8.11.1  Return Related Penalties in Appeals

Manual Transmittal

November 12, 2013

Purpose

(1) This transmits revised IRM 8.11.1, Penalties Worked in Appeals, Return Related Penalties in Appeals.

Background

This section contains general information about Penalties Worked in Appeals and Return Related Penalties in Appeals.

Material Changes

(1) Editorial changes (including grammar, spelling, and minor clarification) were made throughout the IRM.

(2) Clarifed IRM 8.11.1.1.3 (1), Assessed Penalty Settlement Authority, to explain that Delegation Order 8-8, paragraph (13) grants authority to Appeals Area Directors to redelegate to Appeals Officers and Settlement Officers the authority to settle appeals of assessed penalties. Added a Note to explain that the authority to redelegate to Appeals Officers and Settlement Officers has not been made for International penalties.

(3) Added IRM 8.11.1.1.7.2 , Statutory Exceptions and Administrative Waivers, IRM 8.11.1.1.7.3, Administrative Waivers, and IRM 8.11.1.1.7.4, Correction of Service Error, for other abatement considerations.

(4) Revised IRM 8.11.1.1.8.1, Closing Forms, for clarification that both Form 5402 and Form 8278 are required for civil penalty assessments.

(5) Revised IRM 8.11.1.2.6, Processing Fraud Penalty Cases, for clarification on IRC 6663 and IRC 6651(f) fraud penalties.

Effect on Other Documents

This IRM supersedes IRM 8.11.1 dated 09/14/12.

Audience

Appeals

Effective Date

(11-12-2013)

Susan L. Latham
Director, Policy, Quality and Case Support

8.11.1.1  (11-12-2013)
Introduction to Penalties Worked in Appeals

  1. A penalty exists for failing to comply with many filing, paying, and reporting requirements in the Internal Revenue Code. Also, non-return penalties exists such as preparer penalties and appraisal penalty.

  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" throughout this IRM section.

  3. Policy Statement 20–1, (formerly P-1-18) which is found in IRM 1.2.20.1.1, sets forth the Service’s position regarding penalties. See IRM 1.2.20, Policy Statements for Penalties and Interest Activities.

  4. IRM 20.1, Penalty Handbook, provides the following Servicewide instructions for working penalty cases:

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

    2. Guidelines for considering abatement based on reasonable cause exceptions.

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

  5. This IRM section provides Appeals procedures for controlling and working various types of penalty cases worked in Appeals.

  6. This IRM section supplements the information in IRM 20.1, Penalty Handbook and its Sections.

  7. For purposes of IRM 8.11, Appeals Technical Employee (ATE) is used to refer to the employee assigned to the case who has the authority to resolve or settle issues. Appeals Technical employee is defined in IRM Exhibit 8.1.1-1.

8.11.1.1.1  (10-01-2012)
Managerial Approval of Penalties Before Appeals Consideration

  1. The examiner's manager generally must approve the penalty assessment per IRC 6751(b).

  2. See IRM 20.1.5.1.6, Managerial Approval of Penalties for more information.

8.11.1.1.2  (11-12-2013)
Types of Penalties Received in Appeals

  1. Several types of proposed or assessed penalties can be protested to Appeals. Below are some examples (not all-inclusive):

    Type of Penalty Case Description
    Deficiency (Penalties subject to deficiency procedures) 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 tax 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,

    are all penalties subject to deficiency procedures.
    Penalties not subject to deficiency procedures There are several "stand-alone" penalties that Congress specifically provided would not be subject to the deficiency procedures and do not have Tax Court Protest rights. The Service has provided procedures permitting taxpayers to request administrative review of several of these penalties.
    Post-assessment Penalty Appeals (PENAP) The taxpayer has the opportunity to meet with the examiner's manager before the penalties are assessed. Most of these penalties may be abated on grounds of reasonable cause. Appeals sees these penalties as post-assessed, not subject to deficiency procedures and do not have Tax Court Protest rights. See IRM 8.11.4, Penalty Appeals (PENAP), for more information.
    Claim for Refund After penalties are paid, taxpayers are entitled to the claim for refund provisions. If denied, the taxpayer may bring suit in a U.S. District Court or the U.S. Court of Federal Claims. See IRC 6511(a) and IRC 6511(b) for the limitation on the period for filing.
    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 these penalties that are worked in Appeals are:
    • Understatement of taxpayer's liability by tax return preparer under IRC 6694. See IRM 8.11.3,

    • Promoting abusive tax shelters under IRC 6700. See IRM 8.11.7.2. Aiding and abetting under IRC 6701 . See IRM 8.11.7.3. Frivolous tax submission penalties under IRC 6702. See IRM 8.11.8.1.

