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25.25.10  Frivolous Return Program (Cont. 1)

25.25.10.9 
Account Assessments/Adjustments/Reversals

25.25.10.9.3 
Penalty Abatements

25.25.10.9.3.2  (06-07-2016)
Penalty Abatement Procedures

  1. Prepare Form 8278, “Assessment and Abatement of Miscellaneous Penalties”, indicating:

    Reminder:

    Ensure, if a joint return, to prepare a Form 8278 for both taxpayers

    • Taxpayer's name

    • Tax Period

    • TIN

    • Next to "6702 (a) Frivolous tax return" input the form number and the received date

    • Under "Number of Violations" input "X " (X= number of penalties being abated)

    • Under "Amount Abated" input "$X" for the ,(X= $5,000 times the number of penalties being abated)

    • Signature date - the earliest date the return/claim was signed by the taxpayer. If no signature, write "N/A"

    • "Originator" : Technician’s name

    • Date: today's date

    • Organization Code: Employee IDRS number

    • Phone: Technician or manager’s phone number

  2. Select appropriate action on FRP Master

  3. Send Form 8278 to manager for approval

  4. Upon Manager approval of Form 8278, input adjustment using the IAT CC REQ54 Tool :

    • Blocking Series 53

    • Reason code for MFT 55 place 65 in 1st position and 45 in the 4th position for MFT 13 RC 45 only in the 4th position.

    • Category - AUDT

    • Activity - "ABATEPEN"

    • CD – (Penalty Reference Code) 666 or 543 Collection Issues

    • Amount – (5,000.00) (If abating more than one penalty, input the total amount for all penalties.)

    • Remarks section notations: Reason why penalty is being abated
      See IRM 25.25.10.8.2, Penalty Assessment, for association of documentation.

  5. Ensure all offsets are reversed to the appropriate tax period

  6. Select appropriate action on FRP Master

25.25.10.9.4  (09-30-2016)
Credit Offset Reversals

  1. If the overstated withholding was credited to another tax year or to an outstanding federal agency debt, child support debt, state income tax debt or unemployment compensation debt (TOP Offsets), the credit should be reversed by an entry that will post to the Summary Record of Assessment..

    Note:

    Governing Regulations have changed the time frames the treasury has to collect on offsets of tax refunds for child support payments. For special instructions on offsets greater than 5 months old, see IRM 21.4.6.4.2.4, Child Support TOP Offsets

  2. If the offset did not result in a refund, use CC REQ54 to reverse the applicable amount of income, withholding, credits and exemptions:
    - Input TC 290 for .00 if TC 150 amount is .00
    - Input TC 291 for the exact amount of the TC 150 with a minus following the amount.
    - In the Activity field of CC ADJ54, input: W/H-REVERSAL
    - Blocking series 00 (or 05 as appropriate)
    - Source Code 0
    - Reason Code 099
    - Hold Code 4
    - Priority Code 1 (If open TC 420 and L freeze)
    - Input applicable reference codes as shown below with a minus following the amount
    - In the remarks field of CC ADJ54, input: frivolous return processed, account backed off.

  3. Since the IRS has not issued a refund, the verifiable amount of withholding credit will go on the Statutory Notice of Deficiency.

25.25.10.10  (09-30-2016)
Reduction of the Frivolous Return Penalty IRC 6702(d)

  1. IRC Section 6702(d) authorizes the reduction of the frivolous tax submission penalties assessed under IRC Section 6702 if it is determined that a reduction would promote compliance with and administration of the Federal tax laws. Revenue Procedure 2012-43 allows a one-time reduction of all unpaid IRC Section 6702 penalties to $500 if a taxpayer meets the requirements shown in IRM 25.25.10.10.1, Eligibility Requirements for Reduction under IRC Section 6702(d)

  2. When a taxpayer requests a reduction on Form 14402, "IRC 6702(d) Frivolous Tax Submissions Penalty Reduction " or similar written statement, the request must be evaluated within 15 calendar days. If the reduction is granted, the IRC Section 6702 penalties must be reduced within 30 calendar days unless the taxpayer is on a full pay Installment Agreement (IA). The technician is required to open an IDRS control with the received date shown on the Form 14402. Ensure Form 14402 has been input and scanned into FRP Master. When acceptance or rejection is determined update the control to reflect acceptance, rejection or pending IA completions.

  3. If the assessment of an IRC Section 6702 penalty was based on a jointly filed submission, each spouse interested in a reduction must submit a separate Form 14402.

  4. The following letters are used to respond to requests for reduction and are available on the Publishing website.

    • Letter 4940, Request for Penalty Reduction - use to notify the taxpayer of the proper procedures for requesting a reduction under IRC Section 6702; enclose a copy of Form 14402, IRC 6702(d) Frivolous Tax Submission Penalty Reduction.

    • Letter 4941, Rejection of Penalty Reduction Request- use to deny a request for reduction under IRC Section 6702(d) and explain to the taxpayer the reason(s) the IRS denied the reduction request

    • Letter 4942, Acceptance of Penalty Reduction Request- use to approve a request for reduction under IRC Section 6702(d) only if the taxpayer meets all the prerequisites for reduction of the penalty. The letter has an option for taxpayers who have an installment agreement, which must be paid before the penalty is reduced.

25.25.10.10.1  (09-30-2016)
Eligibility Requirements for Reduction under IRC Section 6702(d)

  1. A person must meet all of the requirements of Rev. Proc. 2012-43 to receive a reduction of unpaid IRC Section 6702 penalty liabilities. Deny any request for reduction that does not comply with all the requirements of Rev. Proc. 2012-43. See IRM 20.1.10.10.3, IRC 6702(d) Reduction of Frivolous Submission IRC 6702 Penalties for additional information.

  2. Form 14402 needs to be controlled within 3 days of receipt. The receive date is the date the request is received by FRP.

  3. The following table is a guide for eligibility requirements:

    Requirement Check
    Written request for reduction Form 14402 with signed under penalty of perjury.
    Partial payment of at least $250 Payment must be enclosed with request for reduction unless taxpayer has entered into a full pay installment agreement or refund offset per Revenue Procedure 2012-43.
    Caution: Full payment installment agreement exception-if the taxpayer entered into an IA to fully pay all Federal tax liabilities, including IRC Section 6702 penalty liabilities, up-front partial payment is not required CC IADIS for IA indicators, if present and taxpayer meets all other requirements for reduction, forward to Collection CCP to be manually monitored.

    Note:

    Ensure TC 971 AC 544 has been input for FRP monitoring.

    Filed all Federal tax returns (IMF and BMF) for the last six years See IRM 25.25.10.13.3, Conducting BMF Compliance Checks and IRM 21.3.12.2.1, Full Compliance Check (IMF & BMF), for details on how to complete a full compliance check. Remember to check CC ENMOD or CC TXMOD for cross-reference accounts.
    Fully paid all Federal tax liabilities (other than the IRC Section 6702 penalty liabilities) CC IMFOLI and CC BMFOL for balances
    Deposits by employer of Federal employment taxes for current quarter and prior two quarters CC BMFOLT 94X deposit history ,if current deposits are not consistent with deposit history, give business taxpayer an opportunity to provide reasonable explanation for change.
  4. The following table contains events that disqualify the taxpayer from receiving a reduction of the IRC Section 6702 penalty liabilities.

    Note:

    A taxpayer may receive a reduction of IRC Section 6702 penalty only once.

    Deny Requests where: Exception: Research
    The taxpayer has previously received a reduction of any IRC Section 6702 penalty liabilities   MFT 55 or 13 for all periods for a TC 240 with a PRN of 543 or 666 showing reduction of penalty to $500
    The taxpayer has submitted an Offer-In-Compromise (OIC) that includes any IRC Section 6702 penalty liability and the taxpayer is not pursuing an administrative appeal of the rejection Has submitted an Offer-In-Compromise that includes the IRC Section 6702 penalty liabilities if:
    • the taxpayer has withdrawn the offer in writing

    • the IRS has returned the offer to the taxpayer without accepting it

    • or the IRS rejected the offer and the taxpayer is not pursuing an administrative appeal of the rejection

    CC IMFOLT for:
    • TC 480, Open OIC

    • TC 780, Accepted OIC

    • TC 481, Rejected OIC

    • TC 482, Withdrawn OIC

    The taxpayer has entered into a Partial Payment Installment (PPIA) agreement that includes the IRC Section 6702 penalty liabilities   CC IADIS for a PPIA indicator, Row 3 column 45 "PPIA ASSET CD" 1 or 2 is a Partial Pay IA.
    The taxpayer has entered into a closing agreement under IRC Section 7121 with the IRS that includes the IRC Section 6702 penalty liabilities   AIMS for EGC 58XX or 54XX with a closing code of 02, 03, or 04 request closing package to determine if it includes IRC 6702 penalties
    The taxpayer has an open bankruptcy case that includes the dischargeability of the penalty   TC 520 Stat 72 with a -V freeze. Form 982, "Agreement between Government Attorneys and Defendant."
    The taxpayer has suit filed by United States to collect IRC 6702 penalty liabilities or to reduce assessment of IRC 6702 penalty to judgement   CC TXMOD for a TC 520 followed by a TC 521 with a DC 04 and an extended collection statute
    The taxpayer has defaulted on a Full Payment Installment Agreement after submitting a request for a reduction. If the IA is defaulted the taxpayer is required to submit a new reduction request and provide the additional payment. Default will be identified by tax module showing Collection Status 63 (defaulted IA) 22, 24, or 26.
    The taxpayer has submitted a frivolous filing after FRP received the reduction request and before the reduction is granted   CC TXMOD, CIS, AMS for any identified frivolous filing received after FRP received a request for the reduction
  5. A person must make a written request for reduction on Form 14402, IRC 6702(d) Frivolous Tax Submission Penalty Reduction.

    Note:

    Treat any written statement signed under penalties of perjury that includes the same information prescribed by Form 14402 and its instructions as a valid request for reduction.

25.25.10.10.2  (09-30-2016)
Partial Payment of IRC Section 6702 Penalty Liabilities

  1. If the taxpayer meets the eligibility requirements discussed in IRM 25.25.10.10.1, Eligibility Requirements for Reduction under IRC Section 6702(d). The IRC Section 6702 penalty liabilities will be reduced to $500. The taxpayer must pay the reduced liability by either:

    1. submitting at least $250 with the request for reduction or

    2. paying the reduced penalty as part of a full payment installment agreement

    3. by refund offset - per Revenue Procedure 2012-43

      Note:

      Research CC TXMOD or Remittance Transaction Research (RTR) for payment.

  2. Unless the taxpayer is making payments pursuant to a full payment installment agreement the taxpayer must submit at least $250 with the request for reduction, even if that person has already paid a portion of the penalty. A person who chooses to pay the $250 or more but less than $500 will remain liable for the balance of the reduced penalties.

    Note:

    Interest will continue to accrue on the unpaid and unabated IRC Section 6702 penalty liabilities that are the subject of the reduction request. If, however, a taxpayer submits $500 with a request for reduction and the IRS grants the request, abate any interest that has accrued on the unpaid IRC Section 6702 penalty liabilities.

  3. If a taxpayer submits a payment with a request for IRC Section 6702 penalty reduction, the partial payment will be applied to the taxpayer's assessed IRC Section 6702 penalty liabilities whether or not the IRS grants the reduction request.

  4. Issue Letter 4942, Acceptance of Penalty Reduction Request to the taxpayer.

  5. If a taxpayer is paying the reduced IRC Section 6702 penalty as part of a full pay installment agreement and the taxpayer meets all other requirements , forward the information for Collection CCP to manually monitor the installment agreement and provide Letter 4942, Acceptance of Penalty Reduction Request to the taxpayer.

  6. FRP will determine the new estimated Reduction Completion Date (RCD) based upon the reduced penalty.

    1. Calculate the new estimated full pay date by dividing the amount of the pending penalty reduction by the current monthly amount on CC IADIS

      Note:

      This represents the number of months to subtract from the CC IADIS completion date and provides the RCD

    2. Provide the RCD with the CC IADIS to give Collection CCP an estimated date of completion

    3. Send a copy of the signed and PENDING reduction request

    4. E-Fax both CC IADIS and the Form 14402 to Collection CCP at 855-389-1531

    5. When the taxpayer has fulfilled the requirements of the installment agreement, except for the portion attributed to the rest of the penalty and accrued interest, Collection CCP will E-Fax confirmation to FRP at 855-235-8845.

    6. If the taxpayer does not complete the Manually Monitored Installment Agreement (MMIA), or fails to file or files additional frivolous return(s), send the taxpayer a Letter 4941, Rejection of Penalty Reduction Request advising him/her the reduction request is no longer valid and the reason why.

      Note:

      Such taxpayers may request another reduction provided they submit another reduction request with the required partial payment.

    7. If the taxpayer completes the IA and has filed returns as required while in the IA, complete the actions to reduce the penalty and abate appropriate interest. See IRM 25.25.10.10.5, Approval of Reduction Request Under IRC 6702(d) .

    8. Update IDRS history and FRP Master with the date and status of the reduction request.

25.25.10.10.3  (09-30-2016)
Manually Monitored Installment Agreements

  1. When the taxpayer has an approved installment agreement FRP will provide Collection CCP with a copy of CC IADIS. The CC IADIS installment agreement amount includes the tax balance, accruals and the total amount of the penalty.

