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Part 8. Appeals

Chapter 11. Penalties Worked in Appeals

Section 1. Penalty Appeals

8.11.1  Penalty Appeals

8.11.1.1  (10-23-2007)
Penalty Appeals

  1. A penalty exists for failing to comply with almost every filing, paying, and reporting requirement in the Internal Revenue Code.

  2. IRC Subtitle F, Chapter 68 contains most of the civil penalty provisions. They are called "additions to the tax" , "additional amounts" , or "assessable penalties." For simplicity, they are referred to as "penalties" in this chapter.

  3. The Commissioner issued Policy Statement 20–1, (formerly P-1-18), to set forth the Service’s position regarding penalties. IRM 1.2, General Management.

  4. IRM 20.1, Penalties, provides Servicewide instructions for working penalty cases which includes:

    1. Information for all functions on types of penalties imposed by the Internal Revenue Code,

    2. Guidelines for allowing abatement based on , and

    3. Types of penalties which can be appealed and the process for this.

  5. This IRM section provides Appeals procedures for controlling and working the various types of penalty cases which have been appealed. It also contains detailed information on penalties not addressed in IRM 20.1 such as the IRC 6694, Preparer Conduct penalties. However, it does not take the place of IRM 20.1.

8.11.1.2  (10-23-2007)
Avenues of Penalty Appeals

  1. Various types of proposed or assessed penalties can be protested to Appeals. Below are some examples discussed in IRM 20.1 and IRM 8.7:

    1. Deficiency

    2. Deficiency Type

    3. Post assessment Penalty Appeal

    4. Claim for Refund

    5. Special Claim for Refund

    6. Offer in Compromise see IRM 8.23

    7. Trust Fund Recovery Penalty IRM 8.25

  2. Some penalties are subject to the deficiency procedures of IRC Subchapter B of Chapter 63. A penalty based on a liability determined under the deficiency procedures is considered at the same time the deficiency is considered.

    Example:

    IRC 6662, Accuracy Related Penalty, IRC 6662A Imposition of Accuracy-related Penalty on Understatements with Respect to Reportable Transactions, and IRC 6663, Fraud Penalty.

    IF THEN
    The additions to tax under IRC 6651, Failure to File and Failure to Pay relates to the deficiency The Failure to File and the Failure to Pay penalty is subject to deficiency procedures.
    The addition to tax is not related to a deficiency The addition to tax must be assessed within the applicable statute of limitations.
    There is a related tax deficiency The fraudulent failure to file addition to tax is subject to the deficiency procedures and must be included on the statutory notice of deficiency (90–Day Letter).

  3. Without a related deficiency, the Tax Court will not consider the IRC 6651(f) penalty. The procedure is similar to the IRC 6651(a)(1), Late Filing penalty.

    Note:

    Taxpayers should be granted pre-assessment appeal rights for the fraudulent failure to file addition to tax under IRC 6651(f). This applies even when there is no related tax deficiency.

  4. Deficiency Type —There are several "stand-alone" penalties which Congress specifically provided that are not subject to the deficiency procedure. The Service has provided a deficiency-type procedure for several of these penalties. Most taxpayers do not use the Special Claim for Refund rules provided by Congress for these penalties, since Appeals provides a pre-assessment deficiency type procedures.

  5. Post-assessment Penalty Appeal—These penalties are assessed against a taxpayer before the taxpayer is given an opportunity to dispute the penalty. Most of these penalties may be abated on grounds of reasonable cause. A few have special grounds such as reasonable basis. Previously, some information document penalties had due diligence abatement criteria.

  6. Claim for Refund —after penalties are paid, they are subject to the claim for refund provisions. If denied, the taxpayer may bring suit in U.S. District Court or U.S. Court of Federal Claims.

  7. Special Claim for Refund — Congress provided special rules to mitigate potential hardship for taxpayers subject to certain "stand-alone" penalties which are not subject to the deficiency procedures. Examples of penalties not subject to deficiency procedures are:

    • Preparer Conduct penalty under IRC 6694, and

    • Promoting abusive tax shelters, aiding and abetting, and frivolous return penalties under IRC 6700, IRC 6701, and IRC 6702 respectively.