    Return Preparer Penalty see IRM 8.11.3
  2. The following additional rules apply to additions to tax:

    IF THEN
    Addition to tax is related to a deficiency Addition to tax is subject to the deficiency procedures and must be included in the statutory notice of deficiency (90–Day Letter).

    Note:

    Additions to tax under IRC 6651 Failure to File, Failure to Pay and Fraudulent Failure to File that relate to the deficiency are subject to deficiency procedures. Failure to pay should not be computed on a deficiency when a return has been filed by the taxpayer. See IRM 8.17.7.4(4).

    Note:

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

    Addition to tax is not related to a deficiency Addition to tax must be separately assessed within the applicable statute of limitations.

8.11.1.1.3  (11-12-2013)
Assessed Penalty Settlement Authority

  1. Appeals Technical Employees (ATEs) have authority to settle appeals of assessed penalties for less than the full amount, as provided by delegation orders:

    • Delegation Order 8-8 (formerly DO-66, Rev. 15) delegates the authority to settle cases to Appeals Team Managers, such as income tax cases and Offer-in-Compromise cases. (See IRM 1.2.47.9.)

    • Delegation Order 8-8, paragraph (13) grants authority to Appeals Area Directors to redelegate to Appeals Officers and Settlement Officers the authority to settle appeals of assessed penalties. No other authorities delegated in this Order may be redelegated.

      Note:

      The authority to redelegate to Appeals Officers and Settlement Officers has not been made for International penalties. For further guidance and contact information, see Appeals International OPS website.

    • Delegation Order 8-2 (issued January, 2005 and published in IRM 1.2.47.3) supplements the authorities in Delegation Order 8-8. Delegation Order 8-2 delegates the authority to settle the appeal of assessed penalties not exceeding $25,000 to Tax Specialists (Appeals Service Center Programs), Tax Specialists (Appeals Campus Programs/Bilingual, Spanish), and Appeals Service Center Program Specialists.

      Note:

      Campus ATEs are limited to assessed penalties not exceeding $25,000.

  2. If the ATE has settlement authority, the ATE will sign the Form 5402, Appeals Transmittal and Case Memo and annotate the ATM signature line as follows.

    • If the ATE has settlement authority based upon Delegation Order 8-2, then the ATM does not need to sign. The ATE should write "Delegation Order 8-2" on the ATM signature line.

8.11.1.1.4  (11-12-2013)
Carding Penalty Cases

  1. The ATE will verify that all penalty cases are controlled on the Appeals Centralized Database System (ACDS). Account & Processing Support (APS) will refer to IRM 8.20.5 for procedures for controlling cases on ACDS.

  2. General guidelines for processing receipts are found in IRM 8.20.5 and should be followed unless an exception is noted in the instructions related to a specific type of penalty case.

  3. Post-assessed miscellaneous civil penalty information is contained on Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. Each Form 8278 -

    • includes a document locator number (DLN), and

    • reflects the penalty amount assessed.

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

    • the same calendar year or period, and

    • the same entity.

  5. The following reference chart is provided to assist you when carding penalty cases. Penalty cases will generally fall under one of the following scenarios:

      Return Related Penalties (On the same RAR with the Income Tax Adjustment) Preparer Penalties Penalty Appeals (PENAP) Post-Assessed Miscellaneous Civil Penalties
    TYPE Code
    IRM 8.11.1.1.4 (6)
    I 6694(a), 6694(b), 6695(a)-(g), OTHPEN for "6713" . All the preparer penalties are pre-assessment appeal. PENAP Various
    MFT 30 55 or 13
    IRM 8.11.1.1.4 (7)
    Various 55 or 13
    IRM 8.11.1.1.4 (7)
    FEATRCD Enter Feature Code(s), as applicable AI - Appeals Coordinated Issue except 6713.
    Enter other Feature Code(s), as applicable
    Enter Feature Code(s), as applicable Enter Feature Code(s), as applicable
    TPTYPE Pri, Sec or Both N/A Pri, Sec or Both, if MFT = 30 Miscellaneous civil penalties are assessed against only one individual. Form 3198, Special Handling Notice may indicate whether the penalty is to be assessed against the primary or secondary SSN. Select the corresponding TPTYPE, either "Pri" for primary SSN or "Sec" for secondary SSN.