  2. FRP will determine the new estimated Reduction Completion Date (RCD) based upon the reduced penalty.

    1. Calculate the new estimated full pay date by dividing the amount of the pending penalty reduction by the current monthly amount on CC IADIS

    2. This represents the number of months to subtract from the CC IADIS completion date and provides the RCD

    3. Provide the RCD with the CC IADIS to give Collection CCP an estimated date of completion

    4. Send a copy of the signed and PENDING reduction request (i.e., Form 14402)

    5. E-Fax both CC IADIS and the Form 14402 to Collection CCP at 855-389-1531,

    6. When the taxpayer has fulfilled the requirements of the installment agreement, except for the portion attributed to the rest of the penalty and accrued interest, Collection CCP will E-Fax confirmation to FRP at 855-235-8845.

    7. If the taxpayer does not complete the MMIA, or fails to file or files additional frivolous return(s), send the taxpayer a Letter 4941, Rejection of Penalty Reduction Request advising him/her the reduction request is no longer valid and the reason why. Such taxpayers may request another reduction provided they submit another reduction request with the required partial payment.

    8. If the taxpayer completes the IA and has filed returns as required while in the IA, complete the actions to reduce the penalty and abate appropriate interest. See IRM 25.25.10.10.5, Approval of Reduction Request Under IRC 6702(d).

    9. Update IDRS history and FRP Master with the date and status of the reduction request.

25.25.10.10.4  (09-30-2016)
Approval of Reduction Request under IRC Section 6702(d)

  1. If the taxpayer meets the requirements detailed above, reduce any unpaid IRC Section 6702 penalty liabilities to $500. Use Letter 4942, Acceptance of Penalty Reduction.

  2. Once the taxpayer completes the Installment Agreement (IA), FRP reduces the penalty. See IRM 25.25.10.10.3, Manually Monitored Installment Agreement for detailed procedures.

  3. Do not refund to the taxpayer any amount of the penalty paid, either by refund offset or voluntary payment prior to the date IRS received the request for reduction on Form 14402, IRC 6702(d) Frivolous Tax Submissions Penalty Reduction

    Note:

    Consider the reduction request filed on the date it is stamped received by the IRS. If the taxpayer's account reflects an overpayment that has not been applied to the penalty before the reduction request is received by the IRS and the taxpayer meets the requirements for a reduction, the overpayment should be applied to any unpaid amount of the reduced penalty. Any remaining overpayment should be refunded based on the cycle date (TC 706) of the refund offset. If however, the overpayment had already been applied to any IRC Section 6702 penalties before the reduction request was received, those amounts may not be refunded, regardless of whether the taxpayer qualifies for the penalty reduction. TC 706 indicates the date an offset posts to a taxpayer's account.

  4. Input TC 971 AC 544 with MISC field "accept"

25.25.10.10.5  (09-30-2016)
Rejection of Reduction Request under IRC Section 6702(d)

  1. If the taxpayer does not meet the qualifications, deny the request using Letter 4941, Rejection of Penalty Reduction Request. Indicate on Letter 4941 the reason(s) the taxpayer's request for reduction was denied.

  2. Letter 4941, Rejection of Penalty Reduction Request gives the taxpayer an opportunity to meet eligibility requirements. Denial of a reduction request does not preclude a taxpayer from submitting another request. With each request the taxpayer must pay at least $250 or have entered into a full payment installment agreement.

  3. Update IDRS history and FRP master database with the date of the rejection so the technician can determine the amount of the penalty.

  4. Input TC 971 AC 544 with MISC field "reject"

25.25.10.11  (04-14-2016)
Examination Case Processing

  1. The following information describes procedures that are specific to the Frivolous Return Program. Unless otherwise stated, normal case processing procedures will be followed.

  2. Open a control on CC TXMOD as:
    C#,RTN/AUDT,A,AUDT
    IDRS Number, IRS Received date (the earliest received date on the frivolous document)

  3. AIMS controls include but are not limited to:

    • Project code 310, Source Code 20 for Processed Returns.

    • Project code 311.

  4. AIMS activity codes (Exam Classes) used will be determined using the ADP Document 6209.

  5. Prepare case folders for each paper case initially controlled in FRP. These folders will include the following applicable documents, in order:

    • Form 3198, Special Handling Notice for Examination Case Processing if applicable

    • Copies of letters mailed to taxpayer

    • Any appropriate taxpayer correspondence in descending date order

    • Pertinent IDRS prints such as: IRP that may drop from the system.

    • Penalty approval form

    Caution:

    Case file folders will not include anything that is stored electronically. This includes IDRS prints.

    Note:

    For paperless cases, Include only the Form 8278

  6. For applicable arguments input TC 810. Input a TC 810, using jurisdiction "4" for all years with potential for refund unless one already exists. The TC 810 will be reversed with a TC 811 when the taxpayer is purged from FRP Master, when the Refund Statute Expiration Date (RSED) expires or when the taxpayer comes into compliance.

    Note:

    If taxpayer has been determined to be entitled to information shown on their return, close the case and send the taxpayer an apology letter stating they are not being examined for frivolous issues.

25.25.10.11.1  (09-30-2016)
Statutory Notice Of Deficiency Procedures

  1. Once it has been determined that a case will be forwarded for Statutory Notice Of Deficiency (SNOD) issuance, the tax technician will research all necessary IDRS command codes to verify and secure the taxpayer’s last known address and any POA information.

    Note:

    All cross-reference taxpayer accounts will also be researched.

  2. Review the report to ensure all issues are included and correct tax/penalty computation amounts are indicated including any funds received resulting from a refund issued on a frivolous filing. Fraudulently claimed excessive credits received by the taxpayer constitute an increase of wealth over which the taxpayer exercised control; hence, it is income under IRC Section 61.

  3. An original statutory notice must be provided to both spouses on married filing joint filings, including their separate POAs, if applicable. See IRM 4.8.9.11.1, Separate Notices to Joint Filers and IRM 4.8.9.8.1 , Taxpayer Name for additional information.

  4. Process as follows:

    1. Assemble the 90-day package and update RGS, AIMS, FRP Master Daily, case folder, and IDRS control to "Send 90-Days," ensuring Form 5344, "Exam Closing Record" includes correct collectable codes and any other appropriate codes.

    2. Forward case for Statutory Notice issuance.

    3. Close case controls.

25.25.10.11.2  (05-05-2016)
Case File Assembly

  1. All Examination case file folders will be assembled in the following order:

    Caution:

    Case file folders will not include anything that is stored electronically. This includes IDRS prints.

    • Form 5344

    • Form 1040 Labels (if any)

    • Letters and enclosures waiting to be sent to the taxpayer

    • No Change letter, when applicable

    • Closing examination report

    • Closing document with signature/agreement

    • File copies of correspondence in most recent date order

    • Workpapers

    • For paper cases only original print, amended return, or CIS image

    • Form 5546, "Examination Return Charge-out" or current CC AMDIS print

    • Form 12616

  2. When applicable, Form 895, Notice of Statute Expiration, will be placed on the top of all other documents.

  3. Remove extraneous material such as routing slips, excess prints, etc.

  4. Indicate closing action code and time on outside of case folder.

  5. Ensure FRP Master Daily is updated appropriately for FRP cases.

  6. 90-day notices should never be destroyed. If the 90-day notice is no longer valid, attach a note to indicate "Void, Do Not Assess" . If the 90-day notice is valid, but the report has been revised, attach a note to the 90-day notice to indicate "Do Not Assess."

  7. See Exhibit 4.4.1-2, Case Assembly.

    Note:

    If a case is worked on RGS, printing of the entire closing file package is not necessary, RGS maintains an electronic file copy. See IRM 4.19.13.17, Case File Assembly .

25.25.10.12  (09-30-2016)
Erroneous Refunds

  1. See IRM 21.4.5, Erroneous Refunds, and IRM 4.19.14.8.3, QRP Examination Process, for additional information.

  2. This section provides information on erroneous refunds resulting from frivolous filings. They commonly fall under one of two types - taxpayer claim for improper credits and/or taxpayer claim understating tax liability.

  3. All refunds, resulting from frivolous filings, must be entered into FRP Master by selecting action code "ASSIGN/ERR REF" and completing the erroneous refund tab with the amount of the erroneous refund, the first two digits of the TC 846 DLN, and the cycle the refund was issued.

    1. FRP Master Erroneous Refund Reports will be generated weekly (less often if no new refunds are identified) by the FRP Analyst. The report will include the taxpayer name, SSN, amount of refund and cycle issued, argument code, Campus location that processed the refund, and the area or process that allowed the refund. Send the report to the HQ Policy Analyst and FRP Senior Technical Coordinator.

    2. The FRP Senior Technical Coordinator will provide the Erroneous Refund Report to the appropriate Campus that allowed the refund, requesting a reply with a time frame of one week. The reply will include the following questions:
      1. What IRM guidance provides for the processing that allowed the refund?
      2. If IRM guidance was properly followed in the processing of the refund?
      3. If there is a need for an IRM revision to prevent additional erroneous refunds?
      4. If there is a need for additional or revised training to prevent additional erroneous refunds?

    3. If no response is received after one week, one follow-up will be attempted. If no response is received to the follow-up, elevate request to HQ.

    4. If response from Campus does not resolve the processing error that allowed the refund, elevate the report to the HQ Policy Analyst for resolution.

    5. HQ Policy Analyst will report back to Ogden Fraud and Referral Evaluation (FRE) Analyst with final disposition. Disposition shall include resolution to processing error(s) that caused the refund, follow-up actions required of Ogden FRE and/or Ogden FRP Technical Advisors for review and approval

  4. Every effort will be taken to avoid the issuance of a refund based on the filing of a frivolous return. However, when such filings result in erroneous refunds to taxpayers, the Service has several options available to recover these refunds.

  5. If an erroneous refund is identified prior to systemic generation of check or direct deposit, NOREF processing will be utilized to prevent issuance, if the refund has not posted to IDRS.

  6. If an erroneous refund is identified within sufficient time to recover payment at financial institution or post office but outside the CC NOREF processing time frames, intercept procedures will be utilized

  7. If an erroneous refund is identified after cycle cutoff and intercept procedures were not successful, the Service has options to recover through:

    • On-line Assessment

    • Mathematical or Clerical Error

    • Statutory Notice of Deficiency

    • Erroneous Refund Litigation

25.25.10.12.1  (08-13-2015)
CC NOREF Processing

  1. It is critical that the following actions be taken during the appropriate cycle. The command code must be input by the time frames outlined in IRM 21.4.1.4.10, Refund Intercept CC NOREF with Definer “P”. Refer to IRM 2.4.37.1, Terminal Input CC NOREF.

    Note:

    For IMF, NOREF can only be used if there is not a TC 846, or the TC 846 is showing as pending (PN). For BMF the TC 846 must not be posted. The cycle date of the TC 846 must be the current cycle.

  2. CC: NOREF/NOREFEP posts with all 5’s in the DLN (blocking series, etc.). This input creates a P freeze and a TC 841 posts on the module. It does not post for up to four weeks after the input of the CC NOREF. TC 841 with all 9’s in the DLN (blocking series, etc.) indicates the check was re-deposited.

  3. Input NOREF as follows:

    1. For paper check, CC TXMODA must precede each NOREF input request.
      NOREF 30 TXYRMM NAME
      C#,CYCLEP,M,RFDL – Example: 200924P ( current refund cycle followed by a P for paper)
      *,*
      * Space down two blank lines
      DO Code
      99

      Note:

      For a complete list of reason codes, See Exhibit 2.4.37-2

    2. For direct deposit refund, input TXMODA
      NOREFE30 TXYRMM NAME
      C#,CYCLEE,M,RFDL
      (current refund cycle followed by a E for Electronic Direct Deposit Filing)
      *,*
      * Space down two blank lines
      DO Code
      99
      Routing Transit Number

    Note:

    CC:NOREF must be input upon identification of initial filing. If direct deposit is not identified immediately after filing, it will not stop regardless of the use of CC NOREF.

25.25.10.12.2  (09-30-2016)
Intercept Procedures

  1. Refer to IRM 21.3.8.3.5.1, IRM Refund Intercepts; IRM 3.17.20, Refund Intercept Program.

  2. There are options available to stop an erroneous refund. Payments can be intercepted at a financial institution (Bank Indemnification process for direct deposit), Bureau of Fiscal Services (BFS) , post office (Recall of Mail for a paper check.) or through intervention from Revenue Officer (RO) (Coordination with Collection for RO Assignment). If FRP has issued a Bank Indemnification letter to a bank that has failed to comply in the past, FRP should not wait to make contact with an RO. The RO should be told the letter was issued, but during past interactions with the Bank, they have failed to comply.

    1. Bank Indemnification Process - An indemnification letter is appropriate only if a direct deposit refund is issued and CC NOREFE is unsuccessful or CC IMFOL indicates Customer Account Data Engine (CADE) processing:

    1. Determine the location of the bank to which the refund will be deposited by accessing CC TRDBV and/or CC IMFOBT to determine the routing transit and account number of the claimant’s corresponding bank account. Multiple deposits can be identified by the posting of Form 8888, "Allocation of Refund" on CC TRDBV.

    2. Access the Internet at www.fedwiredirectory.frb.org/ to determine a phone number for the receiving bank using the RTN for identification.

    3. Call bank and ask for Automated Clearing House (ACH) Department. Service identity should be made and an explanation of our intention should be given.

    4. Request the bank’s fax number and name of direct contact (ATTN:)

    5. Prepare letter of indemnification .

    6. Fax letter requesting the amount of the refund to ACH Department at bank.

    7. Monitor for refund to post back to taxpayer’s account.

    8. Reverse credit and work case as if no refund were issued.

    9. Case should be controlled as "BKINDEM" until TC 841 posts.

    2. BFS- Checks are mailed on the refund date (located on IDRS). A special handling request from signed by a certifying officer of the Service Center who released the refund must be sent to BFS prior to the refund pay date. The request must be sent to Kansas City Special handling BFS or to Philadelphia depending on the issuing site.