      Note:

      The general claim procedures of IRC 6511 and the general refund suit rule of IRC 6532 replaced the special partial payment provisions of IRC 6703(c) IRC 6703(c), which applied to IRC 6702 Frivolous Filing penalties, if the tax return is filed after December 31, 1989. Since the IRC 6702 penalty no longer falls under the special claim procedures of IRC 6703(c), the IRC 6702 penalty can now be appealed under the post-assessment penalty appeal program.

8.11.1.3  (10-23-2007)
Resource Documents

  1. The following documents should be used as reference material for resolving cases with penalty issues:

    • IRM 20.1. Penalty Handbook

    • Document 6209, IRS Processing Codes and Information

8.11.1.4  (10-23-2007)
Statutory Changes

  1. Since penalties may impact every IRC filing, paying and reporting requirement, most major tax acts contain revisions to the penalty sections in Chapter 68 of the IRC. For example:

    • The American Jobs Creation Act of 2004, H. R. 4520, Pub. L. No. 108 — 357 (AJCA) - added IRC 6662A, Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions. It gives special rules for amended returns in IRC 6662A(e). It added IRC 6664(d) which sets forth rules and standards for reasonable cause with respect to understatements. It modifies the present law accuracy-related penalty applicable to tax shelters. IRC 6662A and IRC 6662(d) are effective for taxable years ending after October 22, 2004. See IRM 20.1.5.13..

    • Legislative Affairs Update 2004–7 provides a section-by-section summary of 40 AJCA provisions with the greatest administrative impact on IRS.

8.11.1.5  (10-23-2007)
Erroneous Advice

  1. IRC 6404(f) provides for abatement consideration based on erroneous advice.

  2. Penalty Handbook, IRM 20.1.1.3, provides guidance on the basic types of advice which can be considered and the method for evaluating it.

  3. The types of guidance discussed in IRM 20.1.1.3 are:

    • written advice provided by the Service,

    • oral advice provided by the Service, and

    • advice provided by a tax professional.

8.11.1.6  (10-23-2007)
Overview of Appeals Post-Assessment Penalty Program

  1. Post-assessment penalty appeal procedures apply to all assessed additions to the tax, additional amounts, and assessable penalties.

  2. Appeals will consolidate processing of post-assessment penalty appeal cases originating from Compliance.

  3. This involves:

    1. assigning cases to designated Appeals Officers, or

    2. the case file will generally be forwarded to a local Appeals office when the taxpayer requests a face-to-face conference.

  4. For purposes of this IRM, the term Appeals Officer will refer to an Appeals employee assigned to the case who has the authority to resolve or settle the issue.

8.11.1.6.1  (10-23-2007)
Penalty Receipt Process

  1. Post-assessment penalty appeal cases can be received from:

    • Campus

    • Exam

    • Collection

    • Accounts Management

  2. When Compliance sustains the penalty and the taxpayer submits a written protest, they will forward the case to Appeals. Guidelines for documents to be included with the case file can be found in IRM 20.1.

  3. Below is a list of some of the documents which may be included in the file depending on the source of the case:

    • A copy of the previous written abatement request; the request that was originally denied (TC290 for zero, Block Series, 98/99 Source Document)

    • If the source document isn't available, a copy of the file's charge out should be included information to Appeals.

    • Copy of the disallowance letter or print of RCA conclusion screen (852C, 853C, IDRS Print, 854C, 2413P, 2414(P).

    • Letter requesting an appeal, signed by the taxpayer or an authorized POA (a valid Form 2848 on file, not a Form 8821 or Form 2848 Level H).

    • Form 12385, Transmittal of a Case to Appeals, identifies the tax period, type of penalty and amount.

    • Form 3210 transmitting the case to Appeals.

  4. The case will be established on ACDS. Refer to IRM 8.20.3 for a description of the ACDS fields.

  5. IRM 8.20.5 provides general guidelines for Processing Receipts as well as the work unit definition and special guidelines.

    • General guidelines for in IRM 8.20.5, Processing Receipts, for the work unit definition and the allowable exceptions.

      Note:

      PENAP cases with different MFT's are separate work units.

    • The ACDSTYPE code varies depending on the penalty in dispute. A full list of the ACDS type codes can be found on the ACDS Utilities Menu.

    • AIMS indicator = E

    • STATCODE (status code) - Enter ASESD (if penalties are not assessed, control the case on ACDS as type I (Income Tax) and enter the statute date).

    • PropdPen proposed penalty - Enter the total penalties for each tax period.