    Note:

    An exception is IRC 6702(a) - for frivolous tax returns penalties on married filling joint accounts, see IRM 20.1.10.10.1, Frivolous Tax Submissions. In this situation, select TPTYPE "Both."

    AIMS Indicator Y, N or E, as applicable E E E - Civil penalty cases are not controlled on AIMS. Therefore, use AIMS indicator "E."
    STATDATE Pre-assessed - Enter the assessment statute expiration date (ASED). Refer to the IRM on the specific type of penalty for additional information on determining the ASED.
    Post-assessed - Leave blank
    STATCODE Pre-assessed - Leave blank
    Post-assessed - ASESD
    See also IRM 8.11.1.2 IRM 8.11.3 See IRM 8.11.4 IRM 8.11

  6. TYPE - Refer to the ACDS utilities for the type code to be used for these cases. If there is no designated "TYPE" code for the miscellaneous penalty asserted, use "OTHPEN" and enter the IRC section in "Notes."

    Note:

    If more than one type of penalty is included on Form 8278 and more than one ACDS "TYPE" code could apply, use "OTHPEN."

  7. MFT - The following master file tax codes are used to control civil 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).

8.11.1.1.5  (10-01-2012)
Assignment of Penalty Cases

  1. The Appeals Team Manager (ATM) will assign the penalty case to an Appeals Technical Employee based upon the complexity of the penalty issue.

  2. The ATM or designated official will take the following actions:

    • Assign case to an ATE on ACDS.

    • Send the ACDS uniform acknowledgment letter in accordance with IRM 1.4.28.3.1 and IRM 1.4.28-6.

8.11.1.1.6  (10-01-2012)
New Receipt Procedures for Appeals Technical Employees

  1. Upon receipt of the case, the ATE must:

    • Determine the statute of limitations and validate the statute-related fields on ACDS within five (5) business days of receipt of the case. See IRM 8.21.3

    • Validate the Case Summary Card (CSC) information

    • Verify the uniform ACDS acknowledgment letter and enclosure(s) were sent to the taxpayer and that it was documented on the CAR

      Note:

      Make corrections if necessary.

    • Verify all file data is present per IRM 20.1.1.3.5.1(4)

  2. Validate the Case Summary Card (CSC) information and make updates, if necessary.

  3. If a correction is needed to ACDS take the following action(s):

    • Change the data fields by using the "Validations" tab on the bottom tool bar of the Case Activity Record.

    • All other changes not available in the validations tab must be submitted to APS using secured e-mail.

  4. There are several TYPE codes used on ACDS to identify the type of penalty case, including:

    TYPE Codes IRC Section/Description When Used/IRM Reference or For General Information IRM Reference
    I Income Tax Return Related Penalties - these are deficiency or deficiency-type pre-assessed penalties. IRM 8.11.1.2
    PENAP Penalty Appeals See IRM 8.11.4
    6676 IRC 6676, Erroneous Claim for Refund or Credit penalty case IRM 8.11.1.8.5
    6694(a) IRC 6694(a), Understatement Due to Preparer's Unreasonable Position(greater of $1,000 or 50% of income derived (or to be derived)) IRM 8.11.3
    6694(b) IRC 6694(b), Understatement Due to Preparer's Willful or Reckless Conduct (greater of $5,000 or 50%of income derived (or to be derived)) IRM 8.11.3
    6695(a)-(g) IRC 6695(a)-(g), Tax Preparer Penalty for specified failures IRM 8.11.3
    6695A IRC 6695A, Substantial and gross valuation misstatements attributable to incorrect appraisals IRM 8.11.8
    6700 IRC 6700, Penalty for Promoting Abusive Shelters IRM 8.11.7
    6701 IRC 6701, Penalty for Aiding and Abetting an Understatement of Tax Liability IRM 8.11.7
    6702 IRC 6702, Frivolous Tax Submissions IRM 8.11.8
    6704 IRC 6704, Failure to Keep Certain Records IRM 20.1.8.4
    6705 IRC 6705, Failure of Broker to Provide Notice to Payor IRM 20.1.10.11
    6706 IRC 6706, Original Issue Discount Information IRM 20.1.10.12
    6707 IRC 6707, Material Advisor's Failure to Furnish Information Regarding Reportable Transactions IRM 8.11.7
    6707A IRC 6707A, Failure to Disclose a Reportable Transaction IRM 8.11.7
    6708 IRC 6708, Failure to Maintain List of Advisees With Respect to Reportable Transactions IRM 8.11.7
    6709 IRC 6709, Penalties with Respect to Mortgage Credit Certificates IRM 8.11.7
    OTHPEN Other IRC penalty code sections not specified If there is no specified "TYPE" code for the IRC penalty code section asserted, use "OTHPEN" and enter the IRC section in "Notes"