    3. Recall of Mail - If unable to stop erroneous refund using CC NOREF, and check has not actually reached the taxpayer, attempt to recover paper check refund by recall of mail. Per postal procedures, "Mail deposited in a collection box or at a post office may be recalled with proper identification by the sender or the sender’s representative. [Postal] Form 1509 must be submitted to the postmaster at the office of mailing" . Therefore, after Notice Review and CC NOREF cycle cutoffs or during accelerated cycles, the U.S. Post Office can be contacted (usually on Friday) to stop delivery of an erroneous refund check.

    Note:

    Postal Form 1509 can be found at www.usps.gov.

    1. Follow-up daily with postmaster to inquire as to the status of the refund check

    2. Request for assistance from an RO may be made

    3. If the check is recovered, it should be voided and the following should be written in bold, "Fraudulent refund - do not reissue" and sent for redeposit in an envelope marked "Personal" ATTN: FRP Senior Technical Coordinator at:

      Ogden FRP

      1973 N. Rulon White Blvd.

      M/S 4450

      Ogden, UT 84404

    4. TC 844 should be input and coordinated with the Erroneous Refund Function.

    5. Control case as CKPULL@PO until TC 841 posts.

    4. Intervention from RO.

    Follow the If and then tables below for intercept procedures:

    If And Then
    Refund under ≡ ≡ ≡ ≡ ≡ ≡ the refund was generated based on false withholding
    1. Input TC 290 for overstated withholding amount

    Refund under ≡ ≡ ≡ ≡ the refund was generated based on a false Form 2439
    1. Input TC 290 for the amount of the Form 2439 credit, minus the tax. Consider negligence penalty.

    2. Prepare and send letter 474C and suspend the case for 60 days to allow the TP to dispute the assessment. If no dispute is received, move case to next step in FRP process.

    3. If dispute is received, abate the assessment and issue SNOD.

    Refund under≡ ≡ ≡ ≡ ≡ ≡ the refund was generated based on a credit that is subject to deficiency procedures (e. g., Fuel Tax Credit)
    1. Prepare and issue SNOD, assessing tax in the amount of the overstated credit. Consider negligence penalty.

    A copy of the return has been secured and a summary of the facts of the case has been prepared Scanned image has been sent to Senior Technical Coordinator Senior Technical Coordinator or Revenue Agent will:
    1. Prepare memorandum to Counsel requesting authorization to initiate jeopardy assessment/jeopardy levy procedures.

    2. Include a summary of the facts of the case, pertinent account research and a scanned image of the return.

      Note:

      To determine whether a jeopardy condition exists, refer to IRM 4.15.1.6, Conditions

    Note:

    If refund is over ≡ ≡ ≡ refer to designated employee for processing. Enter all manual/jeopardy assessments into FRP master database using program code 91859. Update the "Error Filing Tab"

    If And Then
    Refund claimed is more than ≡ ≡ ≡ ≡ and direct deposit Send indemnification letter Bank returns money Apply money to the appropriate module
    Refund claimed is more than ≡ ≡ ≡ ≡ ≡ ≡ and a paper check, follow postal recall procedures Post Office returns check Void check then send check to refund inquiry.
    Refund claimed is more than ≡ ≡ ≡ ≡ ≡ ≡ Bank or Post Office does not return refund and refund was issued less than two months ago Initiate jeopardy assessment/jeopardy levy procedures:
    1. Secure a copy of the return

    2. Prepare a summary of the facts of the case (ie TP filed a frivolous Form XXXX return for tax period 200X claiming a refund of $XX,XXX from a Form 2439 credit. A refund was issued in error on XX-XX-XXXX).

    3. Forward a scanned image of the return and the facts of the case to the Sr. Technical Coordinator and the FRP-RA.

    Refund over ≡ ≡ ≡ ≡ ≡   Coordinate with Abusive Tax Avoidance Transaction (ATAT) Collection for Revenue Officer (RO) Assignment
    Refund over ≡ ≡ ≡ ≡ the refund was generated based on false withholding
    1. Input TC 971 AC 460.

    2. Request interest computation from designated function on tax and penalty.

    3. Prepare Form 2859, Request for Quick or Prompt Assessment, in the amount of the overstated withholding.

      Note:

      This allows for an immediate assessment. The 23C date will post that day.

    4. Provide Revenue Accounting the completed Form 2859, to request preparation and return of Form 3552.

    5. Provide the completed Form 2859 and Form 3552 to the RO.

    Refund over ≡ ≡ ≡ the refund was generated based on a false Form 2439
    1. Input TC 971 AC 460.

    2. Input TC 290 for the amount of the Form 2439 credit, minus the tax. Consider negligence penalty.

    3. Prepare and send letter 474C and suspend the case for 60 days to allow the TP to dispute the assessment. If no dispute is received, move case to next step in FRP process.

    4. If dispute is received, abate the assessment and issue SNOD.

    5. Once suspense period has expired, notify ATAT Collections for RO assignment.

    Refund over ≡ ≡ ≡ ≡ ≡ ≡ the refund was generated based on a credit that is subject to deficiency procedures (e. g., Fuel Tax Credit)
    1. Input TC 971 AC 460.

    2. Prepare and issue SNOD, assessing tax in the amount of the overstated credit. Consider negligence penalty.

      Reminder:

      DO NOT issue initial contact letter.

    3. Once suspense period has expired, notify ATAT Collections for RO assignment.

    Note:

    For jeopardy assessments

    If And Then
    Refund over ≡ ≡ ≡

    Note:

    These cases are considered on a case by case basis and the tolerances may be flexible.

    issued within the last 12 months and the refund was based on a false credit that is subject to deficiency procedures Initiate a jeopardy assessment:
    1. Secure a copy of the return that caused the refund

    2. Secure asset information from ATAT Collections including name and contact information for assigned RO.

    3. Prepare a memo for Counsel, summarizing the facts of the case, Include the following in the memo:

      • Taxpayer’s name. TIN and address

      • The facts surrounding the issuance of the refund,

      • What prompted the refund

      • What actions have been taken to determine the authenticity of the refund

      • Secured Asset information received from ATAT Collections.

      • Why the collection is in jeopardy

    Authorization is granted:  
    1. Request interest computation from designated function on tax and negligence penalty.

      Note:

      Ask that the calculation be computed for five business days from the date of the request.

    2. Prepare Form 2859, Request for Quick or Prompt Assessment, in the amount of the tax, penalty, and interest.

    3. Prepare Form 2644 and secure required signatures

    4. Prepare Notice of Jeopardy Assessment of Income Tax Under IRC 6861 and secure Director’s signature

    5. Provide the completed Form 2859, Form 2644 and Notice of Jeopardy Assessment of Income Tax Under IRC 6861 to RACS requesting jeopardy assessment.

    6. Immediately send Notice of Jeopardy Assessment of Income Tax Under IRC 6861 by certified mail.

    7. Forward entire case to POC for SNOD issuance

    8. POC will Immediately prepare and issue SNOD, assessing tax in the amount of the overstated credit. Consider negligence penalty.

  3. Once check is intercepted and returned to FRP, take the following actions:

    1. Prepare Form 3244, "Payment Posting Voucher" , directing Payment Perfection Area to deposit check as TC 720, "Other Credit" . In remarks section, add, "Recovery of refund issued in error as a result of frivolous filing" .

    2. Prepare Form 4287, "Record of Discovered Remittances" and forward check, Form 3244, "Payment Posting Voucher" and Form 4287, "Record of Discovered Remittances" to Payment Perfection Area.

    3. Input TC 844 on account to indicate an erroneous refund was issued.

    4. Monitor account for TC 844 to post and take necessary actions to prevent re-issuance of refund unless a freeze already exists on the module and work case as if no refund were issued.

    5. Case will be controlled as "BKINDEM" until reversal and payment (TC 720) posts.

    6. Once all transactions have posted, contact Erroneous Refund area and have them reverse the TC 844.

25.25.10.12.3  (08-13-2015)
Recovering Refunds by Statutory Notice of Deficiency

  1. When recovering refunds issued from a valid, frivolous return by statutory notice of deficiency, audit to determine deficiency which takes into account the rebate to the taxpayer.

  2. Issue statutory notice of deficiency.

  3. Include amount of refund as income to the taxpayer in the year of receipt of the money. If necessary, initiate tax audit for the year of the receipt of the erroneous refund. Input TC 971 AC 460 at the time the assessment is made.

  4. If taxpayer submits a subsequent claim after filing a previous claim, a frivolous return penalty should be assessed for each claim filed, including those referencing the same tax year.

25.25.10.12.4  (09-30-2016)
Recovering Refunds by Erroneous Refund Suit

  1. The Service may ask the Department of Justice to bring legal action against the taxpayer to recover the erroneous refund issued from a valid, frivolous return or as directed by FRP management. See IRM 25.3.2, Litigations and Judgments, Suits by the United States, and IRM 21.4.5.14 , Collection Methods for Category D Erroneous Refunds. An erroneous refund suit must be filed within two years of when the refund was made or five years if the taxpayer induced the issuance of the erroneous refund through fraud or misrepresentation of a material fact

  2. When an erroneous refund suit to recover refunds is initiated, the case will be worked under Program Code 91859. Obtain the following information and forwarded to the FRP Senior Technical Coordinator:

    • Secure and certify a copy of the return filed that generated the refund - use Form 2866.

    • Secure and certify a copy of refund check by submitting a Pacer research request to the refund inquiry unit. Refer to IRM 21.4.2.4.15.2 , Administrative Photocopy.

    • Certified transcripts of account - Requested using Form 4338 faxed to Revenue Accounting function after TC 844 and TC 520 have posted to the account.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. Input TC 844 via CC REQ77 to indicate an erroneous refund has been issued using date of erroneous refund in transaction date field.

    Note:

    The input of TC 844 will generate transcripts anytime a refund return is filed subsequent to the input. Actions will be taken to debit the credit module and credit the 6800 account to ensure available credit is not refunded. Coordinate this action with the FRP .

  4. Input TC 520 via REQ77 with closing code 70 and ULC code 87 indicating refund litigation.

  5. FRP Senior Technical Coordinator will prepare a referral memo and forward documents to Associate Area Counsel, authorizing the suit approved by Operations Manager.

  6. Make no adjustments to module to reverse credit that caused the refund.

25.25.10.13  (08-13-2015)
Business Master File (BMF) Procedures

  1. This section provides specific guidance for Business Master File (BMF)returns and correspondence

    Note:

    BMF and IMF procedures overlap in many areas. See specific sections for complete guidance.

25.25.10.13.1  (08-13-2015)
BMF Correspondence

  1. For BMF correspondence only:

    1. Determine if mail is frivolous. See IRM 25.25.10.4, Screening Correspondence, and IRM 25.25.10.4.1, Frivolous Correspondence.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

25.25.10.13.2  (08-13-2015)
BMF Return/Claim Filings

  1. Screen new BMF returns and claims to determine if frivolous within two business days of FRP received date.

    Note:

    BMF returns require expedite handling (2 business days) to reduce interest on legitimate refunds.

  2. Screen returns and claims per IRM 25.25.10.5, Screening Returns and Claims, and IRM 25.25.10.5.2, Handling of Returns and Claims.

  3. Review frivolous receipts for:

    • potential promoter/preparer investigation referrals

    • appearance of entity change to that of an Abusive Tax Avoidance Transaction (ATAT) promoter/preparer

      Note:

      Do not change entity. Add new address to FRP Master as an alternate address.

  4. Ensure all actions taken on each case are thoroughly documented on FRP Master and that all control bases are updated appropriately, including any cross-reference TINs.

25.25.10.13.3  (08-13-2015)
Conducting BMF Compliance Check

  1. Conduct compliance check by researching IDRS command codes as follows:

    1. Research CC BMFOLE to determine filing requirements.

    2. Research CC BMFOLI to determine which tax periods have been satisfied.

    3. Research CC BMFOLU – to determine the number of employees reported on the Forms 941, "Employer's QUARTERLY Federal Tax Return" , for that year, the number of Forms W-2 filed by the taxpayer, as well as the detail of the wages paid by the taxpayer during that year (gross wages, taxable, etc.).

      Note:

      This will assist in determining if wages have decreased from prior years.

      Reminder:

      This can be pulled by calendar year. This is generally not available until approximately September following the calendar year end.

    4. Research CC BMFOL (T) & (R) – to determine the wage amounts and the taxes paid each quarter.

      Note:

      These two command codes will be used for any quarter/year where the CC BMFOLU is not yet available.

    5. Research CC BRTVU or CC RTVUE – to compare the wages shown on the Forms 941, "Employer's QUARTERLY Federal Tax Return" versus what is claimed on the income tax return (Form 1040-Schedule C, Form 1120, "U.S. Corporation Income Tax Return" , Form 1120S, "U.S. Income Tax Return for an S Corporation" , or Form 1065, "U.S. Return of Partnership Income " ).

      Note:

      This may also identify other potential employment tax issues on the return, such as lack of corporate officer wages. Resulting in incorrect treatment of payments made as dividend or capital gain distributions.

    6. Research CC PMFOL – to determine if the taxpayer has filed any Form(s) 1099 .

      Note:

      This information can be used to determine if the taxpayer may not be espousing the IRC Section 861 argument, but rather shifting the amounts paid from wages to independent contractor payments.