      Note:

      If there is more than one penalty for each tax period, total the amount for each period and enter the sum for the respective period.

  6. The following table identifies TC codes included in the proposed penalty field at the return level which have a type code of "PENAP" :

    Transaction Code Type of Penalty
    160 or 166 Failure to File
    170 or 176 Estimated Tax Penalty
    180 or 186 Deposit Penalty
    234 or 238 Daily Delinquency Penalty
    240 or 246 Miscellaneous Penalty (Missing Information)
    270 or 276 Failure to Pay
    280 or 286 Bad Check

  7. Attach the Case Summary Card (CSC) to the file.

  8. Forward the case to the Appeals Team Manager or designated official for the following actions:

    • Assign the case to an Appeals employee on ACDS.

    • Send ACDS uniform acknowledgment letter ( Letter 4141, Letter 4031, or Letter 4046) and include Publication 4576, Orientation to the Penalty Appeals Process and Notice 1016, How to Stop Interest on Your Account.

8.11.1.6.2  (10-23-2007)
Procedures for Appeals Officers

  1. Appeals Officers have the authority to abate previously assessed penalties.

  2. Upon receipt of the case the Appeals Officer will verify the following Case Summary Card (CSC) information:

    • Entity information (address and spelling),

    • TIN to ensure correct account is controlled on ACDS.

    • MFT

    • Type code

    • Feature Code

    • Representative information

    • Tax periods at issue covered by the Representative's authority

    • Statute Date or Statute Code - generally these penalties have been assessed but these fields must be validated within five (5) days of receipt. See IRM 8.21.3.

      Note:

      verify the RSED is still open.

    • Verify the uniform ACDS acknowledgment letter and enclosure has been sent to the taxpayer

    • Verify that all file data is present per IRM 20.1.1.

    • Update the CARATS activity record

  3. What if a correction is needed to ACDS?

    • Address and Power of Attorney can be made by the Appeals Officer by utilizing the Address tab on the bottom tool bar of the Case Activity Record.

    • All other changes must be submitted to APS via secure E-mail. These changes include be are not limited to: TIN, tax years, statute, type, etc.

  4. Appeals must maintain a close liaison with the Campus Penalty Coordinators.

  5. Appeals Officers should generally resolve these cases as expeditiously as possible, generally within 90 days of receipt.

  6. Depending on the complexity of the penalty issue, the case may be handled by either Centralized Penalty Group or assigned an Appeals Officer in a local office.

  7. Appeals Officers should be familiar with the most current edition of Document 6209, IRS Processing Codes and Information.

  8. When considering the penalty issue, the account information should be less than 60 days old. However, depending on the type of penalty, a may be current transcript may be necessary.

  9. If you need the tax returns to resolve the case, follow normal procedures.

  10. The Appeals Officer will review the case and contact the taxpayer if additional information is necessary to provide a prompt resolution.

  11. No contact is required if the case is fully conceded based upon the information in the file. The closing letter sent to the taxpayer will confirm the decision to fully abate the penalty.

  12. The taxpayer may request a face-to-face conference. The centralized campus teams will transfer the case to a local office for resolution. The Field office will make the necessary conference arrangements.

  13. Appeals will not trade penalty issues for other issues in the case. Penalties can and should still be settled, but the settlement should be based on the merits and the hazards surrounding each penalty standing alone.

8.11.1.6.2.1  (10-23-2007)
Reasonable Cause

  1. Penalty cases handled in Appeals involve more complex and questionable reasonable cause issues.

  2. Decisions are made based on fact and the law, taxpayer circumstances and compliance history, and hazards of litigation.

  3. Refer to IRM 20.1 for reasonable cause criteria guidelines.

  4. The following questions are used to determine if the taxpayer has established reasonable cause:

    1. Do the taxpayers reasons directly relate to the penalty that was assessed?

    2. Do the dates and times coincide with the taxpayer explanation?

    3. Could the noncompliance have been anticipated and or prevented?

    4. Did the taxpayer make an honest mistake?

    5. Has the taxpayer provided sufficient detail (dates, relationships, documents) to determine if ordinary business care and prudence was exercised?