8.11.1.1.7  (10-01-2012)
Consideration of Penalty Cases

  1. ATEs will resolve the cases as expeditiously as possible.

  2. Appeals will not concede penalty issues to obtain a concession on other issues in the case. Penalties should sometimes be settled, but the settlement must be based on reasonable cause, facts and the law, taxpayer circumstances and compliance history, and hazards of litigation.

    Note:

    Not all penalties that Appeals considers have reasonable cause provisions and those penalties are listed throughout this IRM section.

  3. Familiarize yourself with the most current edition of Document 6209, IRS Processing Codes and Information.

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

  5. The taxpayer may request a face-to-face conference. If this occurs on a case assigned to a Campus Appeals Office, transfer the case to a local field Appeals office for resolution and notify the taxpayer of the transfer. The Field office makes the necessary conference arrangements.

8.11.1.1.7.1  (10-01-2012)
Reasonable Cause

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

  2. The following questions should be used to determine if the taxpayer has established reasonable cause and should be considered in your final determination. Your decision must be clearly documented in the ACM and the facts and circumstances must support the decision:

    1. Do the taxpayer's explanations directly relate to the penalty that was assessed?

    2. Do the dates and times coincide with the taxpayer's 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 taxpayer an individual, third party such as a reporting agent, accountant or lawyer?

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

    8. Were there prior abatements of the same or similar penalties?

  3. Refer to IRM 20.1.1.3.2, Reasonable Cause, for more information.

8.11.1.1.7.2  (11-12-2013)
Statutory Exceptions and Administrative Waivers

  1. Statutory exceptions and administrative waivers are two very separate categories that are placed together because in many instances an administrative waiver is an extension of rules that were provided for by statute. For more information, see IRM 20.1.1.3.3, Statutory Exceptions and Administrative Waivers.

8.11.1.1.7.3  (11-12-2013)
Administrative Waivers

  1. The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. For more information, see IRM 20.1.1.3.3.2, Administrative Waivers.

8.11.1.1.7.4  (11-12-2013)
Correction of Service Error

  1. An IRS error can be any error made by the IRS in computing or assessing tax, crediting accounts, etc. IRM 20.1.1-2, Exhibit 20.1.1-2, Penalty Reason Code Chart, for the appropriate PRC to be used when abating either a systemically-generated or manually-input penalty. For more information, see IRM 20.1.1.3.4, Correction of Service Error.

8.11.1.1.7.5  (10-01-2012)
Hazards of Litigation

  1. Penalties may be settled based on hazards of litigation. Unlike Compliance, Appeals may consider the hazards of litigation in attempting to reach a settlement. The proper use of this settlement authority given to Appeals is critical in fulfilling its mission.

  2. Much of the settlement process is a judgment call based on your experience after considering the facts and the law.

  3. ATEs must evaluate the facts pertinent to the issue under consideration, the applicable law, and the potential outcome in the event the case is litigated.

  4. The hazards of litigation are the uncertainties of the outcome of the court’s decision in the event of a trial.

  5. Litigating hazards generally fall into 3 categories: factual, legal and evidentiary.

  6. Appeals may weigh these factors and determine an appropriate settlement range for the issue and obtain a realistic settlement.

8.11.1.1.8  (10-01-2012)
Closing Procedures for Appeals Technical Employees

  1. This section discusses the general process used by the ATE to close penalty cases.

  2. Use ACDS APGolf to generate all forms and letters.

  3. Prepare the Appeals Case Memo to outline the facts and circumstances supporting sustention or abatement of the penalty. This could include, but is not limited to:

    • Documenting taxpayer's filing history

    • Citing case law

    • Discussing hazards of litigation

    IRM 8.6.2 provides additional information on the preparation of ACMs.

