8.11.7  Abusive Transaction Penalties

Manual Transmittal

October 29, 2013

Purpose

(1) This transmits revised IRM 8.11.7, Penalties Worked in Appeals, Abusive Transaction Penalties.

Background

This section contains general information about Abusive Transaction Penalties.

Material Changes

(1) Made editorial changes throughout.

Effect on Other Documents

This IRM supersedes IRM 8.11.7 dated 9-14-2012 (effective 10-1-2012).

Audience

Appeals

Effective Date

(10-29-2013)


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

8.11.7.1  (10-01-2012)
Introduction

  1. This section provides procedural and processing guidance on abusive transaction penalties worked in Appeals.

  2. Abusive transaction penalties are asserted to stop fraudulent, unscrupulous and/or incompetent tax return preparers, abusive transaction promoters, and material advisors who fail to furnish information or maintain lists with respect to reportable transactions.

  3. The terms "post-assessed" and "pre-assessed" are used throughout this section. When a penalty is immediately assessable and is assessed prior to coming to Appeals, it is considered a post-assessed penalty subject to post-assessment appeal rights. When a penalty is not assessed prior to coming to Appeals, it is considered a pre-assessed penalty subject to pre-assessment appeal rights. Generally, the penalties in this section are post-assessed and are not subject to deficiency procedures.

  4. For the purposes of this section, the acronyms used for Appeals Technical Employees are ATEs, Account and Processing Support is APS, and Appeals Centralized Database System is ACDS.

8.11.7.1.1  (10-01-2012)
Appeals Coordinated Issue (ACI)

  1. The ATE should research the Appeals Website to determine if the issue is an Appeals coordinated issue and if there is a Subject Matter Expert designated to the issue.

  2. If the penalty is a coordinated issue:

    • Add Feature Codes "AI" and "IT" when the coordinated issue is first identified. Either APS or ATE may update ACDS with the Feature Codes.

    • If the ATE has a penalty issue that is coordinated, the ATE must make a referral to Appeals Technical Guidance through their manager upon assignment or preliminary review using Form 13381, Appeals Technical Guidance Referral. For more information on coordinated issues, see IRM 8.2.1.6, Preliminary Review of a Case-ATE, and IRM 8.7.3Technical Guidance and International Programs.

    • Appeals employees must secure review and concurrence from the Technical Specialist before finalizing any resolution of the issue, including the penalty computation.

8.11.7.1.2  (10-29-2013)
Consideration of the Abusive Transaction Penalties by Technical Employees

  1. The ATE considers appeals of abusive transaction penalties in the same manner as appeals of any other proposed liability not subject to the deficiency procedures of subchapter B of Chapter 63 of the Internal Revenue Code.

  2. There may be two case files: a penalty case file and a related income tax case file. Each case file will be a separate work unit and may come separately to Appeals.

  3. The statute of limitations may be different on the income case and the penalty case for pre-assessed penalties.

  4. The ATE should use the following forms to process Abusive Transaction Penalty Cases unless noted in a specific penalty section:

    • Form 5402 , Appeals Transmittal and Case Memo, is the transmittal document for all Abusive Transaction penalty cases when closing the case with abatement, adjustment or sustention.

    • Form 866, Agreement as to Final Determination of Tax Liability, to secure an agreement where an Appeals settlement has been made.

    • Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, to process the request for assessment, adjustment or abatement. Always use the most current version of Form 8278.

      Note:

      If penalties are to be assessed upon closing, use Form 8278 to input the assessment information. These penalty cases are identified with Transaction Code 240 and applicable Penalty Reference Code shown on the Form 8278 for the specific penalty. APS needs to be alerted on the Form 5402 to process the Form 8278 when the case is closed.

8.11.7.1.3  (10-29-2013)
Carding In Procedures for Abusive Transaction Penalties

  1. The ATEs and APS will verify:

    1. All abusive penalty cases are controlled on ACDS.

    2. These cases can be identified by reference to code sections 6700, 6701, 6703, 6707, 6707A, etc.

  2. APS follows general guidelines for establishing these penalty cases on ACDS as detailed in IRM 8.20.5, Processing and Establishing New Receipts.

  3. Create a separate work unit for the penalty case. If Appeals also receives the related unagreed underlying income tax case, create a separate work unit for that case, and add information in the "Notes" field for each case to relate the two work units to each other.