    6. Is the individual an employee of the taxpayer or a 3rd party such as a reporting agent, accountant or lawyer?

    7. Is there a history of being assessed the same penalty?

8.11.1.6.2.2  (10-23-2007)
Case Activity Record (CAR) Documentation

  1. Key actions are required to be entered on the CAR along with the applicable time spend for each action..

  2. The following table provides the mandatory CAR codes for case activities which must be documented::

    CARATS code CARATS code definition
    CR Case Received
    CF/xx Conference type/xx =

    • FF - fact-to-face

    • ML - by mail

    • NN - not necessary

    • NR - no response

    • NS - no show

    • PC - telephone call

    • VC - video conference
    DM Determination Made
    AC-FR Final Determination Made

    Additional CAR action codes are found on the ACDS utilities menu.

  3. Enter the appropriate time spent on each activity you entered on the CAR.

8.11.1.6.3  (10-23-2007)
Closing Actions

  1. This section discusses the process for preparing and closing the penalty case by the Appeals Officer and Appeals Processing Services (APS). All forms and letters must be generated from ACDS.

  2. Prepare the Appeals Case Memo which outlines the facts and circumstances supporting sustention or abatement of the penalty. IRM 8.6.2 provides additional information on the preparation of this document.

  3. Depending on the determination one of the following ACDS closing letters should be used:

    • Letter 1277 - Abatement Denied. Use the narrative section to provide the reason for denying the abatement request,

    • Letter 1278 - Fully Abated,

    • Letter 3324 - Proposal or partial abatement. This letter is issued prior to closing the case and provides the taxpayer 15 days to provide additional information supporting the request. If the Appeals Officer does not receive this information within the time allotted, the case will be closed as proposed.

  4. Prepare customized 5402 generated from ACDS. Guidelines for completing the document can be found on the ACDS Utilities Menu. The document is used to:

    • show the affected tax periods included in the case,

    • route the case to the APS unit who will process the adjustments,

    • list penalty transaction codes,

    • provide a source document to adjust the taxpayers account based on the case determination,

    • provide special instructions related to processing the case are included,

    • notate the remarks section of the Form 5402 when a certified claim disallowance letter had been issued ( Letter 1363 and/or Letter 1364), instructing APS to enter this information in the Notesfield on ACDS. The reason for this requirement is to ensure duplicate certified letters are not issues which may erroneously extend the two year period to file suit with the applicable court.

    • send feedback to Compliance when an address is provided in the Route To: field on the Form 5402.

    There is a discussion of APS closing procedures and explanation of the closing code and blocking series below. See IRM 8.11.1.6.3.3.

  5. Appeals Officers sign the closing letters

    IF THEN
    The Appeals Officer has been delegated settlement authority Mail the closing letters
    The Appeals Officer has not been delegated settlement authority Do not mail the closing letters until the Appeals Team Manager/Team Leader has approved the decision.

  6. In rare situations, resolution of the case will involve a specific matter closing agreement. See IRM 8.13.1, Closing Agreement Manual.

8.11.1.6.3.1  (10-23-2007)
APS Closing Procedures

  1. Case received from the Appeals Officer (AO).

  2. Assign on case to an APS employee on PEAs.

  3. Review closing documents for special instructions.

  4. Review and update ACDS with the closing information. See the ACDS utilities menu for the valid closing codes.

    • Closing Codes for penalty cases are:

      Determination Made Closing Code
      Sustained (penalties are not removed) 14
      Abated (penalties are fully removed) 15
      Partially Abated (only part of the penalties are removed) 16

    • ACAPDATE is the date the Appeals Team Manager signs the Form 5402,

    • ACTIONentered is ACKCLS,

    • RevisedPen indicates the amount of the penalty sustained and is taken from Form 5402 or Form 8278,

    • Form 5402 use the total for each period in the AMT SUS (amount sustained column),

    • Form 8278 - subtract the amount abated from the amount proposed.

  5. Multiple tax periods may be listed on the Form 5402. However to satisfy Campus requirements for a source document, provide a copy of the form for each tax period with the applicable period highlighted on each copy.

  6. Input the IDRS adjustments,

  7. If the penalties are sustained a TC 290 $0.00 is input with Blocking Series 96X.

    Note:

    Only Appeals can use Blocking Series 96X, which creates a –N freeze on the account. Penalties can't be abated in the future unless Appeals reverses this freeze code. To reverse the –N freeze, input TC 290 $0.00 with Blocking Series 97X after the Appeals Officer/Appeals Team Manager has verified that penalty abatement is appropriate. Then input a Form 5402 with the penalty abatement amount.