  4. Use the ACDS customized Form 5402:

    • Show the affected tax periods included in the case

    • Route the case to the Account and Processing Support (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

    • Include special instructions related to processing the case

    • 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 Notes field on ACDS. The reason for this requirement is to ensure duplicate certified letters are not issued 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.

      Note:

      See the discussion of APS closing procedures and explanation of the closing code and blocking series below.

    • Use the correct ARDI Code. If penalties have not been paid, ARDI Code 2 should be used when penalties are sustained or partially abated and ARDI Code 7 should be used when penalties are fully abated.

  5. Prepare the applicable ACDS closing letter.

8.11.1.1.8.1  (11-12-2013)
Closing Forms

  1. When assessing civil penalties use the most current version of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties:

    • Prepare Form 5402 and the ACM outlining the settlement of the case.

    • Prepare Form 8278 , Assessment and Abatement of Miscellaneous Civil Penalties.

    The required Form 5402 provides a summary of the case resolution and identifies the penalties and Form 8278 is the source document for IDRS actions. The following table provides guidelines for the required documents:

    IF ON ENTER
    The penalty is sustained Form 5402 Transaction code (TC) 290 for zero dollars (–$0.00–) in the appropriate column in number 12 . Write in "Use blocking series 96X" .
    Form 8278 TC 290 (–$0.00–) in a blank space on the form. Write in "Use blocking series 96X." For pre-assessment Appeal agreed cases Columns 9(b), 9(c), 9(d) are used to assess the penalty. An amount must be entered into 9(d).
    The penalty is not sustained (in full or part) Form 5402 TC 290 with a blocking series 97X (reversal of penalty abatement refusal) in the appropriate column in number 12.
    Form 8278 TC 290 with a blocking series 97X ( reversal of penalty abatement refusal) in a blank space on the form. For pre-assessment Appeal sustained in part, amount sustained is the 9(d) amount. PENAP - if assessment abatement in full or in part the amount abated is 9(e) and 9(f). See IRM 20.1.1-2 , Exhibit 20.1.1-2. Penalty Reason Code (PRC) Chart for 9(f) PRC to enter. Prior to abating penalty secure transcript to verify the penalty abated in full or in part was assessed.

  2. Use Form 3870, Request for Adjustment for interim adjustments and adjustments to accounts and Form 5403, Appeals Closing Record for cases that are RGS generated.

    Note:

    Use of 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.

8.11.1.1.9  (11-12-2013)
Account and Processing Support (APS) Closing Procedures

  1. For the ATE's information, APS will take the following actions when a case is received for closing:

    1. Assign the case to an APS employee on Processing Employees Automated System (PEAs).

    2. Review closing documents for special instructions.

    3. Review and update ACDS with the closing information.

    4. Input the IDRS adjustments.

    5. ACAPDATE is entered by the Appeals Team Manager as a result of closing the case on the ATM module

    6. ACTION- enter ACKCLS

    7. RevisedPen - enter the amount of the penalty sustained.

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

    Note:

    APS will process all miscellaneous civil penalties covered by the civil penalty module (CPM) system through IDRS, using the customized Form 5402 and Form 8278, Computation and Assessment of Miscellaneous Penalties, as the source document.

8.11.1.2  (10-01-2012)
Return Related Penalties Worked in Appeals

  1. This section provides policies and procedures for IRC 6662, IRC 6662A, IRC 6663, and IRC 6676 penalties worked in Appeals. The updates to this section include procedural recommendations as a result of changes in legislation and are found in applicable sections of the IRM. Reasonable cause and good faith exceptions to IRC 6662 and IRC 6662A penalties are discussed in IRC 6664.

