20.3.1 Civil Penalty Accuracy Review Process

Manual Transmittal

January 19, 2017

Purpose

(1) This transmits new IRM 20.3.1, Civil Penalty Accuracy Review Process.

Material Changes

(1) This is a new IRM. This IRM documents the Civil Penalty Accuracy Review Process developed by the Office of Servicewide Penalties (OSP), with the assistance of the Office of the Chief Financial Officer (CFO), Corporate Planning and Internal Control (CPIC). This process was created to enhance controls of the accuracy of penalty assessments and abatements.

(2) This process is required to be used by the OSP when conducting semi-annual (i.e. twice a calendar year) civil penalty accuracy reviews.

Effect on Other Documents

None

Audience

Office of Servicewide Penalties

Effective Date

(01-19-2017)

Mark Pursley
Director, Servicewide Operations

Overview

  1. This chapter provides background information, procedures and guidelines for the Civil Penalty Accuracy Review Process conducted by the Office of Servicewide Penalties (OSP).

  2. To enhance controls of the accuracy of penalty assessments and abatements, OSP established the Civil Penalty Accuracy Review Process. The review process evaluates the accuracy of return-related ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ penalty assessments and abatements made Servicewide.

  3. The Civil Penalty Accuracy Review Process was developed by OSP, with assistance from the Office of the Chief Financial Officer (CFO), Corporate Planning and Internal Control (CPIC). This review process measures the accuracy of assessed and accrued penalties. Reviews are completed semi-annually (i.e. twice a calendar year). Analysts located in OSP conduct the reviews independent of the civil penalty assessment and abatement functions within IRS.

Definitions

  1. The terms below are defined for use with this IRM.

  2. Business Master File (BMF) - Tax returns and forms found on the Business Master File that reflect at least one civil penalty assessment and/or abatement. Business returns and forms include, but are not limited to:

    1. Form 1065, U.S. Return of Partnership Income,

    2. Form 1120, U.S. Corporation Income Tax Return,

    3. Form 1120-S, U.S. Small Business Corporation Income Tax Return,

    4. Form 940, Employer’s Annual Federal Unemployment Tax Return, and

    5. Form 941, Employer’s Quarterly Federal Tax Return.

  3. Civil penalty - Return-related civil penalties assessed on Master File Tax Codes (MFT)≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Civil penalties administered by IRS are detailed in IRM 20.1, Penalty Handbook.

  4. Computation sheet - Worksheets developed by OSP to compute specific penalties, such as failure to file and failure to pay. Instructions for using the computation sheets are detailed in the Civil Penalty Review Job Aid.

  5. Integrated Data Retrieval System (IDRS) - Reviewers are required to use IDRS to conduct civil penalty reviews as detailed in this IRM. IDRS is a key component of the review process. Reviewers recompute all civil penalties applicable to a specific tax module and compare the result to the civil penalty assessments and/or abatements reflected on the tax module.

  6. Individual Master File (IMF) - Tax returns and forms found on the Individual Master File that reflect at least one civil penalty assessment and/or abatement (i.e. Form 1040, U.S. Individual Income Tax Return).

  7. Lead sheet - Documents developed by OSP that detail the steps to compute specific penalties, such as failure to deposit. Instructions for using the lead sheets are detailed in the Civil Penalty Review Job Aid.

  8. Penalty abatement - Reversal of a civil penalty assessment due to reasonable cause, administrative waiver (including first time abatement) or statutory exception (see IRM 20.1.1.3). Reviewers are required to review all civil penalty abatements reflected on a specific tax module.

  9. Penalty assessment - The application of a civil penalty on a specific tax module when taxpayer behavior fails to meet prescribed tax obligations (see IRM 20.1.1.2). Reviewers are required to review all civil penalty assessments reflected on a specific tax module. Penalty assessment information is detailed in IRM 20.1, Penalty Handbook.

  10. Review cycle - The review cycle includes the following steps:

    1. Planning of the review, including the securing of the sample from SB/SE Research & Organizational Accountability (R&OA),

    2. Conducting training for the review team,

    3. Assigning the tax modules to the reviewers,

    4. Conducting the reviews,

    5. Determining results,

    6. Documenting the audit trail and results,

    7. Identifying potential inconsistencies and errors,

    8. Referring potential inconsistencies and errors to subject matter experts (SMEs) for review and evaluation,

    9. Determining corrective actions and monitoring for completion,

    10. Finalizing and distributing the report of findings, and

    11. Continuing monitoring to ensure corrective actions are implemented and functioning properly.

  11. Tax module - Part of a taxpayer’s account which reflects tax data for one tax class (i.e. MFT) and one tax period. All penalty assessments and/or abatements reflected on each tax module must be reviewed.