  4. Guidance for carding an abusive transaction penalty work unit is provided for the following fields:

    ACDS Field Abusive Penalty Case
    TYPE Code Enter applicable type code for the penalty using the drop down menu that corresponds to the IRC section of the penalty or "OTHPEN" if there is no specified TYPE Code.
    MFT Code 13 will be used for all BMF entities; 55 will be used for all IMF entities
    Feature Code AI and IT, if coordinated, and any other feature code(s) as applicable
    Note (Only needed if there is a related underlying income tax work unit) Related to wuno (insert work unit number of the related income tax case)
    AIMS Indicator E (exempt). These cases are not to be controlled on AIMS.
    Statute Date/Code If penalty has not been assessed, enter the Assessment Statute Expiration Date (ASED) of the related income tax return to which the penalty applies in the Statute Date field.
    If penalty has been assessed, enter "ASESD" in the Statute Code field.

    Note:

    For IRC 6707A Penalty Cases, the Form 872 for the underlying income tax does not extend the period of limitations for assessment of the IRC 6707A penalty unless the form includes specific language addressing the penalty. See IRM 4.32.4.1.4.4(2) for the approved language.

    Proposed Penalty Amount Amount shown on Form 8278.
  5. Guidance for carding in the related income tax work unit is provided for the following fields:

    ACDS Field Abusive Penalty Case
    TYPE Code I
    MFT Code Use the applicable MFT Code, generally:
    • 02 for BMF entities

    • 30 for IMF entities

    Feature Code AI and IT, if coordinated, and any other feature code(s) as applicable
    Note Related to wuno (insert work unit number of the related abusive penalty case)
    AIMS Indicator Y. (This case should be controlled on AIMS. If not on AIMS, use N and take action to establish on AIMS.)
    Statute Date/Code If deficiency has not been assessed, enter the Assessment Statute Expiration Date (ASED) in the Statute Date field.
    If the deficiency has been assessed, enter "ASESD" in the Statute Code field.
    Proposed Tax Amount Tax per RAR
    Proposed Penalty Amount Do not include the amount of the abusive penalty. Include any other penalties as shown on the RAR.
  6. Assign the penalty and income tax work units to the same ATE. Assign the case(s) in accord with case assignment practices.

8.11.7.1.4  (10-29-2013)
Closing Procedures for Abusive Transaction Penalties

  1. The ATEs and APS will review and process the case file.

  2. The ATE will provide Form 5402 with the revised penalty amounts APS needs to update ACDS.

  3. Depending on the resolution, Form 8278 may be included and will require processing. See IRM 8.11.1.5.4, APS Closing Procedures, for additional information on processing Form 8278.

    1. If penalty is fully or partially sustained, assess per Form 8278 using TC 240 and applicable reference code.

  4. The following closing codes apply to the abusive penalty work unit:

    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
  5. If there is a related income tax work unit, regular closing codes and procedures apply.

  6. Use general closing guidelines for additional ACDS updates required at closing. See IRM 8.20.7, General Closing Procedures.

8.11.7.2  (10-01-2012)
IRC 6700 - Penalty for Promoting Abusive Tax Shelters

  1. For a discussion of the IRC 6700 Penalty, see IRM 20.1.6.13, Penalty for Promoting Abusive Tax Shelters -IRC 6700.

8.11.7.3  (10-29-2013)
IRC 6701- Penalties for Aiding and Abetting

  1. For a discussion of the IRC 6701 penalty, see IRM 20.1.6.14, Penalties for Aiding and Abetting-IRC 6701 and IRM 4.32.2.11.4, IRC 6701- Penalties for Aiding and Abetting Understatement of Tax Liability.

8.11.7.4  (10-01-2012)
Promoter Rights for IRC 6700 and IRC 6701

  1. For discussion of Promoter Rights for IRC 6700 and IRC 6701, see IRM 4.32.2.11.7.1 , Promoter Rights for IRC 6700 and IRC 6701.

8.11.7.4.1  (10-01-2012)
Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701

  1. For a discussion, see IRM 4.32.2.11.7.1.1, Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701.

8.11.7.4.2  (10-29-2013)
IRC 6703 Appeals Claim Procedures

  1. Control cases on Appeals Centralized Database System (ACDS). Refer to IRM 8.20.3 for procedures for controlling cases on ACDS.

  2. The TYPE code would be either IRC 6700 or IRC 6701 depending on the issue.

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

    • Settle claims based on potential hazards of litigation.

    • Base decisions on the facts and circumstances of each case, subject to the approval of the Appeals Team Manager (ATM).

    • Coordinate decisions to abate IRC 6700 and IRC 6701 penalties with local Counsel prior to taking abatement action to insure related cases are handled consistently.

