1.2.20 Policy Statements for Penalties and Interest Activities

Manual Transmittal

November 08, 2012


(1) This transmits revised IRM 1.2.20, Servicewide Policies and Authorities, Policy Statements for Penalties and Interest Activities

Material Changes

(1) The following policy statement is renumbered according to applicable IRS business processes:

  • IRM P-20-2 (Formerly P-2-4), Penalties and interest not asserted against Federal agencies.

(2) New: Exhibit 1.2.20-1. A complete inventory of the policy statements for Penalty and Interest.

(3) The following is a listing of all sections in the Policy Statement series:

  • IRM 1.2.1, Policies of the Internal Revenue Service;

  • IRM 1.2.10, Policy Statements for Organization, Finance and Management Activities;

  • IRM 1.2.11, Policy Statements for Information Technology Activities;

  • IRM 1.2.12, Policy Statements for Submission Processing Activities;

  • IRM 1.2.13, Policy Statements for the Examining Process;

  • IRM 1.2.14, Policy Statements for the Collecting Process;

  • IRM 1.2.15, Policy Statements for Human Resources Management Activities;

  • IRM 1.2.16, Policy Statements for the Rulings and Agreements Process;

  • IRM 1.2.17, Policy Statements for the Appeals Process;

  • IRM 1.2.18, Policy Statements for Criminal Investigation Activities;

  • IRM 1.2.19, Policy Statements for Communications, Liaison and Disclosure Activities;

  • IRM 1.2.20, Policy Statements for Penalties and Interest Activities;

  • IRM 1.2.21, Policy Statements for Customer Account Services Activities;

  • IRM 1.2.22, Policy Statements for Taxpayer Education and Assistance Activities;

  • IRM 1.2.23, Policy Statements for Chief Counsel Activities; and

  • IRM 1.2.24, Policy Statements for Special Topic Activities.

Effect on Other Documents

This supersedes IRM 1.2.20, dated August 28, 2007.


All Divisions and Functions

Effective Date


Kathryn A. Greene
Director, Servicewide Policy, Directives
and Electronic Research

Introduction to Penalties and Interest related Policy Statements

  1. This IRM contains Policy Statements which relate to Penalties and Interest activities. Each Policy Statement is now categorized by the process to which it belongs. Distribution of the IRM should be to all persons having a need for any of the Policy Statements. Policy Statements apply to all Service personnel involved in the type of program, activity, function, or work process they cover.

  2. Any Policy Statement approved after this revision of IRM 1.2.xx is posted to IRS.gov and can be accessed through the FOIA Reading Room web site under the Instructions to Staff tab at the top and then to "Recently Approved Policy Statements." They will remain on the web until the next revision is made to this IRM. The address is:http://www.irs.gov/uac/Recently-Approved-Policy-Statements-1.


    If any Policy Statements have been inadvertently omitted from this Section they are still considered official and in full force and effect. Please send any discrepancies found to spder@irs.gov.

Policy Statement 20-1 (Formerly P–1–18)

  1. Penalties are used to enhance voluntary compliance

  2. The Internal Revenue Service has a responsibility to collect the proper amount of tax revenue in the most efficient manner. Penalties provide the Service with an important tool to achieve that goal because they enhance voluntary compliance by taxpayers. In order to make the most efficient use of penalties, the Service will design, administer, and evaluate penalty programs based on how those programs can most efficiently encourage voluntary compliance.

  3. Penalties encourage voluntary compliance by:

    1. demonstrating the fairness of the tax system to compliant taxpayers; and

    2. increasing the cost of noncompliance.

  4. In order to effectively use penalties to encourage compliant conduct, examiners and their managers must consider the applicability of penalties in each case, and fully develop the penalty issue when the initial consideration indicates that penalties should apply. That is, examiners and their managers must consider the elements of each potentially applicable penalty and then fully develop the facts to support the application of the penalty, or to establish that the penalty does not apply, when the initial consideration indicates that penalties should apply. Full development of the penalty issue is important for Appeals to sustain a penalty and for Counsel to successfully defend that penalty in litigation.

  5. Abusive transactions, frivolous returns, and other abusive taxpayer conduct undermine the fairness and integrity of the federal tax system and undercut voluntary compliance. Thus, it is particularly important in those cases for examiners and their managers to consider the potential applicability of penalties, and to develop fully the facts to either support the application of the penalty or to demonstrate that penalties should not apply. Consistent development and proper application of the accuracy-related and fraud penalties in abusive transaction cases will help curb this activity by imposing tangible economic consequences on taxpayers who engage in those transactions. In addition, consistent development and proper application of the promoter and preparer penalties in abusive transaction cases will help curb this activity by providing an economic deterrent for promoting abusive transactions and preparing returns claiming tax benefits from abusive transactions. An abusive transaction is one where a significant purpose of the transaction is the avoidance or evasion of Federal tax.

  6. Special Rule for Listed Transactions. The Service will fully develop accuracy-related or fraud penalties in all cases where an underpayment of tax is attributable to a listed transaction. For purposes of this Policy Statement, a listed transaction is a transaction the Service has identified as a listed transaction pursuant to the regulations under IRC § 6011.

  7. In limited circumstances where doing so will promote sound and efficient tax administration, the Service may approve a reduction of otherwise applicable penalties or penalty waiver for a group or class of taxpayers as part of a Service-wide resolution strategy to encourage efficient and prompt resolution of cases of noncompliant taxpayers.

  8. In considering the application of penalties to a particular case, all Service functions must develop procedures that will promote:

    1. Consistency in the application of penalties compared to similar cases;

    2. Unbiased analysis of the facts in each case; and

    3. The proper application of the law to the facts of the case.

  9. The Service will demonstrate the fairness of the tax system to all taxpayers by:

    1. Providing every taxpayer against whom the Service proposes to assess penalties with a reasonable opportunity to provide evidence that the penalty should not apply;

    2. Giving full and fair consideration to evidence in favor of not imposing the penalty, even after the Service’s initial consideration supports imposition of a penalty; and

    3. Determining penalties when a full and fair consideration of the facts and the law support doing so.


    This means that penalties are not a "bargaining point" in resolving the taxpayer’s other tax adjustments. Rather, the imposition of penalties in appropriate cases serves as an incentive for taxpayers to avoid careless or overly aggressive tax reporting positions.

  10. The Service will continue to develop, monitor, and revise programs to help taxpayers voluntarily comply with the law and avoid penalties.

  11. To promote consistent development, consideration, and application of penalties, the Service prescribes guidelines in a Penalty Handbook that all operating divisions and functions will follow. The Office of Penalty and Interest Administration must review and approve changes to the Penalty Handbook for consistency with Service Policy before making recommended changes.

  12. The Service collects statistical and demographic information to evaluate penalties and penalty administration, and to determine the effectiveness of penalties in promoting voluntary compliance. The Service continually evaluates the impact of the penalty program on compliance and recommends changes when the Internal Revenue Code or penalty administration does not effectively promote voluntary compliance.

Policy Statement 20-2 (Formerly P-2-4)

  1. Penalties and interest not asserted against Federal agencies

  2. Penalties and interest will not be asserted against agencies or instrumentalities of the United States.

  3. Full compliance with tax laws

  4. Federal agency compliance with the tax laws is required and will be monitored and enforced by Service personnel.

All Active Policy Statements for Penalty and Interest

New Number Old Number Title
20-1 Penalties are used to enhance voluntary compliance
20-2 2-4 Penalties and interest not asserted against Federal agencies