    7. Research CC IRPTR – to review the Forms W-2 to identify whether any of the payers have names similar to the return in question.

      Note:

      This may indicate a name change for the entity which might explain the difference in wages reported.

  2. The satisfaction of all filing requirements does not necessarily indicate a non-frivolous filing. Other criteria will be considered such as potential for stop-filer and appearance that business is an ongoing entity.

    Note:

    Often in the case of an IRC Section 861 case, you will not see a taxpayer gradually reducing their wages but rather reducing them to zero.

25.25.10.13.4  (08-13-2015)
Potentially Frivolous BMF Filings

  1. Potentially frivolous filings or those that do not fall under existing processing guidance will be worked as follows:

    1. Elevate through FRP Senior Technical Coordinator or other designated employee to RICS HQ Analyst for coordination with HQ ATAT Program Analyst responsible for BMF filings for appropriate action. Determination will be made whether to treat filing as frivolous and/or any special processing requirements.

    2. The FRP Senior Technical Coordinator or other designated employee will ensure coordination is made with RICS HQ , ATAT Collection Policy Analysts and Chief Counsel to obtain counsel opinion or advice that filing type is frivolous.

    3. Ensure appropriate areas are contacted to educate Service employees of new argument. See IRM 25.25.10.15, Coordination with Program Stakeholders.

    4. If unable to determine whether frivolous within two business days, return to Submission Processing for timely processing and refund issuance with instructions to refer case back to FRP for potential examination.

    5. Ensure return is processed as filed. Refer to instructions for frivolous filing below with the exception that any refund should be issued to avoid paying additional interest. Do not include Computer Condition Code (CCC) "X" on Form 4227, "Intra–SC Reject or Routing Slip" .

  2. Suspend case until determination is made by RICS HQ.

25.25.10.13.5  (08-13-2015)
Questionable Frivolous BMF Filings

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. Criteria used to establish area office referral are:

    • IDRS research verifies deposits are being made or have been made of $10,000 or more per quarter/tax period on any delinquent tax module and/or

    • Using last period satisfied to compute aggregate net tax due, net tax due is equal to $10,000 or more for tax period in question and/or

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. If filing does not meet criteria for area office referral, but has been determined to be frivolous, work as follows:

    1. Select for examination returns citing recognized or potentially frivolous arguments

      Note:

      New issues associated with BMF filings will be elevated through the FRP Technical Advisor or other designated employee to RICS HQ for coordination with the appropriate HQ BMF form analyst and ATAT.

    2. Consider for examination referral, accounts with unsatisfied filing requirements

  4. All BMF filings selected for examination will be routed via Form 3210 to the appropriate Classification group for processing.

  5. When routing, ensure all pertinent materials are included that support the filing is frivolous such as :Counsel opinions, Issue Management Team guidance, etc.

  6. Returns will be processed, if possible. Form 4227, "Intra–SC Reject or Routing Slip" , will be used to advise Rejects of appropriate return processing including: freezing refund with CCC "X" and returning filing to FRP. Action Code 331 will be used to cause the return to reject.

  7. Filings selected for examination will be processed as follows:

    If Then
    Return has been processed: Input into FRP Master.
    Return has not been processed and is processable: Send to Receipt & Control (R&C) for processing ensuring refund is not issued.
    1. Attach Form 4227, "Intra–SC Reject or Routing Slip" , and check "Reject Correction" box

    2. Check "Other Activity" box and enter "Attention Lead" .

    3. Check "Other" box and enter CCC "X" , "331 Do not allow refund. When completed, return to FRP M/S 4450"

    4. Include in "Name Unit" box "FRP M/S 4450" .

  8. When returns are returned from Rejects, input into FRP Master.

25.25.10.13.6  (08-13-2015)
Non-Frivolous BMF Filings

  1. If filings are not selected for examination as frivolous or any other Exam criteria, the taxpayer’s return will be accepted as filed.

  2. If return was processed, close all FRP controls and release all FRP freezes, then return to files.

  3. If return was not processed, return to Receipt and Control for regular processing. Stamp upper left corner of return, "FRP CLEARED" , include last 5 digits of IDRS number.

  4. If the taxpayer received a Letter 3176C. Send an apology letter to advise the taxpayer’s return was reviewed for (fill-in) and the item is not frivolous.

25.25.10.13.7  (09-30-2016)
Forms 94X, Employment Tax Return Processing

  1. Returns claiming no wages paid and requesting a refund of Federal Tax Deposits (FTD) or credits previously paid are worked as follows:

    1. Research for subsequent periods filed. If the taxpayer filed subsequent quarterly returns, then it is very likely that the case is NOT a "true" IRC Section 861 return since the taxpayer has not stopped filing and has not withdrawn from the system.

    2. If CC BRTVU shows the employer filed and claimed a deduction for wages paid, the employer should be filing Form 94X to report any employment tax due on those wages. If the employer did not file Forms 94X for this time period or filed Forms 94X showing zero wages and the deposits were refunded to him, the employer may be involved in the IRC Section 861 scheme.

    3. Research if the return is requesting a refund with a statement similar to "not liable for tax" written any where on the return or attachments.

    4. Research any return with a copy of a notice to the taxpayer from IRS attached requesting the taxpayer file a zero tax return in order to claim refund of an FTD or credit that was previously posted to the account with no return filed.

    5. Research for earlier quarters in an entity’s existence where the taxpayer states they paid no wages but where IDRS research of more recent quarters shows a consistent pattern of filing employment tax returns and paying tax.

    6. Research Forms 94X if overpayment box "Applied to next return" is checked.

    7. Research Forms marked “Final” and research indicates ongoing business activity.

  2. Returns not deemed frivolous will be routed to appropriate area for processing.

  3. Returns that are determined not to be frivolous but have examination potential. See IRM 25.25.10.6.7, Area Office Procedures.

  4. Returns selected for FRP processing will be worked as follows:

    If Then
    Return has been processed:
    1. Send Letter 3176C,

    2. Input a history on CC TXMOD that the letter has been sent.

    3. Suspend the case for 60 days.

    Return has not been processed and is deemed a valid frivolous return:
    1. If employer has indicated return is a final return, circle out in red ink.

    2. Attach Form 4227 and check "Reject Correction" box.

    3. Check "Other Activity" box and enter "Attention Lead" .

    4. Check "Other" box and enter CCC "X" , "331, Do not allow refund. When completed return to FRP M/S 4450."

    5. Include in "Name-Unit" box "FRP M/S 4450" .

    6. Send Letter 3176C.

    7. Input history on CC TXMOD that letter has been sent.

    8. Suspend for 60 days.

  5. If taxpayer responds or suspense period expires:

    If Then
    Response substantiates return is not frivolous: Accept as filed.
    1. Input TC 290 .00 with blocking series 00 for original/electronic and 18 to associate to the original , attach as source document.

    2. Release all FRP freezes

    3. Close all FRP controls.

    4. Update FRP Master

    Response substantiates return is frivolous or no response is received:
    1. Assess the penalty on MFT 13.

      Note:

      Consider referring to Classification if questionable items indicate examination potential.

25.25.10.13.8  (08-13-2015)
Processing Frivolous Form 1041, "U.S. Income Tax Return for Estates and Trusts" , with Argument Code 33, 34 & 46

  1. Forms 1041, "U.S. Income Tax Return for Estates and Trusts" , based on frivolous arguments will be worked under this category as claims. Input the document to FRP Master, regardless of whether the filing is an original or a subsequent filing on MFT 05.

  2. Any Form 1041 that is filed with an SSN,( no legitimate EIN available) must be edited to a Form 1040 and processed as an IMF form. Any Form 1041 with a legitimate EIN must be processed under that EIN and worked as BMF.

25.25.10.13.9  (08-13-2015)
Processing Frivolous Form Claiming Fuel Tax Credit (FTC)

  1. Frivolous FTC returns will be treated as valid for processing purposes. Normal procedures will be followed through the penalty stage of the case.

  2. FTC may not be allowed for vehicles registered for highway use. Taxpayers must establish that they have a legitimate business use for the fuel. Substantiation for use requires:

    1. a list of vehicles or equipment designated for the fuel usage claimed

    2. the name and identification number of the seller of the fuel,

    3. the dates the fuel was purchased

    4. invoices and receipts showing the cost and number of gallons purchased

    Note:

    Excise tax must be included in the purchase price.

  3. If any of these items are refused or otherwise not provided, the credit will be disallowed in full.

  4. Then proceed as follows:

    If Then
    The return has been processed

    Note:

    This would be for cases where either the credit has been held or refunded.

    1. Check to ensure the claimed FTC has not been reversed.

    2. If the credit has not been reversed, conduct an examination by establishing AIMS.

    3. Create RGS record; manually add income information.

    4. Create an issue for each FTC and include the selected FTC paragraph.

    5. Send Letter 525, "General 30-day letter, Initial Audit Report"

    6. Update CC TXMOD control with letter sent.

    7. Suspend for 45 days.

    After 45 day suspense period expires with no response:
    1. Send SNOD

    2. Update CC TXMOD control with letter sent

    3. Suspend for 105 days

    After 105 suspense period expires with no response:
    1. Input adjustment to remove the credit either through RGS CC AMCLS or CC TXMOD

    2. Close CC TXMOD control.

    The original return has been processed and the amended return is received agreeing to remove the frivolous FTC.

    Note:

    No contact other than the Letter 3176C is made and the AIMS Status is 10 or below.

    Note:

    When above AIMS Status 10, follow normal audit procedures as shown in IRM 4.19.15, Discretionary Programs.

    1. Close AIMS with a DC 33.

    2. Manually adjust the account using the FTC credit reference number(s)

    3. Archive RGS record

25.25.10.13.10  (08-13-2015)
Frivolous BMF Forms

  1. Frivolous BMF filings (excluding Forms 1041 with Argument Code 33,34 or 46) will be loaded and scanned into FRP Master ensuring the EIN and Xref SSN is included. Ensure the appropriate form number is selected ( e.g. 941, 1120, 1041, etc.). One of the following scenarios will apply:

    If And Then
    the return is determined to be valid and processable potentially frivolous
    1. Send to processing. Attach Form 4227 to advise of appropriate return processing. Include:

      • CCC "X"

      • Action Code 331

      • Notate "Return to FRP M/S 4450 after processing"

    the return is determined to be invalid or unprocessable was processed in error, and the refund was issued on false withholding
    1. Assess tax in the amount of the withholding.

    Note:

    If the frivolous issue resulted in the amount of overstated withholding, no further action is necessary.

    the return is determined to be invalid or unprocessable, was processed in error, and the refund is held on the account,
    1. Correct the account on the applicable MFT to avoid any potential erroneous refund.

    2. If the credit is withholding, reverse with a TC 290 for .00 and TC 807.

      Caution:

      If the entire amount of withholding is being reversed, also input a TC 170 for .00 to avoid an estimated tax penalty assessment.

    Note:

    This is applicable only to Form 990C, Form 1041, Form 990PF, and Form 1120. Withholding is not subject to Statutory Notice of Deficiency procedures, and no other action is necessary.

  2. When asserting the IRC Section 6702 penalty on BMF, a corresponding action code on FRP Master will be input as "ASSESSPEN52/FRVBMF" or "ASSESSPENS3/FRVBMF" .

  3. Accounts with returns processed must either be corrected with an online adjustment, a FRP audit or examined by a field office. If examination is warranted, complete and attach a checksheet indicating what research was conducted. Route case for specialized BMF Classification processing to M/S 4450 Attn: FRP BMF classifier.

  4. C-Filings will be worked the same as IMF, following guidance found in IRM 25.25.10.5.4, C-Filings. No C-filings will be forwarded to field offices for audit.

25.25.10.14  (09-30-2016)
Civil Investigations of Abusive Promoters and/or Preparers

  1. The Service uses several IRC Sections to address promotions of frivolous arguments and fraudulent or unscrupulous tax return preparers. Refer to IRM 20.1.1 ,Introduction and Penalty Relief, and IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties, for additional information.

  2. Related Internal Revenue Code Sections are:

    • IRC Section 6694 - Understatement of taxpayer’s liability by tax return preparer

    • IRC Section 6695 - Other assessable penalties with respect to the preparation of tax returns for other persons

    • IRC Section 6700 - Promoting abusive tax shelters, etc.

    • IRC Section 6701 - Penalties for aiding and abetting understatement of tax liability

    • IRC Section 7402 - Jurisdiction of District Courts

    • IRC Section 7407 - Action to enjoin income tax return preparers

    • IRC Section 7408 - Actions to enjoin specified conduct related to tax shelters and reportable transactions.

  3. Civil preparer, promoter, material advisor Investigations - Understatements of tax resulting from abusive shelters are curbed through the assertion of penalties under this section, the issuance of injunctions under IRC Section 7408, and the issuance of pre-filing notices to investors. See IRM 4.32.2, Abusive Transactions, The Abusive Transactions (AT) Process for additional information.

  4. Penalties may be asserted against any person who organizes (or assists in the organization of) a partnership, any investment plan or arrangement, or any other plan or arrangement, or who participates (directly or indirectly) in the sale of any interest in an entity or plan or arrangement, and makes or furnishes or causes another to make or furnish:

    • a statement with respect to the allowance of any deduction or credit, the excludability of any income, or the security of any tax benefit by reason of participating in the entity, plan or arrangement when the person knows or has reason to know that the statement is false or fraudulent as to any material matter, or

    • a gross valuation overstatement as to any material matter.

25.25.10.14.1  (08-13-2015)
Screening Filings for Potential Civil Investigations to LDC

  1. The Lead Development Center (LDC) authorizes civil investigations on abusive promotions for referral to investigating offices.