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

  5. Send the following correspondence to the taxpayer:

    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 a certified letter of Claim Disallowance (Letter 1364) by certified mail.

  6. Alert APS by notating on the Form 5402 to process any abatement action on Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, at the time of closing the case.

  7. For additional information, see IRM 4.32.2.11.7.1.1, Special Claim Procedures for Penalties Under IRC 6700 and IRC 6701.

8.11.7.5  (10-01-2012)
IRC 6707 - Failure to Furnish Information Regarding Reportable Transactions

  1. For a discussion on IRC 6707, Failure to furnish information regarding reportable transactions, see IRM 20.1.6.16, Failure to Furnish Information Regarding Reportable Transactions - IRC 6707.

  2. These cases are controlled on ACDS with TYPE Code = 6707.

  3. Promoter penalties under IRC 6707 were designated as Appeals Coordinated Issues on July 23, 2003 (along with other preparer and promoter penalties). See IRM 8.11.7.1.1 , Appeals Coordinated Issue (ACI).

  4. The ATE who is considering a case under IRC 6707 will follow general guidance for Abusive Transaction penalties. See IRM 8.11.7.1.2, Consideration of the Abusive Transaction Penalties by Technical Employees.

  5. For more information, see IRM 4.32.2.11.5.2, Computation of IRC 6707 Penalties and IRM 20.1.6.16, Failure to Furnish Information Regarding Reportable Transactions.

8.11.7.5.1  (10-01-2012)
Promoter Rights for IRC 6707 and IRC 6708 Assessments

  1. For a discussion, see IRM 4.32.2.11.7.2, Promoter Rights for IRC 6707 and IRC 6708 Assessments.

8.11.7.6  (10-29-2013)
IRC 6707A Penalties Overview

  1. IRC 6707A penalties are one of several "stand-alone" penalties (penalties that do not require an associated income tax examination) that are not be subject to deficiency procedures. IRC 6707A penalties are assessable penalties with no reasonable cause exceptions. The 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 underpayment.

  2. Generally, IRC 6707A penalty cases originate in Compliance [Large Business and International (LB&I), Small Business Self Employed (SBSE) or Tax Exempt/Government Entities (TE/GE)]. See IRM 20.1.6.17.2, Operating Division IRC 6707A Functional Procedures.

  3. Compliance Examiners are responsible for identifying income tax returns to which the IRC 6707A penalty applies. Examiners are responsible for submitting to Appeals both the related unagreed income tax return case and the unagreed IRC 6707A penalty case. If the income tax case is agreed, only the IRC 6707A penalty case is submitted to Appeals, but it must include a copy of the original income tax return and related documents.

  4. Once the 30-day letter is issued, the taxpayer or an authorized representative can request that Appeals consider the proposed penalty by filing a protest with Compliance.

  5. An IRC 6707A penalty and/or the underlying liability income tax case may not be submitted to Appeals if there are less than 180 days remaining on the statute of limitations.

  6. If the statutory period for assessment of the IRC 6707A penalty is about to expire and the taxpayer will not agree to an extension, Compliance will assess the penalty.

  7. If both the underlying income tax liability issue and the IRC 6707A penalty are appealed, Compliance will mail both case files to the appropriate Field Appeals Office according to the zip code routing instructions posted on the Appeals web site.

  8. If the underlying income tax liability issue is agreed, Compliance will forward only the appealed IRC 6707A penalty case to the appropriate Field Appeals Office, according to the zip code routing instructions posted on the Appeals web site. Compliance will include the taxpayer's protest and copies of the following documents in the penalty case file:

    • original filed income tax return

    • Power of Attorney, if any

    • agreement form

    • current transcripts of income tax return

    • 30-day letter and IRC 6707A penalty computation

    • information from flow-through entities (Form K-1 , etc...)

8.11.7.6.1  (10-01-2012)
IRC 6707A - Failure to Include Reportable Transaction with Return

  1. For a discussion of the IRC 6707A, Penalty for failure to include reportable transaction information with return, see IRM 20.1.6.17, Failure to Include Reportable Transaction with Return - IRC 6707A.

  2. IRC 6707A can have pre-assessment or post-assessment appeal rights. See IRM 4.32.4.6.2, Sending the Case to Appeals - Pre-Assessment Consideration and IRM 4.32.4.6.3, Sending the Case to Appeals - Post-Assessment Consideration.

  3. This section addresses the procedures for IRC 6707A penalties considered by Appeals. These cases are controlled on ACDS with TYPE Code = 6707A.

