibit 16 at Employee Plans IRM Exhibits for an example of Form 8278 completed for an IRC 6707A penalty case.

  23. Form 5599, TE/GE Examined Closing Record, should be completed for all IRC 6707A examinations. The following line items on Form 5599 should be completed as noted:

    1. P7-18: Enter the taxpayer’s TIN followed by a "N" .

    2. P21-22: The MFT is 99.

    3. P24-29: Enter the tax period.

    4. P31-34: Enter the name control.

    5. C: Enter the name of the taxpayer.

    6. Item 13: Enter the applicable disposal code: 02 if case is closed "no change" ; 03 if the penalty is agreed (taxpayer signs Form 870); 07 if the taxpayer protests to Appeals; 10 if the taxpayer neither protests nor signs Form 870; 13 if the penalty case is transferred to SB/SE or LB&I.

    7. Item 14: Enter the statute expiration date.

    8. Item 15: Enter the penalty amount with reference code 648.

    9. Item 28: Enter the examiner’s time on the case.

    10. Item 30: Enter the technique code: 4 – Field exam, or; 2 – OCEP.

    11. Item 31: Enter the examiner’s grade.

    12. Item 32: Enter the grade of the case in the blocks from left to right as two digits (i.e., Grade 9= 09)

    13. Item 33: Enter the examiner’s last name; leave a space and then first initial.

    14. Item 40: Enter the applicable project code.

    15. Item 42: Enter the ARDI code, if applicable.

    16. Item 48: Enter the EP Special Project Code Definer, if applicable.

    17. Item 50: Enter the examiner’s group code.

    Note:

    See IRM 4.71.18 Exhibit 9 at Employee Plans IRM Exhibits for an example of a completed Form 5599.

  24. When the case is ready to close, the agent will complete:

    1. All of the appropriate RCCMS closing actions; however, do not check the "Update AIMS" box.

    2. Form 5595 for an update to the case for Status Code 51 on NMF AIMS and place it in the paper case file.

    3. Assemble the case files in accordance with IRM 4.71.18.14.2 below.

  25. IRC 6707A penalty cases will be closed to:

    1. EP Mandatory Review if "unagreed" .

    2. ESSP (EP Closing Unit) if "agreed" or "no change" .

4.71.18.15.2  (05-22-2012)
Transferring an IRC 6707A Penalty Case to SB/SE or LB&I

  1. When there is a concurrent examination in SB/SE or LB&I and the decision is made that the IRC 6707A penalty exam will be worked by SB/SE or LB&I the following procedures will be followed:

    1. The EP agent will keep a copy of the RAR, the Case Overview and Record of Approval of IRC 6707A Penalty form , and the Acknowledged copy of the Form 3210 in the workpapers of the 5500 case file under Form 5772, Section R – Penalties.

    2. The EP agent will manually prepare a Form 3210, addressed to the SBSE/LB&I agent assigned the collateral case and mail the IRC 6707A penalty case file to the SBSE/LB&I agent.

    3. When the Acknowledged copy of the Form 3210 is received, the EP Agent will then make the following comment in the RCCMS Closing Record: "Referral was made to SBSE (or LB&I). There will be no hard copy case file to follow. Please close controls in RCCMS and on NMF AIMS."

    4. The agent will complete Form 5595, electronically sign the form and save a copy in the Office Documents folder in RCCMS.

    5. The EP agent will prepare Form 5599 as provided in paragraph (23) of IRM 4.71.18.14.1 (except that the disposal code is 13 and the penalty amount is $0) for the NMF AIMS controls and save a copy in the Office Documents folder in RCCMS.

    6. The RCCMS file will be closed to ESSP (APU 1).

4.71.18.15.3  (05-22-2012)
IRC 6707A Penalty Case File Assembly

  1. IRC 6707A Penalty exams are in many respects assembled in the same way as Form 5500 exams, but there are exceptions.

  2. The following items will be assembled on the outside of the case file from top to bottom as applicable:

    1. Form 10329, Transmittal Sheet (if there are multiple years and/or related taxpayers);

    2. Signed Form 895-EP, Notice of Statute Expiration;

    3. Form 3198-A, TE/GE Special Handling Notice, identifying the type of case in the "Other Instructions" section (e.g., "IRC 6707A Penalty Case File - 412(i)" ).

  3. The following items will be assembled on the inside right-hand side of the case file from top to bottom as applicable:

    1. Form 5595, TE/GE Update, to update to status 20 (if going to Mandatory Review) or 51 (if going to ESSP);

    2. Form 5599, TE/GE Examined Closing Record;

    3. Case Overview and Record of Approval of IRC 6707A Penalty form with applicable signatures;

    4. Completed Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties;

    5. Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment (if secured);

    6. Copy of the 30-Day letter (Letter 4143) and Penalty RAR;

    7. Form 2848, Power of Attorney (if applicable)

      Note:

      In order to be valid, Form 2848 must specifically refer to "IRC 6707A Penalties" .

    8. Original Form 872 if secured for the penalty, or copy if the Form 872 for the income tax return included the penalty;

    9. Form 5772, EP Workpaper Summary;

    10. Form 5773, EP Workpaper Summary Continuation Form (or its equivalent);

    11. Form 5464, Case Chronology Record;

    12. Copies of any workpapers that relate to the development of the 6707A penalty;

    13. Copy of the corresponding Form 5500;

    14. Copy of the corporate tax return (i.e., Form 1120, 1120-S, or 1065) or Form 1040 that the penalty relates to with the amount of the deduction highlighted;

    15. If the transaction is a Listed Transaction under Rev. Rul. 2004-20: a copy of the Actuarial Hand-off Memo and Summary, a copy of the plan document with the benefit section tabbed, a copy of the adoption agreement if different from the plan document with benefit section tabbed, a copy of any insurance policies, and a copy of promotional and marketing materials and brochures if available;

    16. Copy of the IRC 6707A opening letter and any other correspondence relating to the penalty.

    Note:

    The workpapers must be fully developed with all the documents listed above. A file with just a copy of the approved Form 886-A RAR is not acceptable.

  4. If the case involves more than 1 tax year, the main file will contain all the information listed in paragraph (3). The files for the related years will contain at a minimum:

    1. Form 5599,

    2. Case Overview and Record of Approval of IRC 6707A Penalty form,

    3. Form 8278,

    4. Form 2848 (if applicable) and

    5. Copy of the 30-Day letter (Letter 4143) and Penalty RAR.

    6. The files listed in paragraph (2) will be attached to the outside of the case file.


More Internal Revenue Manual