  2. All frivolous filings will be considered for potential civil investigation when promotions, promoters, or preparers are associated with them. Initial screening of returns, claims and correspondence may determine the need to consider further development of case referrals for civil investigations. When a filing is associated with a reasonable number of continuous frivolous filings that are potentially attributable to a specific promotion, promoter, or preparer, FRP shall forward Referral Memo to LDC for determination of further processing.

  3. When unable to determine identity of promoters/preparers on filings containing similar characteristics, e.g., scheme language/appearance, document fonts/colors, geographic information, entity identifiers, etc., consider contacting individual taxpayers using FRP Master database interview screen questions.

    Note:

    Ensure authentication requirements are met per IRM 11.3.2.3.2, Requirements for Verbal or Electronic Requests and IRM 21.1.3.2.3, Required Taxpayer Authentication.

  4. On rare occasions, generally when there is not signed return preparer, but finite characteristics of the promoter's filing can be determined, it may be necessary to secure EFDS research. Requests for EFDS queries will be made through RICS research analyst staff assigned to FRP

    Note:

    Inventory queries versus Information queries

  5. When promoter/preparer identity is obtained without TIN, attempt to secure TIN via IDRS. If unable to secure TIN, provide comments in Referral Memo.

  6. When positive identification of a promoter/preparer is made, provide documentation if possible that indicates extent of activity and whether it is ongoing. This may include but is not limited to:

    • Copies of tax returns (if the case will not be worked by FRP)

    • Advertisements

    • Attachments to returns

    • Promotional materials

    • Correspondence

    • POA’s

    • Purchase agreements

    • Informant items

  7. Research IDRS/RPVUE to determine if additional returns were submitted but not referred to FRP or otherwise not identified. If returns are identified that need to be ordered from CC RPVUE research, order them.

  8. If it appears that the preparers or promoters of frivolous arguments require income tax audits of their individual filings, refer the case the Area Office PSP. Order promoter/preparer’s personal returns to determine if they have participated in the scheme.

25.25.10.14.2  (09-30-2016)
Referrals of Potential Civil Investigations to LDC

  1. When a reasonable number of continuous filings from one promoter/preparer are identified, prepare a three-section brown case file folder with label containing promoter/preparer identification; to be maintained by the Campus until the case is closed and include:

    • A participant list compiled from all available sources including FRP Master containing:
      - TIN
      - TP Name
      - Tax year(s) for associated tax returns for which preparer may be enjoined or penalties may be assessed
      - Claim amount

    • Copies of all returns associated to promotion, if investigation is being conducted in FRP

    • LDC Referral Memo including the following
      - Subject: IRC Section 7402/7407/7408 Investigation(s)
      - Taxpayer name (including Doing Business As (dba’s))
      - TIN
      - Description of promotion
      - Chief Counsel position paper, if available
      - Preparer’s involvement in tax promotion; e.g., promoting the argument, conducting seminars, preparer’s employees involvement, website, etc.
      - Summary of preparer’s personal income tax filings; e.g., preparer’s returns reflect the tax promotion, non-filer, etc.
      - Summary of preparer’s tax return filings
      - Information on impact of promotion to IRS. Address violations subject to IRC Section 6695, if applicable.

  2. Forward, by e-mail the referral memo and participant list to LDC.

  3. All other information listed above will be kept to support investigation as warranted

  4. Suspend case file until response is received from LDC.

  5. Enter promotion/promoter/preparer information to FRP Master database Project Status Listing to ensure accurate identification of all similar filings and ensure periodic updates as actions are taken.

  6. LDC will consider all the factors involved in each case and determine if promoter/preparer will be investigated for injunctive action including a streamlined investigation conducted by FRP or returned to FRP to have penalties assessed only.

    Note:

    LDC will obtain approval from Chief Counsel and Criminal Investigation to pursue a civil investigation prior to any case being forwarded on a Recommendation Memo.

25.25.10.14.3  (08-13-2015)
Approved Investigations for Injunctive Action from LDC

  1. LDC will forward all approved Civil Investigation Recommendation Memos related to frivolous filings to FRP and the appropriate IMT technical advisor for review.

  2. Ensure all related frivolous filer promoters/preparers (Including Anti-tax/Constitutional) are reflected on Project Status Listing.

  3. If determination is made that FRP will conduct the IRC Section 6700 investigation, the LDC will forward the case file to FRP via E-mail. Criteria used includes, but is not limited to: promoter/preparer activity sufficiently developed to allow for streamlined referral, i.e., at least three filings signed by preparer or additional filings not signed by preparer but with identical characteristics, attachments or information from taxpayer indicating preparer involvement with return.

  4. If case is not selected for FRP streamlined IRC Section 6700 investigation, assistance will be provided to appropriate area office conducting investigation.

25.25.10.14.4  (08-13-2015)
FRP Preparer Promoter Investigation

  1. FRP preparer promoter investigations are more efficient and cost effective. These investigations result in shutting down abusive tax avoidance promotions before they proliferate. FRP will conduct all case research, document preparation and Department of Justice (DOJ) referral processes.

  2. Cases will be processed as follows:

    1. Compile evidence and secure certified copies of any returns, IRP data or Forms relevant to the injunction case. In the event that an original paper return cannot be secured for certifying, the following language will be used on the Form 2866 to certify a scanned image of previously-made copy in order to satisfy the rules of evidence: "As part of the normal business practice of the Internal Revenue Service Frivolous Return Program function, tax returns received are scanned and electronically stored or otherwise maintained.  I certify that the attached copy of a return filed on [February 15, 2015] by [John Doe], Social Security Number [XXX-XX-XXXX] for tax year ending [December 31, 2014] received on [April 15, 2015] is a true and correct copy of the return filed with the Internal Revenue Service as electronically stored or otherwise maintained in the Frivolous Return Program."

    2. Prepare and send by certified mail promoter Letter 3828, "Opportunity to Present Position - Tax Shelter Promoter" , indicating date, place and time of interview and enclosing Notice 609, "Privacy Act and Paperwork Reduction Act Notice" , Letter 3164P, "Third Party Notification for IRC Section 6700 /6701 Investigation" and Form 4564, "Information Document Request" .

    3. FRP Sr. Technical Coordinator will conduct a promoter/preparer interview by phone. After interview takes place or scheduled date passes, FRP Sr. Technical Coordinator will prepare a memo of interview or pertinent results. If participant list is obtained, FRP will forward to CWSD Gatekeeper to ensure any appropriate audit actions are taken.

    4. Prepare injunction referral memo and forward case to Counsel for referral to Department of Justice or for advice as to penalty only assessments. If analysis results in determination to seek no injunctive action or penalty assessment, close case advising promoter of no change via Letter 1866, "Discontinuance" .

    5. Ensure promoter/preparer income tax case is addressed.

      Note:

      Ensure any income derived from promotion is considered including erroneous refunds and income derived from promotional activities.

  3. Counsel will forward results of injunctive action including any rejected cases with appropriate penalty instructions.

25.25.10.14.5  (08-13-2015)
Approved Cases for Preparer Penalty Only Assessment

  1. Cases that do not result in civil investigations under section 6700 or 6701 will be considered for IRC Section 6694/6695 investigations if associated with a tax return preparer(s). To apply sanctions on non-compliant preparers, Penalty Policy Statement P-20-1 directs assertion of preparer penalties only after due deliberation on all facts and circumstances.

  2. Individuals who knowingly aid and abet in the understatement of the tax liability for another person may be subject to certain penalties. See IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties and IRM 20.1.6.12, Office of Professional Responsibility, for information on practitioners who file delinquent and/or frivolous returns.

  3. For purposes of imposing a penalty under IRC Section 6694 or 6695, a tax return preparer is any person who prepares for compensation, or who employs or engages one or more persons to prepare for compensation (other than for the person) all or a substantial portion of any return or any claim for refund of tax. The preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund.

  4. IRC Section 6701(b)imposes a $1,000.00 penalty against any person for aiding or assisting in the understatement of tax or overstatement of credit. If the return, affidavit, claim, or other document involved relates to a corporation, the penalty is $10,000. Consider IRC Section 6701(b) as a potential alternative to the IRC Section 6694 penalty.

  5. All preparer penalty cases prepared by FRP will be coordinated with Associate Area Counsel to determine if the case will be considered for civil injunction, penalty assessment, or no action

  6. Cases referred for IRC Section 6694 penalties are usually those with frivolous filings that are limited in number and in which the preparer has stopped preparing returns. Understatements due to an unreasonable position (as defined in IRC Section 6694(a)(2)) are subject to a penalty for each return or claim equal to the greater of $1,000 or 50% of the income derived (or to be derived)by the return preparer with respect to the return or claim. Understatements due to willful or reckless conduct (as defined in IRC Section 6694(b)(2)) are subject to a penalty for each return or claim equal to the greater of $5,000 or 50% of the income derived (or to be derived) by the return preparer with respect to the return or claim. IRC Section 6696(d) provides that the amount of any penalty assessed under IRC Section 6694(a) must be done within 3 years after the return with respect to which the penalty is assessed was filed and the penalty under IRC Section 6694(b) can be assessed at any time. Therefore, whenever there are more than six months remaining on the assessment statutes, refer for assessment penalties under both (a) and (b) for any applicable tax periods and (b) alone for those with less than six months remaining on the assessment statute. IRM 20.1.6.14.4, Coordination with Other Penalties.

    Note:

    IRM 20.1 directs that penalty cases will be conducted independently of and without regard to the determination of the income tax case. The tax case has bearing on the penalty on the IRC Section 6694 case only insofar as assertion of the penalty requires an understatement of tax, or overstatement of credit. A preparer penalty case is not an income tax investigation of the preparer. If there are indications that the preparer is participating in the scheme or is otherwise in need of audit (e.g., preparer fails to file own return, etc.), then refer the preparer income tax case to the applicable PSP .Assess the penalty on the year of the infraction.

25.25.10.14.6  (08-13-2015)
Preparer Penalty Case Creation

  1. Input IDRS control to preparer TIN current CC TXMOD history, "Prep Inv" to ensure proper routing of subsequent correspondence or filings. Case file will contain:

    • Injunction

    • Client List for penalties

    • Form 8278, "Computation and Assessment of Miscellaneous Penalties" , indicating:
      - Preparer/Promoter Name
      - TIN -Tax year(s) of penalty assessment (may reflect "See Form 5816" )
      - Tax Technician Number
      - Computation "amount" of penalty
      - IRC Section of penalty
      - Team Manager approval and signature date

    • Copies of frivolous tax returns inserted in a separate folder

    • IRC Section 7408/7407 Investigation Memo containing:
      - Subject: IRC Section 7407/6694 Investigation
      - Taxpayer Name (including dba’s)
      - TIN -Description of promotion
      - Preparer’s involvement in tax promotion, e.g., promoting the argument, conducting seminars, preparer’s employees involvement, website, etc.
      - Summary of preparer’s personal income tax filings, e.g., preparer’s returns reflect the tax promotion, non-filer, etc.
      - Summary of preparer’s tax filings per IDRS/RPVUE/FRP Master -Information on impact of promotion to IRS
      - Address violations of IRC Section 6695, if applicable
      - Discussion of rationale for proposing parallel investigation with CI. Include discussion of gravity of harm, extent of preparer’s participation and his degree of knowledge, likelihood of recurrence, preparer’s admission of responsibility and/or willingness to cooperate to correct filings.
      -A copy of closing letter from Counsel, if available
      Copies of frivolous tax returns inserted in a separate folder

  2. Cases referred for IRC Section 6695 penalties are not as common, but will be considered when appropriate. Associate Area Counsel will provide guidance on the determination of when IRC Section 6695 will be applied.

  3. If case is approved for IRC Section 6694 penalty assessment, forward to RICS Director for approval on Form 8278 and follow IRM 25.25.10.14.7, Proposing Preparer Penalties When there is no injunction referral but there is an approved investigation.

25.25.10.14.7  (08-13-2015)
Proposing Preparer Penalties When There is no Injunction Referral but There is an Approved Investigation

  1. Prepare Letter 1125, "Preparer Penalty 30-Day Letter " , indicating:

    • TIN

    • Person to Contact

    • Tax Examiner Name

    • Employee IDRS number

  2. Prepare Form 5816, "Report of Tax Return Preparer Penalty Case" , indicating:

    • Name and address of preparer

    • Self-employed preparer - checked, if applicable

    • Preparer’s TIN

    • Examining district: Area number

    • Name and title of person with whom penalty was discussed

    • Date of report

    • In reply refer to: IDRS number

    • Taxpayer’s name and address: See attached list (all taxpayers with the same tax period indicated on report)

    • Tax period

    • Master file tax code

    • Total penalties

    • Other information: "Explanation of Penalty" - Use information from court injunction or specific explanation from non-enjoined penalty case, e.g., "You filed tax returns claiming credits for reparations not allowable by law."

      Note:

      Multiple taxpayers for the same tax period can be included on one Form 5816 with taxpayer’s names attached.

    • Employee's signature

  3. Prepare Form 5838, "Waiver of Restrictions on Assessment and Collection of Tax Return Preparer Penalty" , indicating:

    • Form number of return for which penalty is being charged - 1040, 1040X, etc. or "see attached list "

    • Taxpayer’s name as shown on return or "see attached list"

    • TIN or "see attached list"

    • Tax period or "see attached list"

    • Kind of penalty - (such as IRC Section 6694(a) and/or IRC Section 6694(b) )

    • Amount of penalty - (Total penalty amount being assessed for each kind of penalty)

    • Name and address of preparer

  4. Prepare Form 6459, "Return Preparer’s Checksheet" , checking all applicable boxes and including team manager’s approval.