Office of Servicewide Penalties (OSP) Responsibilities

  1. This section covers team members and their responsibilities for the accuracy review process

Program Manager Responsibilities

  1. To begin each review cycle, the program manager or project lead makes a written request to SB/SE R&OA to identify the sample of tax modules to be reviewed. SB/SE R&OA provides the sample to the program manager or project lead directly. The project lead and specific penalty SMEs (see IRM 20.3.1.3.4) prepare the sample for review. The program manager sets a completion date for the specific review cycle.

  2. The program manager ensures the review team is provided with adequate training and tools to conduct the review, including a copy of the Civil Penalty Review Job Aid and all lead and computation sheets. The program manager ensures that the project lead organizes and schedules training for the reviewers (see IRM 20.3.1.3).

  3. The program manager finalizes the report of findings. The program manager reviews and assesses the documented review process, results and corrective actions to ensure the report of findings is accurate and complete. The report of findings is considered final when signed by the program manager.

  4. The program manager shares the report with Director, Servicewide Operations and other leadership, as needed. In addition, the report of findings will be shared with the CFO, specifically Financial Management Revenue Oversight and Support (ROS) and Corporate Planning and Internal Control (CPIC).

  5. The program manager ensures corrective actions are properly implemented, tested and documented as an addendum to the finalized report of findings (see IRM 20.3.1.9).

Project Lead (Oversight) Responsibilities

  1. The program manager designates a project lead for oversight of the Civil Penalty Accuracy Review process. The project lead is an OSP analyst serving as an intermediary between the program manager, reviewers, SMEs, the CFO and other internal stakeholders with an interest in the review process.

  2. The project lead monitors the progress of each review cycle from identification of the sample through completion of the report of findings. The project lead develops the civil penalty master listing for monitoring purposes (see IRM 20.3.1.4). The project lead should be aware of the status of the tax modules being reviewed at all times. The project lead assigns the tax modules to the reviewers and ensures all case reviews are properly tracked and documented. The project lead maintains a listing of tax modules included in the sample. This listing is referred to as the civil penalty review master listing.

  3. The project lead provides instructions for completing the reviews and communicates expectations for use of the Civil Penalty Review Job Aid in the review process. The project lead communicates the due date for completion of the reviews to the review team. The project lead organizes and schedules training for the reviewers. The project lead coordinates with the SMEs to ensure the reviewers understand how to compute specific penalties and how to use the lead and computation sheets (see IRM 20.3.1.3.4).

  4. On completion of the reviews by the reviewers, the project lead collects and compiles the results. The project lead conducts a review of the documentation and results to ensure the documentation is complete and the findings are accurate.

  5. The project lead ensures all documents related to the review process, including a copy of the final report of findings, are uploaded to an enterprise shared folder and retained for five years from the date of issuance of the final report of findings, based on IRM 20.3.1.8.2(2)IRM 1.15.2, Types of Records and Their Life Cycles.

  6. The project lead addresses questions and issues as they arise by interacting with all related parties, including Director, Servicewide Operations and other leadership.

  7. The project lead coordinates with the SMEs to monitor the implementation of corrective actions and to ensure corrective actions are functioning properly through testing. The project lead incorporates testing results as an addendum to the finalized report of findings (see IRM 20.3.1.9).

Reviewer Responsibilities

  1. The penalty review team performs the reviews under the direction of the program manager, while also working in conjunction with the project lead. Generally, the team will consist of four OSP analysts, who serve as reviewers.

  2. Prior to conducting the reviews, the reviewers receive training and guidance to ensure understanding of each specific penalty computation. Training includes a review of the Civil Penalty Review Job Aid and direction from the SMEs on how to compute specific penalties and how to use the lead and computation sheets (see IRM 20.3.1.3.4). The reviewers ensure they understand the review process, including the documentation of the audit trail and conclusions reached and the computation of the various civil penalties identified on the tax modules.

  3. Reviewers must have access to the Integrated Data Retrieval System (IDRS), to conduct the reviews. Reviewers use IDRS research, along with lead and computation sheets (see IRM 20.3.1.3.4) and manual computations to review and recompute all civil penalties identified on the tax modules assigned.