  8. Additional information on adjustment actions are found in IRM 20.1.2Failure To File/Failure To Pay Penalties and IRM 2.4.16 Command Codes REQ54 and ADJ54.

  9. Maintain closed office file in accordance with IRM 8.20 guidelines.

8.11.1.6.3.2  (10-23-2007)
Form 8278 Closing Actions

  1. For penalties assessed and processed on Form 8278, Computation and Assessment of Miscellaneous Penalties:

    • Prepare Form 5402 and appeals case memo outlining the settlement of the case.

    • Prepare the appropriate closing letter, either Letter 1277, or Letter 1278.

    • Prepare Form 8278 or other adjustment document when an assessment is to be made as part of the case closing.

  2. Prepare Form 5402 from ACDS for a summary of the case resolution and identify penalties involved. The Form 8278, Computation and Assessment of Miscellaneous Penalties, may also be prepared as the source document for IDRS actions. The following table provides guidelines for required documents:

    IF AND THEN
    Form 5402 is used the penalty is sustained enter transaction code (TC) 290 for zero (–0–) in the appropriate column in number 12 . Write in "Use blocking series 96X" .
    Form 8278 is used the penalty is sustained enter TC 290 (–0–) in a blank space on the form. Write in "Use blocking series 96X."
    Form 5402 is used penalty previously sustained by Appeals is to be abated enter a TC 290 with a blocking series 97X (reversal of penalty abatement refusal) in the appropriate column in number 12.
    Form 8278 is used penalty previously sustained by Appeals is to be abated enter a TC 290 with a blocking series 97X ( reversal of penalty abatement refusal) in a blank space on the form.

    Note:

    Use blocking series 96X (penalty abatement refusal) for the TC 290 (-0-) transaction prevents the abatement of a penalty sustained by Appeals. Only Appeals personnel are permitted to use blocking series 96X and 97X.

8.11.1.6.3.3  (10-23-2007)
Closing Actions for Other Penalties

  1. Indicate closing actions and amounts on a Form 5402, Appeals Transmittal Memorandum and Supporting Statement, for IDRS actions not processed on Form 8278, Computation and Assessment of Miscellaneous Penalties.

  2. Enter the Appeals findings and/or reason for adjustment in the blank space on Form 5402.

    • If the penalty is sustained, also enter the blocking series described in the If/Then Table below.

    • Use the columns on the customized Form 5402 for account closing actions on IDRS and appeals closing actions (last three columns) on ACDS. One form may be used for multiple penalties.

  3. When the penalty is sustained, enter transaction code TC 290 -0- in the appropriate column in number 12 on Form 5402. Write in "Use blocking series 96X." The use of a TC 290 for zero (0) amount with blocking series 96X (penalty abatement refusal) will prevent the abatement of a penalty sustained by Appeals. If an appeals officer subsequently decides to abate a penalty previously sustained by Appeals, input a TC 290 with a blocking series 97X (reversal of penalty abatement refusal). Only Appeals personnel can use these two blocking series.

  4. Appeals Officers must prepare a case memo to explain the disposition of each penalty. If the penalty case has uncomplicated issues, prepare a brief narrative case memo. If a penalty case has more complicated issues, prepare a longer narrative case memo.

  5. When all case action has been completed, forward the case file to the records section through the Appeals Team Manager. If the appeals officer has delegated settlement authority, forward the case file directly APS depending on local procedure.

8.11.1.7  (10-23-2007)
Processing Master File Assessment of Certain Civil Penalties

  1. Process all miscellaneous penalties covered by the civil penalty module (CPM) system on Form 8278, Computation and Assessment of Miscellaneous Penalties.

  2. All penalty cases must be controlled on ACDS. Refer to the ACDS utilities for the type code to be used for these cases. .

  3. Two master file tax (MFT) codes were created to record account action to facilitate processing of these penalties.

    • MFT 55 for assessments against individuals (processed on the individual master file — IMF)

    • MFT 13 for assessments against business entities (processed on the business master file — BMF).

  4. Take all account actions through IDRS. All assessed miscellaneous penalty case files sent to Appeals by either the area offices or SB/SE and W & I campuses will contain a Form 8278.

  5. Do not control any of these penalty cases on AIMS.

  6. Each Form 8278 will include:

    • a document locator number (DLN), and

    • reflect the penalty amount assessed.