  5. Mail Letter 1125, "Preparer Penalty 30-Day Letter " , Forms 5816, "Report of Tax Return Preparer Penalty Case" , Form 5838, "Waiver of Restrictions on Assessment and Collection of Tax Return Preparer Penalty" , Letter 3164, "Third Party Notification" , (if not previously sent) and Notice 609, "Privacy Act Notice and Paperwork Reduction Act Notice" , to preparer and suspend case for 45 days.

  6. Annotate CC ENMOD with "LTR1125" to indicate letter has been sent.

25.25.10.14.8  (08-13-2015)
Preparer Penalty Post Assessment Processing

  1. Requests for conference:

    Contact preparer and attempt to resolve the issue.

    If And Then
    Preparer disagrees with proposed assessment the conference results in abatement of the penalty
    1. Coordinate assessment reversal with manager.

    Preparer disagrees with proposed assessment the Service position remains unchanged and sufficient time remains for the Service to receive the request prior to suspense period expiring
    1. Instruct the preparer to send a letter requesting Appeals Consideration indicating what they do not agree with and the reasons why they do not agree

    Preparer disagrees with proposed assessment the Service position remains unchanged and sufficient time does not remain for the Service to receive the request prior to suspense period expiring
    1. Advise the preparer of their post assessment rights

  2. Requests for Appeals Consideration - ( IRM 8.1.1.3.1, No Appeals Conference or Concession on Certain Arguments. There are no administrative appeals provisions for requests based on frivolous positions.

    Note:

    Per Publication 5, "Your Appeal Rights and How To Prepare a Protest If You Don’t Agree" , Appeals cannot consider your reasons for not agreeing if they don’t fall within the scope of the tax laws (e.g., if you disagree solely on moral, religious, political, constitutional, conscientious, or similar grounds), however, valid requests for post-assessment appeals consideration will be granted. See IRM 4.4.5.4, Non-Docketed Cases for guidance.

  3. Requests for appeals that meet abatement criteria will be processed by FRP.

  4. Claims - See IRM 20.1.1.3, Criteria for Relief from Penalties and IRM 20.1.10.10.1.3, Penalty Relief. Review case for specific processing requirements per IRM 21.5.3, General Claims Procedures and IRM 4.19.16, Claims for additional processing information. Claims are usually filed on Form 843, "Claim for Refund and Request for Abatement" , or Form 6118, "Claim for Income Tax Return Preparers" , but may be made in an informal inquiry. Claims may be for abatement or refund and will be worked as follows:

    If And Then
    Claim is for abatement the incorrect account was assessed or taxpayer proves they were not responsible for the penalized action
    1. Review case for administrative errors and abate the penalty

      Note:

      (See IRM 20.1.1.3.4, Correction of Service Error and IRM 20.1.1.3.5.2 ,Taxpayer Entitled to Relief.

    Claim is for abatement the Service finds no administrative error
    1. Send 105C, advising that the Service was not in error and the penalty applies.

    Claim is for refund the preparer pays 15% of the penalty and the claim will be granted
    1. the preparer must file the claim for refund within 30 days after the date of notice and demand

    Claim is for refund the preparer pays 15% of the penalty and the claim will be denied
    1. Issue Letter 105C and include appeal rights

    Claim is for refund 15% of penalty has not been paid and the claim will be granted due to an incorrect account assessment or taxpayer proves they were not responsible for the penalized action
    1. Review the case for administrative errors and work as accepted abatement request

    Claim is for refund 15% of penalty has not been paid and the claim will be denied
    1. Send 105C, advising that the preparer has not paid the required 15% or provided sufficient documentation to honor the claim. They are not entitled to judicial review.

    Note:

    If valid claims are received and denied, the preparer must then bring suit in Federal District court within 30 days of receiving a Notice of Claim Disallowance or 30 days after the expiration of six months from the filing of the claim, whichever is earlier; if the preparer pays the penalty in full, they may bring a refund suit in either the U.S. Court of Federal Claims or a district court within two years of the date of denial of the claim or upon the expiration of six months after the date of filing the claim.

25.25.10.14.9  (08-13-2015)
Assessing Preparer/Promoter Penalties

  1. Complete Form 8278, "Computation and Assessment of Miscellaneous Penalties " See IRM 20.1.9.2.2, Penalty Assessment - Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

  2. If assessing under IRC Section 6694(a), input TC 290.00 with Penalty Reference Number (PRN) 645 for the amount of the penalties. Under IRC Section 6694(a), the penalty is $250 per return for returns prepared on or before May 25, 2007 and the greater of $1,000 or 50% of the income derived or to be derived by the tax return preparer for returns/claims prepared on or after May 26, 2007. For penalties assessed under IRC Section 6694(b), use PRN 650. For returns/claims prepared on or before May 25, 2007, the penalty is $1,000 per return/claim and for those prepared after May 26, 2007, the penalty is the greater of $5,000 of the income derived or to be derived by the tax return preparer.

    Note:

    CP Notice 15 (IMF) and CP Notice 215 (BMF) will generate from this transaction.

  3. If assessing under IRC Section 6695 input TC 290 .00 with PRN 626 for total amount of penalties. The amount of penalty equals $50 per return/claim under IRC Section 6695 (a)-(e), $500 per return/claim under IRC Section 6695(f), and $500 per return/claim under IRC Section 6695(g).

  4. If assessing under IRC Section 6701 input TC 290 .00 with PRN 631 (IRC Section 6701) $1,000 per return/claim unless the return/claim is a corporation. Corporation return/claim is $10,000.

  5. Establish civil penalty name line, if necessary per IRM 20.1.6.2.3, Civil Penalty Name Line.

  6. File case under TC 240 Document Locator Number (DLN) associated with Form 5147, "IDRS Transaction Record" .

  7. Close IDRS control.

  8. Ensure Electronic Filing Coordinator is notified of all penalties asserted on return preparers per IRM 20.1.6.11, E-File Program.

25.25.10.14.10  (09-30-2016)
Preparer/Promoter Penalty Closing Actions and Follow-up Monitoring

  1. Closing Actions and monitoring follow-ups will be completed by:

    • Send closing letter to Promoter/Preparer

    • Update Promoter Database via E-mail to LDC.

    • LDC will notify Collections as appropriate, that penalties are being assessed by contacting the ATAT Coordinator for the area where the taxpayer resides. A list of Collection Coordinators can be found on the Abusive Shelter Web Site. http://abusiveshelter.web.irs.gov

    • Consider referral to "Office of Professional Responsibility" per IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties and IRM 4.19.10..6.2, Office of Professional Responsibility.

    • Consider referral to Communications Liaison.

    • Submit case for quality review

    • Monitor new receipts for continued filings and/or injunction violations and refer findings to Associate Area Counsel for consideration.

25.25.10.15  (08-13-2015)
Coordination with Program Stakeholders

  1. Coordination with both internal and external stakeholders is imperative to ensure a consistent approach to combating frivolous non-compliance. The nature of tax avoidance has insidious effects. When undetected, improper tax avoidance grows with long-lasting impact on compliance, such as pyramiding non-filing, erroneous refunds, and an impact on IRS resources, including TAS and Appeals involvement. When erroneous refunds result from unidentified frivolous filings, revenue is lost, but most importantly, the public trust is endangered.

  2. Timely outreach education is a program priority and includes employee and taxpayer communication through internal and external forums such as SERP, other Service electronic alerts, Treasury/IRS websites, press releases, revenue rulings and procedures, Internal Revenue Manuals and continued professional education.

  3. Upon initial detection of new frivolous promotions, education throughout the Service will be undertaken. Coordination will be made with the following stakeholders:

    • Counsel

    • Criminal Investigation

    • Customer Account Services (CAS)

    • SB/SE Lead Development Center (LDC)

    • Communications and Liaison/TEC/SPEC

    • Training

    • Systemic or electronic detection systems

    • Collection

    • Taxpayer Advocate Service (TAS)

  4. When processing campuses fail to identify frivolous filings, feedback will be provided through HQ staff to prevent continued misidentification. HQ will include the appropriate Service Center FRP Coordinator when providing feedback. Refer to the FRP Website for a complete list of Service Center FRP Coordinators.

  5. When erroneous refunds result from failure to identify frivolous filings, coordination will be made with the appropriate processing function to correct procedures.

25.25.10.15.1  (08-13-2015)
Coordination with Area Counsel

  1. The Frivolous Return Program coordinates with Area Counsel to obtain legal and/or significant advice on:

    • Whether an argument is frivolous;

    • Whether an argument is subject to the frivolous return penalty, and

    • If there is a concern, whether a return constitutes a valid return

  2. All potential frivolous arguments must be coordinated with Counsel prior to processing under FRP guidelines. Requests for Counsel opinion will be coordinated with the Senior Technical Coordinator to prevent duplicate requests. Requests will outline the specific frivolous argument involved and must have examples provided to assist Counsel in rendering opinions and must have Headquarters authorization.

  3. As new frivolous arguments are identified, they will be coordinated with Chief Counsel for updating of Chief Counsel’s web page, "The Truth about Frivolous Arguments" and creating new revenue rulings and updating the "List of Frivolous Arguments" required by IRC Section 6702(c).

  4. All new Chief Counsel opinions will be reviewed for potential coordination on SERP/CAS alerts, updating existing training materials for employee identification and processing, coordination with TEC/CI and/or any affected processing areas.

25.25.10.15.2  (08-13-2015)
Coordination with Criminal Investigation

  1. The FRP coordinates with Criminal Investigation in Headquarters for both Refund and Financial Crimes to:

    • Provide information on specific cases and trends in possible criminal activity.

    • Provide support for criminal investigations leading to prosecution of frivolous preparers, promoter, and filers.

    • Coordinate case processing to promote productive use of resources.

  2. Information referrals to and from Criminal Investigation will be coordinated with the FRP CI Liaison.

25.25.10.15.3  (08-13-2015)
SERP Alerts

  1. SERP electronic alerts will be issued whenever new frivolous arguments are identified or when existing arguments resurface in significant numbers. The alert process will be used to apprise all employees to watch for filings in order to prevent processing and erroneous refunds.

  2. All alerts will be approved and published by the HQ analyst.

  3. Forward information for alerts to the LDC and include all pertinent information related to the nature of the filing.

25.25.10.15.4  (09-30-2016)
Training

  1. Outreach education for internal stakeholders on frivolous arguments is critical and will be given priority. This training will be provided annually to Submission Processing and also made available for all Service offices. This endeavor is imperative to stop the proliferation of egregious promotions, ensure timely and accurate tax assessments, avoid erroneous refunds and provide fair and consistent treatment to all taxpayers.

  2. RICS will coordinate with HQ CAS and W&I Learning and Education to schedule training and provide instructors during annual pipeline processing Continuing Professional Education (CPE).

  3. RICS will provide updated training materials and IRM information to CAS HQ analysts.

  4. Coordination will be undertaken for all affected areas and will encompass IMF and BMF original returns, amended returns and claims processing.

  5. Training materials and supplemental support will be available on the FRP Web page listed below.

25.25.10.15.5  (08-13-2015)
FRP Web Page

  1. The FRP web page is currently unavailable .

  2. This web page is designed to provide internal customers information on pertinent issues and data associated with FRP such as current training materials, letters used, FRP Coordinators, trends in frivolous filings, etc.

  3. All updates to the web page must be approved by RICS HQ.

  4. Updates from Ogden FRP will be routed through the FRP Senior Technical Coordinator.

  5. The FRP Senior Technical Coordinator will sanitize any updates prior to referral to RICS HQ.

  6. RICS HQ will secure any necessary Disclosure clearance and route to: Webmaster assigned to SE:S:CCS:CRC:EP.

25.25.10.16  (08-13-2015)
Unpostables

  1. Refer to IRM 3.12.179, Individual Master File (IMF) Unpostable Resolutions, for additional information on unpostable conditions and procedures.

25.25.10.17  (09-30-2016)
Phone Calls Received via FRP Toll-Free line

  1. Toll-Free Tax Technicians should perform appropriate authentication per IRM 21.1.3.2.3, Required Taxpayer Authentication, before releasing any taxpayer’s account information

  2. Toll-Free Tax Technicians (TT) who are not designated to answer the Frivolous Return Program (FRP) toll-free line should provide the caller with the new toll free number 1-866-883-0235 and the hours of operation. The hours of operation for the new toll-free number are Monday through Friday 7:00 am to 3:30 p.m. MST.

    Reminder:

    If the call does not involve a frivolous issue or needs to be transferred to another area, transfer the caller and input the appropriate AMS notes explaining the transfer or referral of the taxpayer to another area.

  3. Most questions should be answered during the phone call on the FRP toll-free line. There should be a minimal number of referrals made to TTs working the case.

  4. TTs answering the FRP toll-free line for taxpayers responding to the Letter 3176C or Notice CP72, should follow the table below:

    Note:

    When the taxpayer calls in and asks what options are available the technician is required to provide information regarding the reduction of the penalty. Provide the taxpayer with the IRS.gov web site and tell them to search for Form 14402, IRC 6702(d) Frivolous Tax Submissions Penalty Reduction. The search results will provide the taxpayer with access to Form 14402, the instructions, and Rev. Proc 2012-43.