    IRC Section Penalty Description Penalty Amount Related IRM(s)
    6662(c) Negligence or Disregard of Rules or Regulations 20 percent of the portion of the underpayment resulting from the misconduct IRM 20.1.5.7
    6662(d) Substantial Understatement 20 percent of the portion of the underpayment resulting from the misconduct IRM 20.1.5.8
    6662(e)(1)(A) Substantial Valuation Misstatement 20 percent of the portion of the underpayment resulting from the misconduct IRM 20.1.5.9.2
    6662(e)(1(B) Valuation Misstatement Penalties for Transfer Pricing Transactions under IRC Section 482 20 percent of the portion of the underpayment resulting from the misconduct IRM 20.1.5.9.3
    6662(f) Substantial Overstatement of Pension Liabilities 20 percent of the portion of the underpayment resulting from the misconduct IRM 20.1.5.10
    6662(g) Substantial Estate or Gift Tax Valuation Understatement 20 percent of the portion of the underpayment resulting from the misconduct IRM 20.1.5.11
    6662(h) Gross Valuation Misstatement 40 percent involving gross valuation misstatements IRM 20.1.5.9.4
    6662A Accuracy-Related Penalty with Respect to Reportable Transactions 20 percent of the reportable transaction understatement. The penalty rate is increased to 30 percent of the reportable transaction understatement where the transaction was not properly disclosed. IRM 20.1.5.15
    6663 Civil Fraud 75 percent of the underpayment due to fraud. IRM 20.1.5.14
    6662(b)(6) Penalty for Underpayment Attributable to Transactions Lacking Economic Substance 20 percent of the portion of the underpayment attributable to any transaction lacking economic substance that is disclosed IRM 20.1.5.12
    6662(i) Nondisclosed Noneconomic Substance Transactions 40 percent involving nondisclosed noneconomic substance transactions IRM 20.1.5.12.1
    6662(j) Undisclosed Foreign Financial Asset Understatement 40 percent involving undisclosed foreign financial asset understatements IRM 20.1.5.13
    6676 Erroneous Claim for Refund or Credit 20 percent of the "excessive amount" IRM 20.1.5.16

    Note:

    Use TYPE Code "I" for all of the above penalties except for IRC 6676 penalties, use "6676" .

8.11.1.2.1  (11-12-2013)
Effect of Statutory Changes

  1. Since penalties may impact many IRC filing, paying and reporting requirements, many major tax acts contain revisions to the penalty sections in Chapter 68 of the IRC. See IRM 20.1, for any statutory changes that may affect the penalty at issue.

8.11.1.2.2  (10-01-2012)
Statute of Limitations

  1. Generally, the statute of limitations for the return related penalties listed above that use ACDS TYPE code "I" is the same as the statute of limitations for the income tax return. For information on the statute of limitation for IRC 6676 penalty cases, see IRM 8.11.1.2.7.

8.11.1.2.3  (10-01-2012)
Penalty Relief

  1. For penalty relief on the above applicable penalties, see IRM 20.1.5.6 including Reasonable Cause.

  2. The Affordable Care Act of 2010, Section 1409 amendment, provides that any excessive amount which is attributable to any transaction (with respect to transactions entered into on or after March 31, 2010), described in IRC 6662(b)(6) will not be treated as having a reasonable basis.

8.11.1.2.4  (10-01-2012)
Stacking of Penalties

  1. Stacking of the IRC 6662, IRC 6663 , IRC 6662A , and IRC 6676 penalties are not permitted.

  2. The maximum amount of the IRC 6662 penalty imposed on a portion of an underpayment of tax is 20 percent ( or 40 percent in certain circumstances) of that portion of underpayment (even if that portion of the underpayment is attributable to more than one type of misconduct proscribed underIRC 6662). See IRM 20.1.5.15.3. The 30 percent penalty only applies in an IRC 6662A penalty.

8.11.1.2.5  (10-01-2012)
Accuracy-Related and Civil Fraud Penalties

  1. For common features of both penalties, see IRM 20.1.5.2.2.

  2. For allocation of both penalties, see IRM 20.1.5.2.3.

8.11.1.2.6  (11-12-2013)
Processing Fraud Penalty Cases

  1. Appeals has authority to eliminate or partially concede the fraud penalty under IRC 6663. Appeals can partially concede the fraudulent failure to file penalty under IRC 6651(f), to an amount less than 75 percent but greater than zero in any case under its sole jurisdiction.