  4. IRC 6707A penalties were added by the American Jobs Creation Act of 2004 (AJCA), which provides a separate penalty applicable to taxpayers who fail to disclose a reportable transaction on their returns.

  5. On September 27, 2010, the President signed HR 5297 (Small Business Jobs and Credit Act of 2010) [P.L. 111 - 240] into law, amending subsection (b) of IRC 6707A effective for assessments made after December 31, 2006.

8.11.7.6.2  (10-01-2012)
IRC 6707A Penalty Cases as Appeals Coordinated Issues (ACI)

  1. IRC 6707A penalty issues were designated as Appeals Coordinated Issues on February 23, 2006.

  2. Add Feature Codes "AI" and "IT" when the coordinated issue is first identified. Either APS or the ATE may update ACDS with the Feature Codes.

  3. Appeals employees having a work unit with an IRC 6707A penalty issue must make a referral to Appeals Technical Guidance through their manager upon assignment or preliminary review using Form 13381, Appeals Technical Guidance Referral. For more information on coordinated issues, see IRM 8.2.1.6, Preliminary Review of a Case-ATE, and IRM 8.7.3Technical Guidance and International Programs.

  4. Appeals employees must secure review and concurrence from the Technical Specialist before finalizing any resolution of the issue including the penalty computation.

8.11.7.6.3  (10-01-2012)
Issue Consideration of IRC 6707A Penalty Cases

  1. Appeals Officers work appeals of IRC 6707A penalties in the same manner as appeals of any other proposed liability not subject to the deficiency procedures of subchapter B of Chapter 63 of the Internal Revenue Code.

  2. The following references maybe helpful:

    • Small Business Jobs and Credit Act of 2010, P.L. 111-240

    • Treasury Regulation 1.6011-4

    • Discussion papers for various types of plans under IRC 6707A

      Note:

      Consult with area Counsel for legal guidance, when necessary.

8.11.7.6.4  (10-01-2012)
Forms for Processing IRC 6707A Penalty Cases

  1. ATEs will prepare and use the following forms to process IRC 6707A penalty cases:

    • Form 5402, Appeals Transmittal and Case Memo, is the transmittal document for all IRC 6707A penalty cases when closing the case with abatement, adjustment or sustention.

    • Form 866, Agreement as to Final Determination of Tax Liability, to secure an agreement where an Appeals settlement has been made.

    • Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, to process the request for assessment, adjustment or abatement.

    Note:

    If IRC 6707A penalties are to be assessed upon closing, use Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties to input the assessment information. IRC 6707A penalty cases are identified with Transaction Code 240 and Penalty Reference Code 648. Both spouses will be individually assessed if both file a Married Filing Joint return. Appeals receives most IRC 6707A penalty cases before assessment.

8.11.7.6.5  (10-01-2012)
Carding Procedures for IRC 6707A Penalty Cases

  1. All IRC 6707A penalty work units are controlled on ACDS .

  2. APS follows general guidelines for establishing IRC 6707A penalty cases on ACDS as detailed in IRM 8.20.5, Processing and Establishing New Receipts.

  3. Create a separate work unit for the IRC 6707A penalty case. If Appeals also receives a related unagreed underlying income tax case, create a separate work unit for that case, and add information in the "Notes" field for each case to relate the two work units to each other.

  4. Guidance specific to the IRC 6707A penalty work unit is provided for the following fields:

    ACDS Field IRC 6707A Penalty Case
    TYPE Code 6707A
    MFT Code 13 will be used for all BMF entities; 55 will be used for all IMF entities
    Feature Code AI and IT, if coordinated, and any other feature code(s) as applicable
    Note (Only needed if there is a related underlying tax work unit) Related to wuno (insert work unit number of the related income tax case)
    AIMS Indicator E (exempt). These cases are not to be controlled on AIMS.
    Statute Date/Code If penalty has not been assessed, enter the Assessment Statute Expiration Date (ASED) of the related income tax return to which the penalty applies in the Statute Date field.
    If penalty has been assessed, enter "ASESD" in the Statute Code field.

    Note:

    The Form 872 for the underlying income tax does not extend the period of limitations for assessment of the IRC 6707A penalty unless the form includes specific language addressing the penalty. See IRM 4.32.4.1.4.4(2) for the approved language.