    Caution:

    Do Not provide an electronic payment option. Electronic payments are not available on MFT 55

    Note:

    A request for a credit or refund may be allowed based on an informal inquiry, but if the request is denied the taxpayer should be informed that the informal inquiry does not constitute a claim for credit or refund and the informal response does not enable the taxpayer to go to court and contest the rejections. This informal inquiry should be distinguished from an informal claim for refund which may constitute a filing within the period of limitations for filing a claim for credit or refund. See IRM 25.6.1.10.2.6.3, Informal Claims. Under the informal claims doctrine created by the courts, the information needed to make a formal claim may be substituted after the period of limitations has expired.

    If the Taxpayer's Response is: And Then
    The taxpayer agrees the return/claim is frivolous they have called within the 30 day time frame
    • Have the taxpayer mail or fax the valid response/return to:
      Mail to: Internal Revenue Service, 1973 N. Rulon White Blvd. Ogden, UT 84404
      Fax to: 855-246-4886

    • If the result will be a refund, advise the taxpayer to allow 6-8 weeks from the received date of the documentation for a refund to be issued.

    • If a balance due will result – follow IRM 21.3.12.4, Determine the Earliest The Taxpayer Can Full Pay

    Note:

    If not trained on balance due issues, tell the caller you will transfer them to someone who can set up an installment agreement. Transfer the caller to #92010 (English) or #92011 (Spanish).

    • Input/Update AMS notes per IRM 21.2.2.4.5, Account Management Services (AMS), use "Exam Assessment" when choosing an issue

    • On accounts with open audits: Input/update Correspondence Examination Automation Support (CEAS) notes per IRM 4.19.19.3.3(1) & (2), CEAS Notes.

    Disagreed – Substantiated (no change) the taxpayer has non-frivolous documentation that supports the return/claim corrected W-2,
    • Have the taxpayer mail or fax the valid response/return to:
      Mail to: Internal Revenue Service, 1973 N. Rulon White Blvd. Ogden, UT 84404
      Fax to: 855-246-4886

    • If the result will be a refund, advise the taxpayer to allow 6-8 weeks from the received date of the documentation for a refund to be issued.

    • If a balance due will result – follow IRM 21.3.12.4, Determine the Earliest The Taxpayer Can Full Pay

    Note:

    If not trained on balance due issues, tell the caller you will transfer them to someone who can set up an installment agreement. Transfer the caller to #92010 (English) or #92011 (Spanish).

    • Input/Update AMS notes per IRM 21.2.2.4.5, Account Management Services (AMS), use "Exam Assessment" when choosing an issue

    • On accounts with open audits: Input/update CEAS notes per IRM 4.19.19.3.3(1) & (2), CEAS Notes.

    Disagreed – Substantiated (no change) research shows appropriate documentation on the system (IRP documents available)
    • Have taxpayer (TP) removed from FRP Master Database by e-mailing the FRP Coordinator

    • Close CC TXMOD control as "NOTFRIV"

    • Release all FRP related freezes

    • Send 544C apology letter

    • If the result will be a refund, advise the taxpayer to allow 6-8 weeks from the received date of the documentation for a refund to be issued.

    • Input/Update AMS notes per IRM 21.2.2.4.5, Account Management Services (AMS), use "Exam Assessment" when choosing an issue

    • On accounts with open audits: Input/update CEAS notes per IRM 4.19.19.3.3(1) & (2), CEAS Notes.

    Disagreed –Unsubstantiated the taxpayer has no documentation that supports the claim
    • Advise TP to rescind the frivolous position.

    Note:

    If frivolous return/claim processed, the TP will need to send in an amended return to correct the account. If the return/claim did not process, tell the TP they can send in a written rescind letter. NOTE: If the TP has a filing requirement and an original return has not been filed, advise the TP to file the return.

    • Mail or fax the response/return with their explanation.
      Mail to: Internal Revenue Service 1973 N. Rulon White Blvd. Ogden, UT 84404
      Fax to: 855-246-4886

    • If the result will be a refund, advise the taxpayer to allow 6-8 weeks from the received date of the documentation for a refund to be issued.

    • Input/Update AMS notes per IRM 21.2.2.4.5, Account Management Services (AMS), use "Exam Assessment" when choosing an issue

    • On accounts with open audits: Input/update CEAS notes per IRM 4.19.19.3.3(1) & (2), CEAS Notes.

    Disagreed Identity Theft The taxpayer claims identity theft such as, "I didn’t file this return "
    • Follow procedures in IRM 25.23.3.2, Identity Theft Telephone Overview and General Guidance ,.
      Mail to: Internal Revenue Service 1973 N. Rulon White Blvd. Ogden, UT 84404
      Fax to: 855-246-4886

    • Input/Update AMS notes per IRM 21.2.2.4.5, Account Management Services (AMS), use "Exam Assessment" when choosing an issue.

    • On accounts with open audits: Input/update CEAS notes per IRM 4.19.19.3.3(1) & (2), CEAS Notes.

    The taxpayer inquires to the status of their refund, however no correspondence has been sent (No Letter/Notice 3176C/CP72 indicated on ENMOD or FRP Master) there are FRP indicators on CC TXMOD (ie –E/ freeze on the questionable tax period or F- Freeze, TC 971 AC 089 on another tax period that has frozen the Entity Module)
    • Try to determine if/why the return/claim is frivolous by researching TRDBV/RTVUE.

    • If frivolous determination can be made, inform the TP of the frivolous issue and advise them to rescind their position (follow steps for Disagreed- Unsubstantiated).

    • If frivolous nature of the return/claim cannot be determined, tell the TP a letter will be sent when the return gets to the FRP department. NOTE: If research does not determine why a return/claim is frivolous, CSR should probe the TP for any indication of frivolous statements on return.

    • Input/Update AMS notes per IRM 21.2.2.4.5, Account Management Services (AMS), use "Exam Assessment" when choosing an issue.

  5. TTs answering the FRP toll-free line for taxpayers responding to the CP 15, "Notice of Penalty Charge" , should follow the table below:

    If Then
    The taxpayer states they did not file the return Follow procedures in IRM 25.23.3.2, Identity Theft Telephone Overview and General Guidance.
    The taxpayer states they responded within the 30 day time frame and a review of all available systems indicates service error Request an abatement of the penalty.

    Note:

    Requests for abatement will be granted ONLY in cases involving Service error. Team Manager approval is required before abating the IRC section 6702 penalty.

    The taxpayer states they responded within the 30 day time frame and extensive research indicates no response was received Inform taxpayer that we have no record of the response. Request that taxpayer provide verification of proof of mailing.
    The taxpayer states they never received Letter/Notice 3176C/CP72 or states they are not liable for the Frivolous Penalty.
    • Review the account to ensure the letter was sent to the correct address.

      Note:

      It is the TP’s responsibility to make sure their address is updated.

    • Remind the taxpayer they were sent a Letter 3176C to the address of record. This notice provides a 30 day time frame to provide a valid response. If no response was received, or it was not received within the 30 days, then the frivolous penalty is assessed

    • Advise taxpayer that they can submit reasons for abatement request in a letter or by using Form 843, Request for Penalty Abatement

    • Advise TP of Penalty Reduction Procedures. IRM 25.25.10.10, Reduction of the Frivolous Return Penalty IRC Section 6702(d)

  6. TTs answering the FRP toll-free line for taxpayers responding to the Letter 3175C, should follow the table below:

    If the Taxpayers Response is: And Then
    Agreed wants to avoid the penalty
    • Inform TP no penalty will be assessed for frivolous correspondence

    • Warn TP not to file a frivolous return

    Disagreed with the frivolous determination wants to avoid the penalty
    • Inform TP no penalty will be assessed for frivolous correspondence

    • Warn TP not to file a frivolous return

    Unsure what was sent in wants to avoid the penalty
    • Inform TP no penalty will be assessed for frivolous correspondence

    • Warn TP not to file a frivolous return

Exhibit 25.25.10-1 
Frivolous Arguments

Frivolous arguments are currently described in Notice 2010-33, available at http://www.irs.gov/irb/2010-17_IRB/ar13.html (or its successor notice), the Truth About Frivolous Arguments, and a number of revenue rulings. Please refer to these publications for the most current listing of frivolous arguments. Recognized frivolous arguments include but are not limited to:

  1. Wages/Receipts Not Income (NTR) - The filer argues that salaries and wages are not "income" within the meaning of the Sixteenth Amendment, which grants Congress the power to "Lay and collect taxes on income, from whatever source derived..." The individual could also argue that labor worth a certain amount is exchanged for money worth the same amount and therefore there is no taxable income.

  2. Eisner v. McComber- The filer reports wages but deducts them as "non-taxable receipts to reduce some or all income" referencing Eisner v. McComber 252 U.S. 189 (1920). The individual may alter line items showing non-taxable compensation or non-taxable receipts to back out some or all of their income, generally resulting in a zero tax liability.

  3. Zero Returns (ZERO) - The filer submits a return with zero money amounts on all or most of the line items on the form, e.g., an individual may enter zeros for income and deductions but enter an amount of tax withheld by an employer and request a refund of that amount. See Rev. Rul. 2004-34. The filer may include on or attach to a return a statement claiming there is no section of the Internal Revenue Code that established an income tax liability. The statement may also contain arguments regarding the definition of income. There are several variations on this type of filing such as those bearing the words "nunc pro tunc" and "not liable." See also item 42 in this list.

  4. U.S. v. Long (Z-LONG) - The filer submits a return with zero money amounts. To explain the zeros inserted on the form, the individual references "U.S. v. Long" . See United States v Long. 618 F.2d 74 (9th Cir 1980).

  5. Not a Citizen/Free Citizen/Not a Resident of Federal Zone - The filer argues that he or she is not a citizen of the United States and receives no income or benefits from sources within the United States. The individual may file a Form 1040NR to receive a refund of withheld income tax or claim citizenship of a "State Republic" . Alternatively, the individual may claim that the United States does not include all or part of the physical territory of the 50 States and instead consists of only places such as the District of Columbia, Guam, Puerto Rico, the Virgin Islands, the Northern Marianna Islands, and certain other possessions, enclaves, and trust territories. See Rev. Rul. 2004-28.

    Note:

    The aforementioned does not apply to a foreign person who has paid withholding inadvertently and has filed a claim for a refund.

  6. Reparation Tax (REPTX) - The filer submits a return, an amended return, or correspondence referring to a reparation settlement based on the impact of slavery, or may refer to black taxes, reparations for African-Americans, or 40 acres and a mule. It may also include a Form 2439 with fictitious RIC such as Investment Taxes or Department of the Treasury. See Rev. Rul. 2004-33.

  7. Form 2555 Deduction (F2555) - The filer submits a return showing income then deducts that same amount (or a large portion of that amount) by adding "Form 2555" to line 21. Form 2555, Foreign Earned Income, is usually attached showing the individual's address in the United States as the foreign address. The filer also shows his income on Form 2555 as "foreign earned income" even though his employers address is also in the United States. Correspondence may be attached arguing the term "income" and stating that each of the several states are foreign countries.

    Note:

    Frivolous Forms 2555 should be worked in the FRP area at the receiving Campus rather than forwarded to AUSC.

  8. Not a "Person" or "Individual (NTINDV)" - The filer argues he or she is not a "Person" or "Individual" within the meaning of the Internal Revenue Code and is therefore not subject to income taxes. See Rev. Rul. 2007-22.

  9. Sixteenth Amendment (16AMEND) - The filer argues the Sixteenth Amendment was not properly ratified and therefore the federal government does not have the legal authority to collect an income tax without apportionment. Generally the argument focuses on matters such as inconsistencies in versions ratified by the various states. See Rev. Rul. 2005-19.

  10. Fifth Amendment (5AMEND) - The individual makes an improper blanket assertion of the Fifth Amendment right against self-incrimination as a basis for not providing any financial information. See Rev Rul 2005-19.

  11. Altered Jurat/UCC 1–207 (JURAT) - The filer submits a return that contains income and deductions but the jurat (generally defined as a certification on an affidavit declaring when, where, and before whom the document was signed) has been altered or stricken. May include reference to UCC 1–207 or a statement that the return was not signed under penalties of perjury. The alteration may be located elsewhere on the return with an arrow pointing to the jurat. There may be an explanation on the return or attachments reflecting the desire to negate the effect of the jurat by showing the taxpayer did not intend to file a return in good faith. See Rev. Rul. 2004-34.

  12. Altered Form (ALTFORM) - The filer submits a return altering any or all line items with the intent of facilitating non-compliance with the tax laws

  13. Unsigned Returns (UNSIGN) - The filer completes a return but fails to sign and includes a statement explaining why the return is not signed indicating, among other arguments, disagreement with the tax system, IRC 6061(a)

  14. Wages Deducted in Cost of Goods Sold (F-SCHC) - The individual submits a return with a Schedule C attached claiming a deduction which is equal, or nearly equal, to the amount reported as wage income. The deduction is usually included in the cost of goods sold but could appear under a different deduction category.

  15. Valuation (FAIRMV) - The filer argues that income is not taxable because of the declining fair market value of the dollar, because the dollar is not backed by gold/silver, because the value of services is offset by the value of the labor (barter income), etc.

  16. In Lieu of (ILO) - The individual submits a document captioned, Statement in lieu of U.S. income tax Form 1040. Various other arguments may be used in the document. See Rev. Rul. 2004-34.

  17. Disclaimer (DISCL) - The individual submits documentation which contains a disclaimer. The disclaimer states the individual, "disclaims the liability for the tax due" , making the liability on the return zero. This disclaimer may be a part of a return, on a return attachment, or in other documents.