  7. More than one penalty may be assessed on a Form 8278. Additional penalties must be for:

    • the same calendar year or period, and

    • the same entity.

  8. Assess all miscellaneous penalties against only one individual.

  9. Joint returns forwarded to Appeals will include a Form 3198, Special Handling Notice, and indicate whether the penalty is to be assessed against the primary or secondary SSN.

8.11.1.7.1  (10-23-2007)
Closing Miscellaneous Penalty Cases

  1. Prepare Form 5402, Appeals Transmittal and Case Memo, for each case. In addition, it may be necessary depending on the penalty to prepare Form 8278 for processing IDRS actions.

  2. The following table provides guidance for completing Form 5402:

    IF AND THEN
    There is an assessed penalty amount the miscellaneous penalty is to be fully or partially abated complete the appropriate column in number 12 of the Form 5402
    There is an assessed penalty amount the miscellaneous penalty is to be sustained show a zero in the appropriate columns in number 12 and enter a TC 290 (–0–) with a blocking series 96X on the Form 5402
    There is an assessed penalty amount the amount is to be subsequently abated show a zero in the appropriate columns in number 12 and enter a TC 290 with a blocking series 97X on Form 5402

  3. Line by line instructions for preparing Form 8278 are on the back of the form.

    IF AND THEN
    There is an assessed penalty amount the miscellaneous penalty is to be fully or partially abated show the amount in column 9(e) and the amount abated in column 9(f) of the Form 8278.
    There is an assessed penalty amount the miscellaneous penalty is to be sustained show a zero in column 9(f) and enter a TC 290 (–0–) with a blocking series 96X in a blank space on the Form 8278.
    There is a sustained penalty the amount is to be subsequently abated show a zero in column 9 (f) and enter a TC 290 with a blocking series 97X on Form 8278.

  4. The use of a TC 290 for -0- with blocking series 96X (penalty abatement refusal) alerts someone looking at the account the penalty issue had been considered by Appeals.

    Note:

    Only Appeals personnel are permitted to use the 96X blocking series.

  5. A TC 290 with a blocking series 97X reverses a penalty abatement indicator and allows additional action related to this type of penalty..

    Note:

    Only Appeals personnel are permitted to use the 97X blocking series.

  6. If the penalty was recommended by Compliance, attach a Form 3198, Special Handling Notice, to the administrative file and note that Appeals sustains this assessment..

8.11.1.8  (10-23-2007)
IRC 6703 Claims for Refund Processing on IRC 6700, 6701, and 6702 Penalties

  1. Under IRC 6703, the following procedural rules apply to the penalties under IRC 6700 and IRC 6701:

    1. The burden of proof is on the Government.

    2. The deficiency procedures do not apply.

    3. Suspend collection action on penalties asserted under IRC 6700 and 6701 if the taxpayer pays 15 percent of the penalty and files a claim for refund within 30 days after notice and demand. If the claim is denied, continue to suspend collection if the taxpayer files suit in district court within 30 days after issuance of the claim denial or 30 days after the expiration of 6 months from the filing of the claim, whichever date occurs first. If the taxpayer does not timely file suit in district court, then the prohibition on collection ends. The statutory period for collection is suspended during the period the government is prohibited from collecting.

    Note:

    a) and b) above also apply to the penalty under IRC 6702.

  2. IRC 6700 provides a penalty for promoting abusive tax shelters. The penalty is the lesser of:

    1. $1000, or

    2. 100% of the gross income derived from the activity, if the taxpayer establishes that it is lesser.

    3. Despite (a) and (b) above, the penalty for activities after October 22, 2004 is 50% of the gross income derived (or to be derived) from the activity if a false or fraudulent statement regarding tax benefits of the activity is provided.

  3. The penalty is imposed for fraudulently representing the tax benefits of the shelter or for making a gross valuation overstatement (exceeds 200 percent of correct valuation) as to value of the property or services.

    1. Although the penalty is subject to abatement on grounds that the promoter has a reasonable basis for the valuations and made the valuation in good faith, the penalty cannot be appealed under the post assessment penalty procedures in Treas. Reg. 601.106(a)(1)(iv). This is because the penalty is subject to the special claim for refund rules under IRC 6703.

    2. IRC 7408 permits the Government to seek a district court injunction against the promoter engaged in conduct subject to the IRC 6700 penalty in order to prevent recurrence of the conduct. The injunctive suit can be filed in the district court where the promoter resides, does business, or conducts activity subject to the IRC 6700 penalty.