    Caution:

    In any case where criminal prosecution against the taxpayer was recommended to the Department of Justice, the recommendation or concurrence of Counsel is required for reduction or elimination of the sections 6663 and 6651(f) penalties whether or not the criminal prosecution recommendation resulted in a conviction. This also applies to any related taxpayer involved in the same transaction and to the same taxpayer with respect to any tax year or period affecting the tax year or period for which criminal prosecution was recommended. (See Delegation Order 8–8, IRM 1.2.47.9.) The concurrence of Counsel is required for the reduction of any criminal fraud income item. To indicate concurrence, the appropriate official in Counsel’s office signs in the space provided at the bottom of Form 5402. Refer to IRM 8.7.1.9 for cases in which a recommendation for criminal prosecution is pending.

  2. The following table provides actions which may be required based on the statute of limitations and the case resolution:

    IF AND THEN
    The three-year period of limitations for assessment has not expired for a non-docketed case there is a partial concession of the fraud penalty or the fraudulent failure to file penalty to an amount less than 75% of the fraudulent portion of the underpayment but greater than zero secure a closing agreement.
    The three-year period of limitations for assessment has not expired for a docketed case there is a partial concession of the fraud penalty or the fraudulent failure to file penalty to an amount less than 75% of the fraudulent portion of the underpayment but greater than zero it is usually not necessary to secure a closing agreement because the stipulated-decision filed with the court is sufficient. Always consult with Counsel when considering a closing agreement in a docketed cases.
    Period of limitations for assessment has expired except for fraud the evidence warrants litigating the fraud penalty execute a closing agreement where mutual concession settlement is worked out for
    • a deficiency with no fraud penalty, or

    • fraud penalty or the fraudulent failure to file penalty to an amount less than 75% of the fraudulent portion of the underpayment but greater than zero

    Period of limitations for assessment has expired except for fraud the evidence of fraud is insufficient to warrant litigation concede the deficiency in tax and the fraud penalty

  3. Return a case to the Compliance office when it appears important new information or evidence was purposely withheld from the Compliance Officer or where information requires extensive verification and consideration by the area office. See IRM 8.2.1.5 for instructions.

  4. Consult with your Appeals Team Manager when any new information or evidence implies a fraud potential in the case under Appeals jurisdiction. With the concurrence of the ATM

    • in docketed cases, where fraudulent documents have impeached the credibility of the taxpayer, cease the settlement negotiations and notify counsel that you are forwarding the case for trial preparation.

    • in non-docketed cases, return the new evidence for Compliance's review and consideration of fraud penalty assertion.

  5. In all mail order ministry/vow of poverty cases where the civil fraud penalty has been asserted, consult local SB/SE Counsel prior to closing the case if there is any substantial doubt about whether the fraud penalty should be sustained or conceded.

8.11.1.2.7  (10-01-2012)
IRC 6676

  1. As background, the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA), enacted on May 25, 2007, added IRC 6676, Erroneous Claim for Refund or Credit penalty. An IRC 6676 penalty may be imposed on a taxpayer who files an erroneous claim for refund or credit with respect to income tax (other than a claim for earned income credit) that is excessive and for which there is no reasonable basis for the claimed tax treatment. This penalty can be asserted on claims submitted after the enactment date of May 25, 2007.

  2. ACDS TYPE code "6676" is used to control an IRC 6676 penalty case on ACDS.

  3. The IRC 6676 penalty is not subject to deficiency procedures. The penalty should not be included on the examination report (30-day letter) or Statutory Notice of Deficiency relating to the disallowed claim for refund or credit return or the filed income tax return.

  4. IRC 6676 cases are generally subject to pre-assessment and appeal rights procedures.

8.11.1.2.7.1  (11-12-2013)
Carding Procedures for IRC 6676

  1. The ATE and APS will verify whether there should be two case files that are carded in under IRC 6676 - the 6676 penalty case and the income tax case. APS will create a separate work unit for the IRC 6676 penalty case and a separate work unit for the income tax case.

  2. Each case file should have a Form 3198, Special Handling Notice.

  3. APS would follow normal card-in procedures of these penalties. See IRM 8.20.5 .

8.11.1.2.7.2  (11-12-2013)
ATE Consideration for IRC 6676

  1. The ATE and APS will verify if the correct number of case files have been forwarded for Appeals consideration. In some cases only the penalty case will be forwarded as the claim case will be agreed. Depending on the number of case files received by Appeals, the APS will create a separate work unit for each case. If both cases are unagreed, the ATE should have two case files for IRC 6676 penalty cases. Generally, Examination will not propose the penalty until the disallowed amount of the claim for refund or credit is determined. See IRM 4.10.8.9. Examination will close both files together unless they must be processed and closed separately because of issues with the period of limitations for assessment.