  4. Reviewers document each review, including the steps taken to recompute each penalty.. Reviewers maintain supporting documentation for each review based on IRM 20.3.1.8.2(2) and IRM 1.15.2.

  5. The reviewers communicate the results of each review to the project lead.

  6. During the course of each review cycle, the review team meets periodically to assess the process and address issues.

Subject Matter Expert Responsibilities

  1. As part of the review team, analysts located in OSP will serve as SMEs for specific penalties. To allow for segregation of duties, reviewers should not serve as SMEs during the same review cycle. The SMEs:

    1. prepare the sample for assignment,

    2. develop lead and computation sheets to be used to review specific penalties,

    3. provide training to the reviewers on how to compute specific penalties,

    4. provide training to the reviewers on how to use the lead and computation sheets during the review,

    5. answer penalty-specific questions as the reviews are completed,

    6. review penalty computations to confirm errors identified by the reviewers,

    7. determine and implement corrective actions when errors are identified,

    8. monitor to ensure corrective actions are implemented and functioning properly,

    9. conduct testing to ensure corrective actions are functioning properly and document results of testing, and

    10. provide results of testing to project lead.

Sample Selection Process

  1. On a semi-annual basis, as requested by the program manager or project lead, SB/SE R&OA identifies the sample of tax modules to be included in each review cycle.

  2. The tax modules must include at least one penalty assessment. In some cases, one tax module may include multiple penalty assessments for a variety of penalties. The sample is delivered directly to the program manager or project lead by SB/SE R&OA.

  3. The sample should include tax modules that proportionately reflect the total population in the Unpaid Assessments inventory. The sample should be selected proportionately across the four financial classifications (tax receivables, compliance assessments, write-offs and memos) and include the following:

    1. representative sample from Individual Master File (IMF) and Business Master File (BMF),

    2. representative sample of systemic assessments and manual assessments, and

    3. tax modules where the sum of the assessed penalty and accrued penalty is greater than $0.

    Note:

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  4. The project lead maintains a listing of tax modules included in the sample. This listing is referred to as the civil penalty review master listing.

Scope of Civil Penalty Reviews

  1. Prior to assignment to the reviewers, the SMEs complete IDRS research and analyze the sample to identify the types of civil penalties included in the review cycle. Generally, the penalties include:

    1. failure to file (FTF) penalty under IRC 6651(a)(1),

    2. failure to pay (FTP) penalty under IRC 6651(a)(2),

    3. estimated tax (EST) penalty under IRC 6654,

    4. failure to deposit (FTD) penalty under IRC 6656,

    5. bad check penalty under IRC 6657, and

    6. the accuracy-related penalty under IRC 6662.

  2. The list above is not all-inclusive (there are over 170 civil penalties administered by IRS). The sample may include tax modules with other civil penalties that must be verified for accuracy during the review process.

  3. In instances where multiple penalties are assessed against the same taxpayer, all civil penalties identified on the tax module must be verified for accuracy.

  4. Penalty abatements should be reviewed to the extent possible, based on information available on the Integrated Data Retrieval System (IDRS).

Documenting Civil Penalty Reviews

  1. It is important for reviewers to document their audit trail so subsequent reviewers can follow steps taken, information and documents reviewed and conclusions reached.

  2. Each module reviewed is controlled using a unique control number designated on assignment to the reviewers. Control numbers are generated using the following naming convention: YYYYLNNN

    • YYYY = the calendar year when the review was conducted (i.e. 2016)

    • L = a letter to correspond with the review cycle for the year (i.e. A - first cycle, B - second cycle, etc.)

    • NNN = the control number assigned to the taxpayer module (i.e. 001...100...etc.)

    Example:

    2016A050 is module 50 from the first review conducted in 2016

  3. Each electronic file folder should contain the following for all penalty assessments and/or abatements reviewed:

    1. Data Collection Instrument (DCI),

    2. Copies of IDRS research including: TXMODA, IMFOL/BMFOL, PIFTF (for failure to file (FTF) penalties), INTSTD (for failure to pay (FTP) penalties), FTDPN (for failure to deposit (FTD) penalties), and COMPAS and PIEST (for estimated tax (EST) penalties),

    3. Copies of lead and computation sheets used for recalculation of the penalty,

    4. Additional workpapers and spreadsheets used for manual computations and to document findings, and

    5. Supporting penalty abatement documentation reviewed, if applicable.

  4. Documentation will be uploaded to an enterprise shared folder and retained for five years from the date of issuance of the final report of findings, based on IRM 1.15.2 and Document 12990, Records Control Schedules.