  18. Protest Against Government Action/Inaction (WARTAX) - The filer argues that their refusal to file a return or pay tax is justified because they disagree with government policies or spending plans. For the return to be frivolous the individual must claim frivolous deductions or credits based on an objection to having his or her taxes used to support various government activities. See Rev. Rul. 2005-20.

  19. Taxes are Voluntary/Law Does Not Require (VOLUN) - The filer argues on a return or specified submission that income taxes are voluntary.

  20. Challenges to Authority/Title 26 or "law" in Other Documents (CONST) - The filer may argue that Title 26 of the United States Code is not law because it was never enacted as named. As a separate position, the individual may argue that other laws or documents prevent the IRS from assessing and collecting tax. This argument may reference the Bible, Bill of Rights, Declaration of Independence, Magna Carta, Northwest Ordinance, Declaration of Resolve, Federalist Papers, Mayflower Compact, Articles of Confederation of 1788, Declaration of Rights of 1765 and 1774, and others.

  21. Paperwork Reduction Act-An individual argues that he or she cannot be penalized for failing to file a Form 1040 series return because the instructions and regulations associated with the Form 1040 do not display an OMB control number.

  22. Internal Revenue Service is a Private Organization/Collects Tribute, Not Taxes (TRIBU) - The individual argues that the IRS is an entity named the Internal Revenue and Tax Service, Inc. which was incorporated in Delaware in 1933. The individual further argues that since the IRS deposits its revenues in the Federal Reserve Bank, it is a collection agency for the bank, which is in the business of making loans and conducting proprietary business, thereby removing the cloak of governmental immunity. Additionally, they argue the Department of Treasury is part of the United Nations and is clandestinely leading the tax-paying public into a "new world order."

  23. Alleged Churches/First Amendment (ALDGCH)-The individual receives income from non-religious sources and may claim a vow of poverty. The individual submits a return on which all, or substantially all, of the gross income is claimed as a deduction on Schedule A of the return.

  24. Amended Returns/Form 843 Claim for Refund and Request for Abatement (AMEND) - The individual files an amended return or a Form 843 to obtain a total refund of all taxes paid in prior years, based on a tax avoidance argument not supported by law.

  25. Untaxed (UNTAX) - The individual argues that he or she should be "untaxed" and attempts to drop out of the Social Security system. He or she will withdraw or rescind his or her SSN, claiming he or she is a sovereign citizen. See Rev. Rul. 2004-31.

  26. Federal Reserve Notes Are Not Legal Tender (FEDRES) - The individual argues that their wages are not taxable because they were paid in federal reserve notes. He or she argues that notes are not valid currency or legal tender and, thus, those who possess them cannot be subject to a tax on them.

  27. Services Not Taxable/Thirteenth Amendment/Form of Servitude (13AMEND) - The individual argues that income results only from the sale of goods, and therefore, the value of services is not taxable. This includes indentured servitude arguments and barter offsets. The individual may also argue that the Thirteenth Amendment outlawed slavery. He or she may claim to be "natural unfranchised individuals and freemen" who are residents of states, and therefore nonresident aliens for the purpose of the Internal Revenue Code.

  28. Obscene, Vulgar, Harassing (OBSC) - The individual submits documents or other materials indicating that non-filing is due to dissatisfaction with tax policies or taxation in general. Often, this argument is expressed with obscene, vulgar, or crude language and characters in an extremely demeaning manner.

  29. Any other position described as frivolous in any revenue ruling or other published guidance in existence when the return or the specified submission adopting the position is filed with the Service.

  30. Non-negotiable Chargeback (NNCB) - The filer attempts to sell his/her birthright back to the government for a large dollar amount and requests that a "Treasury Direct Account" be set up to hold the money.

  31. IRC 861 for Individual Employees (IMF 861) - The individual files a return or claim stating that wages are not taxable based on 26 CFR section 1.861 and requesting a refund of all federal withholding.

  32. IRC 3121 (FICA) - The individual contends that IRC section 3121 exempts the Federal Insurance Contribution Act (FICA) portion of earnings from the definition of wages and therefore from gross income for federal tax purposes. The individual attempts to reduce taxable income by his/her portion of withheld social security tax

  33. 1041 - Lifetime Social Security Claims (LFTMEARN) - The individual claims a refund for all social security paid during their lifetime. Taxpayer requests a "lifetime earnings statement" from Social Security Administration in order to list the amount of withheld social security taxes as federal income tax or other payments. See Rev. Rul. 2005-17.

  34. 1041 - In Lieu of 1040 (1041 ILO) - The individual deducts personal income as fiduciary fees or other deductions on Form 1041 resulting in a zero tax liability.

  35. IRC 1341 - Claim of Right (COR) - The filer claims "compensation for personal labor" is not taxed by Title 26, IRC section 134 1, and takes a deduction on Schedule A or removes the amount from gross income. See Rev. Rul. 2004-29.

  36. Bosnian Refugees (BOSNREF) - The individual attempts to eliminate tax liability by filing Form 1040X, removing their tax on line 10 (Total Tax) and citing under Part II that they are entitled to refunds based upon their status as Bosnian refugees.

  37. Not Liable (NTLIABL) - The individual submits a return with "Not Liable" printed on it. The return also reflects zero money amounts despite indications the taxpayer has taxable income.

  38. IRC 861 Business - Employment Tax (BMF 861) - This argument targets employers and advises them that wages are exempt from withholding. Based on 26 CFR section 1.861, promoters of this scheme advise employers to stop withholding and paying payroll taxes on their employees wages. In addition, some employers file amended payroll tax returns and request refunds of previously paid payroll taxes.

  39. EIC with Disability Income (FRIVEIC) - The individual reports disability income as the sole source of income to claim earned income credit but does not attach a Form W-2 or Form 1099.

  40. Exempt Employees of World Bank Organization (XMTEMP) - The individual files a return with a statement attached which asserts, "World Bank Employee - Wages not Subject to Income and/or Non-Taxable Income - World Bank." The individual lists an adjustment equal to the amount of the wages and claims adjusted gross income is zero. May also cite IRC section 893 which provides a tax exemption to some employees of international organizations.

    Note:

    The World Bank qualifies as an international organization, therefore, if the individual worked for the World Bank as a citizen of another country, they may qualify for the exemption.

  41. American Indian Treaty (AMERIND) - The individual attempts to eliminate tax liability by filing forms 1040 removing their income on line 21 (Other Income) and citing, "less Native American Indian Treaty" or "Native American Indian Treaty." The returns usually include Form 1099 MISC or other income documents that include withholding which can result in a refund of withholding credit.

    Note:

    IRC section 7873, various court cases and revenue rulings allow for tax free income earned either for fishing rights on treaty land, income from the land or on land held in trust for certain individual Native Americans. For more information, contact an IRS Indian Tribal Government Specialist.

  42. Nunc Pro Tunc (NUNC) -The filer attempts to eliminate tax liability by filing returns citing "Nunc Pro Tunc" somewhere on the return. The return usually consists of all zeros except withholding and generally a refund is claimed. No further justification for the zero return is given. "Nunc Pro Tunc" is Latin for "Now for Then" . These taxpayers appear to want the IRS to accept the frivolous return they have filed in place of what they filed previously. See Rev. Rul. 2006-17.

  43. IRC 1001 (1001) - The individual attempts to eliminate tax liability by filing Form 1040X removing all or part of income as an itemized deduction on Schedule A, "Other Miscellaneous Deductions" and citing, "IRC 1001: even exchange of property - Labor (property) - Employer's (property). NO GAIN REALIZED. Butcher's Union Co. v. Crescent City Co., 111 US 746 (1884)."

  44. Zero Wages on a Substitute Form: Taxpayer generally attaches either a substitute Form W-2, Form 1099, or Form 4852 that shows "$0" wages or no wage information. A statement may be included indicating the taxpayer is rebutting information submitted to the IRS by the payer. Entries are usually for Federal Income Tax Withheld, Social Security Tax Withheld, and/or Medicare Tax Withheld. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and IRC 3121" , or may include some reference to the company refusing to issue a corrected Form W-2 for fear of IRS retaliation.

  45. Fuel Tax Credit - A filer files a return or claim requesting an amount of fuel tax credit that is so disproportionately excessive to income (normally business income) reported on the individual's return as to be unallowable. In addition, the individual's occupation would generally not qualify for off-highway usage.

  46. Form 1099-OID - An individual or business files a return reporting false amounts of income (generally "Other" or "Miscellaneous" income) and claims a false amount of income tax withholding approximately equal to the amount of falsely reported income. Although the return reports income, the taxpayer does not calculate any tax due. Some of the returns have Form 1099-OID (Original Issue Discount) or 1099-MISC (Miscellaneous) attached and some have Forms 1096. Other false financial instruments may be filed in the place of or in addition to the 1099 Series Form(s) such as Form 2439, promissory notes, bonds, sight drafts, etc.

  47. C-Filings - This frivolous position includes four categories of filings as follows

    1. An individual files a return claiming various types of deductions, credits, or overpayments/refunds that are clearly unrealistic and because of their outrageous character, qualify as frivolous returns.

    2. An individual files a return containing the filer's identifying information but does not request a refund, often lacking sufficient information to determine a tax liability.

    3. An individual files a return with various types of rambling dialogue and/or confusing arguments that no one could reasonably view as a good faith attempt to comply with the law.

    4. An individual files a return that attempts to send some type of message or protest to the IRS, but fails to include sufficient identifying information for the Service to determine the identity of the taxpayer or the taxpayer's return address.

  48. Prisoner Filings - An individual who is incarcerated files a return with which they include a Substitute Form W-2 (Form 4852). In the explanation portion of the Form 4852 they explain the income is based on a computation of minimum wage for hours worked within the prisons and lists an amount of withholding which allegedly represents the withholding an employer would withhold from an employee working at minimum wage. The inmate claims a refund based on the data for income and withholding the prisoner alleges the prison should have reported. The claims also may include a list that includes a work log or a computer printout showing their cost of incarceration.

  49. Collections Issues - . Collections Issues - An individual submits documents contending, on frivolous grounds, that certain collection actions are invalid, such as: 1) the statutory notice of deficiency, notice of federal tax lien, collection due process notice, or notice and demand is invalid because it is not signed by the Secretary of the Treasury or some particular official; 2) the assessment is invalid because the taxpayer did not receive a copy of a Form 23C, because a Form 23C must be signed personally by the Secretary of the Treasury, or because the assessment was made on the basis of a 6020(b) return, which is not a valid return; 3) the form or content of a notice of federal tax lien is controlled by or subject to a state or local law, and a notice of federal tax lien that does not comply in form or content with state law is invalid; 4) Verification under section 6330 that the requirements of any applicable law or administrative procedure have been met may only be based on one or more particular forms or documents (which must be in a certain format), such as a summary record of assessment, or that the particular forms or documents or the ones on which verification was actually determined must be provided to a taxpayer at a collection due process hearing.; 5) revenue officers are not authorized to seize property in satisfaction of unpaid taxes; 6) IRS employees lack authority to carry out their duties because they lack certain required credentials, such as a pocket commission or badge; or 7) a civil action to collect unpaid taxes or penalties must be personally authorized by the Secretary of the Treasury and Attorney General.

  50. Non Taxable Social Security (SS) Benefits - An individual files a return reflecting non-taxable SS, or Railroad Retirement benefits and claims false or excessive withholding credit resulting in a zero return.

Exhibit 25.25.10-2 
FRP Master Database

Frivolous Return Program Master (FRP Master) is a database used to track and monitor current inventory and includes historical data on accounts not in filing and/or payment compliance for two consecutive years.. FRP Master is a composite of several tables linked together to allow FRP employees to accurately respond to taxpayers and assists in trending frivolous filings for outreach education to internal and external stakeholders. It also provides the means to identify new abusive tax avoidance promotions in order to make referrals for civil injunctive actions, criminal investigations, and follow-up monitoring on violations of existing court orders on abusive promoters and preparers. The tables include but are not limited to:

  • Daily Reports- Employee time and action taken on cases

  • Project Status Listing (PSL) - Current information on new program issues, abusive tax schemes, frivolous return preparers and promoters, court actions on FRP cases, and general topical data on FRP cases

  • Friv Input Form - Table used to update taxpayer compliance history, forms and letter sent to taxpayers, pre-audit compliance, frivolous arguments used by the taxpayer, etc.

  • TAR Form - Used to elevate unique technical questions, data on new promotions, etc., for inclusion on PSL

  • Interview Screen - Questions posed to taxpayers during telephone interviews to ascertain background on specific frivolous promotions and/or taxpayer frivolous arguments

  • Weekly Reports - Inventory report data

  • FRP Alerts - Sign on message to inform employees of pertinent information

Utilize FRP Master to ensure a record is made of all pertinent actions taken on accounts. Consider existing information derived from FRP Master Project Status Listing prior to taking action on existing accounts such as whether:

  • PSL reflects if a return preparer is currently enjoined from return preparation

  • Copy will be made of new filings by a particular promoter/preparer for referral to the Lead Development Center (LDC)

  • If specific action or no action will be taken on a new receipt for a particular type of filing.

  • New receipts will be routed to a specific area or employee

FRP Master reports will be created on a regular basis to proactively provide data to TEC, SB/SE Communications and Liaison, and ATAT on:

  • emerging schemes

  • abusive promoters and/or preparers

  • trends in geographic locations of frivolous filings or specific business affiliations

  • the need for outreach education on specific promotions

  • any data pertinent to the overall compliance objectives of the Service

FRP Master reports will also be used to fulfill requests made by internal and external stakeholders on program data but will be coordinated and approved through the Ogden FRP Senior Technical Coordinator and RICS Operations Manager.


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