    Note:

    Examination should place copies of relevant documents from the IRC 6676 penalty case file into the penalty section of the income tax case file (if applicable) to ensure that documentation relating to the IRC 6676 penalty will be available should the files become separated.

  2. IRC 6676 has a reasonable basis provision. See IRM 4.10.6.4 Finalizing Penalty Determinations and IRM 20.1 Penalties.

  3. The IRC 6676 penalty does not apply to any portion of the disallowed amount of the claim for refund or credit that is subject to IRC 6662, IRC 6663, and IRC 6662A penalties.

  4. The amount of the IRC 6676 penalty is 20 percent of the "excessive amount." See IRM 20.1.5.16.3.

  5. For statute consideration of pre-assessed IRC 6676 penalty cases, see IRM 20.1.5.16.

    Note:

    The assessment statute expiration date (ASED) for the income tax case and the IRC 6676 penalty could be different dates or the dates could be the same if the claim for refund is the original tax return. In any event, the ASED for assessment of a tax deficiency and the ASED for assessment of the IRC 6676 penalty must be separately controlled and protected by means of the appropriate consent forms.

  6. The ASED for assessment of an erroneous claims penalty can be extended using Form 872-EC, Consent to Extend the TIme on Assessment of IRC section 6676 Erroneous Claim for Refund or Credit Penalty. Generally, consents should be obtained 180 days before the end of the three-year period after the filing of the claim or 180 days before the end of a previously extended period for assessing the erroneous claims penalty. A current transcript for the filed claim for refund or credit should be included in the penalty case file for accurate monitoring of the statute expiration date of the filed claim for refund or credit.

  7. The IRC 6676 penalty case file should be transmitted to Appeals with Form 3198, Special Handling Notice, on the outside front cover of the file with the "Civil Penalties (Form 8278)" box under "Special Features" checked.

  8. The penalty case file should include a separate assessment Form 8278 or Form 3870 for each penalty tax year:

    • Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is used for IRC 6676 penalty cases except for a MFJ income tax return claims. Form 8278 should not be used for MFJ penalty cases. The penalty is assessed on MFT 55 for IMF and MFT 13 for BMF with PRN 565 using Form 8278, Computation and Assessment of Miscellaneous Penalties. Verify that the manager's signature is on Line 10b of Form 8278

    • Form 3870, Request for Adjustment, is used when asserting the IRC 6676 penalty on MFJ income tax returns. Verify that the manager's signature is on line 14 of Form 3870. The penalty "related" case, for MFJ income tax return claims, must be assessed on MFT 30 with PRN 687.

    Note:

    See IRM 8.11.1.1.1 and IRM 20.1.5.1.4 for more information on managerial approval of penalties.

  9. Other pertinent documents or workpapers should be included in the penalty case file when it is sent to Appeals, including:

    • Letter 4143-C, IRC section 6676 Erroneous Claims Penalty Assessment Notification Letter

    • Form 5838-EC, Agreement to Assessment and Collection of IRC section 6676 Erroneous Claim for Refund or Credit Penalty

    • Form 886-A

    • For other documents that should be in the IRC 6676 penalty case file, see IRM 20.1.5.16.3

  10. The ATE will follow normal closing procedures. See IRM 8.11.1.1.8.

    Note:

    The ATE will notify APS in the notes of the Form 5402 to process the Form 8278 when the case is closed.

8.11.1.2.8  (10-01-2012)
Deficiency Related Estimated Tax Penalty Adjustments

  1. If an estimated tax penalty is considered during Appeals consideration of a deficiency related case and an adjustment will be made, use Form 5403, Appeals Closing Record.

  2. See IRM 20.1.3.2.2, Adjustments After Penalty Assessments and IRM 8.17.7.7, Estimated Tax Penalties, IRC 6654, Failure by individual to pay estimated income tax and IRC 6655, Failure by corporation to pay estimated income tax.

  3. Estimated tax (ES) penalties are systemically-generated with TC 176 at the time an original return is posted to an account.

  4. To adjust a computer generated IMF estimated tax penalty, follow the instructions outlined in IRM 8.20.7 for entering adjustments to estimated tax penalty amounts on Form 5403.


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