  4. IRC 6701 provides a $1,000 (individual) or $10,000 (corporation) penalty for aiding and abetting understatement of tax liability.

    Note:

    This penalty is not subject to a reasonable cause or reasonable basis determination.

  5. IRC 6702 provides a $500 penalty for filing a frivolous return.

    1. These penalties no longer have the special claim provisions of IRC 6703(c) as their avenue of appeal.

    2. Penalties under IRC 6702 for returns filed after December 31,1989, may be appealed under the post assessment penalty program.

    Note:

    This penalty is not subject to a reasonable cause or reasonable basis determination.

    Note:

    A change was made to IRC 6702in Pub. L 109–432 effective for submissions made or issues raised after April 2, 2007. The change increased the penalty to $5000. See Notice 2007-30, 2007 I.R.B. 883 (April 2, 2007).

8.11.1.8.1  (10-23-2007)
IRC 6703 Assessment and Initial Claim Procedures

  1. The compliance function determines the IRC 6700, 6701, and 6702 penalties.

    1. Once determined, the penalty is assessed and the taxpayer is billed for the amount due.

    2. The billing notice for penalties under IRC 6700 and 6701 advises the taxpayer that, if 15 percent of the penalty is paid within 30 days from the date of the notice, a claim for refund may be filed on Form 843, Claim for refund and request for abatement.

      Note:

      The penalty under IRC 6702 is no longer eligible for the special 15 percent partial payment provision, for tax returns filed after December 31, 1989.

  2. If a claim is filed under (1)(b) above, examination reviews the claim and when appropriate, abates the penalty.

    1. Late filed claims are disallowed.

    2. As provided in Treas. Reg. 601.106(b), claims are denied where the penalty is protested on moral, religious, political, constitutional, conscientious or similar grounds.

    3. In other cases, the taxpayer is sent a letter advising that the claim will be disallowed unless a written request for Appeals consideration is received within 30 days after the date of the notifying letter.

8.11.1.8.1.1  (10-23-2007)
IRC 6703 Appeals Claim Procedures

  1. Work IRC 6703 claim cases on an expedited basis. The prohibition on collection of the unpaid amount only runs for 30 days after the earlier of:

    • Six month from the date the claim for refund is filed, or

    • The day on which the claim for refund is denied;

    unless the taxpayer begins a proceeding in the appropriate United States district court for the determination of his liability with the 30-day period. If the taxpayer does timely begin a proceeding, then the prohibition on collection continues until there has been a final resolution of the IRC 6703 proceeding.

  2. The period of limitation on collection is tolled during the period the Service is prohibited from collecting the unpaid amount.

  3. Issuance of a Claim Disallowance letter ( Letter 1364) by certified mail is necessary when the claim is disallowed to begin the two-ear period in which to file a refund suit under IRC 6532.

  4. Consider an IRC 6703 claim for refund in the same manner as any other claim for refund.

    1. Settle claims based on potential hazards of litigation.

    2. Base decisions on the facts and circumstances of each case, subject to the approval of the team manager.

    3. Coordinate decisions to abate IRC 6700 penalty with local SB/SE Counsel prior to taking abatement action.

  5. Control cases on the Appeals Centralized Database System (ACDS). Process any abatement action on Form 8278, Computation and Assessment of Miscellaneous Penalties.

    IF THEN
    The determination is to abate the penalty Send the taxpayer a letter acknowledging the abatement.
    The determination is to sustain the penalty Send the taxpayer certified letter of Claim Disallowance (Letter1364) by certified mail.

8.11.1.9  (10-23-2007)
IRC 6707 Promoter Penalty Cases

  1. Promoter penalties under IRC 6707 were designated as Appeals Coordinated Issues on July 23, 2003 (along with other preparer and promoter penalties).

  2. In accordance with IRM 1.4.28 and IRM 8.2.1.6, Appeals Officers (AOs) or Appeals Team Case Leaders (ATCLs) who have this issue must make a referral to Appeals Technical Guidance through their manager upon assignment or preliminary review using Form 13381. This form is on both ACDS and the Appeals web site.

  3. AOs and ATCLs who are considering a case with the IRC 6707 issue must contact the Appeals Technical Guidance Coordinator prior to scheduling the initial conference to obtain the most current information. They must also secure the Coordinator's review and concurrence before