    Proposed Penalty Amount Amount shown on Form 8278.
  5. Guidance specific to the related underlying tax (income tax) work unit is provided for the following fields:

    ACDS Field IRC 6707A Related Income Tax Case
    TYPE Code I
    MFT Code Use the applicable MFT Code, generally:
    • 02 for BMF entities

    • 30 for IMF entities

    Feature Code AI and IT, if coordinated, and any other feature code(s) as applicable
    Note Related to wuno (insert work unit number of the related 6707A case)
    AIMS Indicator Y. (This case should be controlled on AIMS. If not on AIMS, use N and take action to establish on AIMS.)
    Statute Date/Code If deficiency has not been assessed, enter the Assessment Statute Expiration Date (ASED) in the Statute Date field.
    If the deficiency has been assessed, enter "ASESD" in the Statute Code field.
    Proposed Tax Amount Tax per RAR
    Proposed Penalty Amount Do not include the amount of the 6707A penalty. Include any other penalties as shown on the RAR.
  6. Assign related 6707A penalty and income tax work units to the same ATE. Assign the case(s) in accord with case assignment practices.

8.11.7.6.6  (10-29-2013)
Closing Procedures for IRC 6707A Penalty Cases

  1. The ATEs and APS will review and process the case file.

  2. The ATE will provide Form 5402, Appeals Transmittal and Case Memorandum with the revised penalty amounts APS needs to update ACDS.

  3. Depending on the resolution, Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties may be included and will require processing. See IRM 8.11.1.9 for additional information on processing Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

  4. The following closing codes apply to the 6707A work unit:

    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
  5. If there is a related income tax work unit, regular closing codes and procedures apply.

  6. Use general closing guidelines for additional ACDS updates required at closing. See IRM 8.20.7, General Closing Procedures. Update ACDS following general closing procedures outlined in IRM 8.11.1.8, Closing Miscellaneous Civil Penalty Cases.

8.11.7.6.7  (10-01-2012)
ATE Closing Actions

  1. If the penalty relates to a non-listed reportable transaction, the ATE forwards the copy of the penalty file to LB&I Pre-Filing Technical Guidance Joint Committee per IRM 4.32.4.9 for potential rescission request. See IRM 20.1.6.17.4, Rescission Requests.

  2. If the penalty relates to a listed transaction and the taxpayer is a publicly traded company, Appeals should send a copy of the Form 8278 and attachments to the Office of Tax Shelter Analysis (OTSA). OTSA will review to ensure compliance with IRC 6707A(e) which provides for disclosures to the Securities and Exchange Commission (SEC) where a taxpayer has an SEC reporting requirement and has participated in a listed transaction.

8.11.7.6.8  (10-29-2013)
Rescission Requests

  1. Unlike most other penalties, IRC 6707A allows the Commissioner to rescind the imposition of the penalty with respect to reportable non-listed transactions if it would "promote compliance with the tax laws and effective tax administration." The penalty cannot be rescinded with respect to a listed transaction. A decision to rescind must be accompanied by a record describing the facts, reasons for the decision and the amount rescinded.

  2. While a taxpayer may challenge, in Appeals and in 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. The IRS is required to submit an annual report to Congress summarizing the application of the IRC 6707A penalty and the rescission provision.

    1. The Deputy Commissioner for Services and Enforcement will be delegated the responsibility to determine for the Commissioner whether to rescind the penalty in part or in full.

    2. The taxpayer must seek rescission within 30 days of notice and demand or full payment of the penalty, whichever is earlier.

    3. Currently, a taxpayer may seek rescission only if:

      • the Service did not offer an opportunity to go to Appeals prior to assessment of the penalty;

      • Appeals has concluded its consideration of the issue; or

      • the taxpayer has, in writing, both waived its right to such consideration and conceded its liability for the penalty.

    4. Listed reportable transactions are not eligible for rescission consideration.

    Note:

    Rev. Proc. 2007-21, 2007-9 I.R.B. 613, provides detailed information about how a taxpayer will seek rescission and factors that will support a rescission request. Rescission requests should be sent to the address listed at IRM 4.32.4.7.2(12).

8.11.7.7  (10-01-2012)
IRC 6708 - Failure to Maintain Lists of Advisees with Respect to Reportable Transactions

  1. This penalty is imposed on any person required to maintain a list under IRC 6112(a), Material advisors of reportable transactions must keep list of advisees, etc., who fails to make such list available. These cases are controlled on ACDS with TYPE Code = 6708.

  2. See IRM 20.1.6.18, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions.

  3. A material advisor who fails to make the list available upon written request of the Service within 20 business days after the request will be subject to a penalty of $10,000 for each day of such failure after the 20th business day.

  4. The penalty does not apply for any day where the failure to comply is due to reasonable cause.


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