Conducting Civil Penalty Reviews

  1. In general, the reviewers analyze IDRS research and utilize verification tools (i.e. lead and computation sheets) to review the penalty assessments. (See Civil Penalty Review Job Aid for a detailed explanation of steps taken to conduct the reviews.) Using IDRS research and the verification tools, the reviewers recompute each penalty and compare the results to the assessed amount. The reviewers document the computation of each penalty and maintain electronic copies of all IDRS research used to complete the reviews.

  2. For penalties found to “match” the assessed amount, the reviewers communicate findings to the project lead and the civil penalty review master listing is updated to reflect “match”.

  3. In instances where the penalties do not match the assessment shown on Master File, the reviewers communicate findings to the project lead and the civil penalty review master listing is updated to reflect “mismatch”. The reviewers consult with the specific penalty SME to determine if the penalty is a true “mismatch”. The SME conducts additional research and analysis to verify the mismatch (i.e. amount and type), determines the cause of the mismatch and identifies corrective actions needed.

Identifying Potential Inconsistencies and Errors

  1. The types of mismatches (or errors) found may include:

    1. manual data entry errors specific to one taxpayer,

    2. systemic computational errors affecting many taxpayers,

    3. processing or procedural errors, and

    4. use of incorrect information in systemic reference/explanation tools available on IDRS.

      Note:

      This list is not all-inclusive. Other types of mismatches may be identified through this review process.

  2. The civil penalty review master listing is updated by the project lead to document the findings.

  3. Depending on the type of mismatch, the SMEs identify the actions needed to resolve both the systemic root cause and computational errors on the specific case. Where required, the SMEs input Knowledge Incident/Problem Service Asset Management (KISAM) tickets to report the issue to Information Technology (IT) for further analysis. Based on their findings, IT may initiate programming changes affecting systemic computations as necessary.

  4. The SMEs contact affected functions (i.e. Automated Substitute for Return (ASFR), Automated Underreporter (AUR), etc.) to request adjustments to correct the errors, as needed. The SMEs keep the program manager and project lead apprised of the status of the mismatches and corrective actions. After corrective actions are requested, the SMEs and/or project lead continue to take actions to verify corrections were implemented.

  5. The SMEs conduct testing to ensure corrective actions are functioning properly. The SMEs document the results of the testing and provide the results of testing to the project lead for inclusion as an addendum to the finalized report of findings (see IRM 20.3.1.9). As needed, affected tax modules may be included in subsequent review cycles and rechecked to determine if corrections and adjustments were made properly.

  6. The SMEs maintain control of the mismatches from identification through resolution.

Reporting Civil Penalty Review Results

  1. This section covers the report preparation and dissemination.

Civil Penalty Accuracy Review Report Preparation

  1. When the reviews are complete, the reviewers must provide the project lead with a completed copy of their civil penalty review master listing and all associated files (included in their electronic file folders) for review. The project lead compiles the results into a spreadsheet that encompasses all reviewed tax modules. A report of findings will be prepared that conveys actions taken, errors identified (if any) and corrective actions completed (if any).

Civil Penalty Accuracy Review Report Distribution

  1. The report of findings is reviewed by the review team members before being presented to the program manager for a final review of the document. The program manager reviews and assesses the documented review process, results and corrective actions to ensure the report of findings is accurate and complete. The report of findings is considered final when signed by the program manager.

  2. The finalized report of findings is shared with Director, Servicewide Operations and other leadership, as needed. In addition, the report of findings will be shared with the CFO, specifically Financial Management Revenue Oversight and Support (ROS) and Corporate Planning and Internal Control (CPIC). The finalized report of findings will be uploaded to an enterprise shared folder and retained for five years from the date of issuance of the final report of findings, based on IRM 1.15.2, and Document 12990, Records Control Schedules.

Resolution of Corrective Actions Identified in the Civil Penalty Accuracy Review Report

  1. On finalization of the report of findings, if unresolved corrective actions exist, the program manager ensures corrective actions are properly implemented, tested and documented as an addendum to the finalized report of findings.