4.71.18 EP Penalties

Manual Transmittal

May 30, 2019

Purpose

(1) This transmits revised IRM 4.71.18, Employee Plans Examination of Returns, EP Penalties.

Material Changes

(1) Removed reference in IRM section 4.71.18.1.1 to IRM 1.2.10 and IRM 1.2.13 since the manual sections were obsoleted.

(2) Incorporated the provisions of the October 5, 2018, Internal Guidance Memo (IGM) TE/GE-04-1018-0024 with the subject line Single Type of Examination issued by the Acting Director, Employee Plans into IRM section 4.71.18.5.1. The IGM was effective the date it was issued and provides that examinations are no longer classified as either Field or OCEP. The IGM’s result is a single type of examination. The examination’s location is determined by the agent and the front-line manager on a case by case basis.

(3) Enhanced IRM 4.71.18.1, Program, Scope and Objectives, and the subsections thereunder, and added new section IRM 4.71.21.1.3, Program Controls, to provide more information on the internal controls regulating EP Examinations. Reorganized material for improved readability and consistency with other EP, Examination IRMs.

(4) Changed name of IRM 4.71.18.1.2 from Acronyms and Forms to Acronyms, Abbreviations, Forms and Pubs and updated table name to reflect the applicable content.

(5) Updated the manual to reflect Letter 3605 instead of Letter 3605-A, which is now obsolete. Letter 3605 replaced Letter 3605-A to comply with the letter consolidation requirements for the organization.

(6) Added new section IRM 4.71.18.1.3, Safeguarding Personally Identifiable Information, to comply with the December 20, 2016, Internal Guidance Memorandum (IGM) from the Director, Identity and Records Protection Privacy, Governmental Liaison and Disclosure, entitled Social Security Number Elimination and Reduction (SSN ER). This section augments compliance with the May 22, 2007 Memorandum (M-07-16) issued by the Office of Management and Budget (OMB) entitled Safeguarding Against and Responding to the Breach of Personally Identifiable Information to the Heads of Executive Departments and Agencies. Subsequent subsections were renumbered.

(7) Added new section 4.71.18.4, Related Resources. Subsequent subsections were renumbered.

Effect on Other Documents

This supersedes IRM 4.71.18 dated December 06, 2018.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(05-30-2019)

Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

Program, Scope and Objectives

  1. Purpose: IRM 4.71.18, Employee Plans Examination of Returns, EP Penalties, provides the basic examination procedures for Employee Plans (EP) agents and their managers to process penalty cases.

  2. Audience: This IRM provides procedures for agents, managers, and support staff in EP Examinations.

  3. Program Owner: Director, EP Examinations sets the program for the EP Examinations.

  4. Program Authority: EP Examinations’ authority to conduct examinations, resolve issues and determine tax liability is derived from Title 26, Internal Revenue Code, Subtitle F – Procedure and Administration, which includes but is not limited to:

    1. IRC section 7602 - Examination of books and witnesses, which falls under Chapter 78 - Discovery of Liability and Enforcement of Title.

      Note:

      IRC 7602 provides agents with the authority to:
      * Audit any books, papers, records or other data necessary to complete an audit.
      * Take testimony under oath to secure additional information needed.
      * Issue summons for information necessary to complete an audit.
      * Ask about any offense connected to the administering or enforcing of the Internal Revenue laws.

    2. IRC section 6201- Assessment authority, which falls under Chapter 63 - Assessment.

      Note:

      EP Examinations’ authority to resolve issues is derived from its authority to make determinations of tax liability under IRC 6201.

  5. This IRM is written by EP Mandatory Review. Contact the manager of EP Mandatory Review if you have questions, information or suggestions.

Background

  1. Policy Statement 4-119 provides the primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans. The purpose of selecting and examining returns is to:

    1. Promote the highest degree of voluntary compliance with the tax laws governing plan qualification.

    2. Determine the extent of compliance and the causes of noncompliance with the tax laws.

    3. Determine whether such plans meet the applicable qualification requirements in operation.

  2. Under Policy Statement 4-117, EP agents and managers:

    1. Have been given broad authority to consider and weigh conflicting information, data, and opinions.

    2. Will use professional judgement in accordance with auditing standards to make findings of fact and apply the IRS’s position on issues of law to determine the correct tax liability.

    3. Will exercise this authority to:
      i. Obtain the greatest number of agreements to tax determinations without sacrificing the quality or integrity of those determinations.
      ii. Dispose of tax differences at the lowest level.

  3. All examinations will be done in accordance with Policy Statement 1-236, Fairness and Integrity in Enforcement Selection.

Program Controls
  1. EP Examinations established two review groups to make sure agents conduct examinations per technical, procedural and administrative requirements:

    1. Mandatory Review, see IRM 4.71.14, Employee Plans Examination of Returns, EP Mandatory Review.

    2. Special Review, see IRM 4.70.7, Special Review (SR) and Tax Exempt Quality Measurement System (TEQMS) Procedures.

  2. Tax Exempt Quality Measurement System (TEQMS) is the quality control system TE/GE uses to oversee the entire examination program. For more information on TEQMS, see IRM 4.70.7, Special Review (SR) and Tax Exempt Quality Measurement System (TEQMS) Procedures.

  3. All examinations will be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

    Note:

    Find additional information at: Taxpayer Bill of Rights

Acronyms, Abbreviations, Forms and Pubs

  1. This manual uses the following acronyms and references the following forms.

    Acronyms and Abbreviations

    Acronym Definition
    AIMS Audit Information Management System AIMS
    BMF Business Master File
    CCR Case Chronology Record
    EP Employee Plans
    ERISA Employee Retirement Income Security Act of 1974
    FFTF Fraudulent Failure to File
    IDRS Integrated Data Retrieval System
    IRA Individual Retirement Arrangement
    IRC Internal Revenue Code
    IRM Internal Revenue Manual
    LB&I Large Business and International Division
    MFT Master File Tax
    NMF Non-Master File
    OTSA Office of Tax Shelter Analysis
    POA Power of Attorney
    RAR Revenue Agent Report
    RCCMS Reporting Compliance Case Management System
    SARSEP Salary Reduction Simplified Employee Pensions
    SB/SE Small Business /Self-Employed Division
    SEP Simplified Employee Pensions
    SFR Substitute for Return
    SIMPLE Simple Retirement Accounts
    SME Subject Matter Expert
    SSN Social Security Number

     

    Forms and Pubs

    Form Name
    Form 870-EP Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Over-assessment
    Form 872 Consent to Extend the Time to Assess Tax
    Form 886-A Revenue Agent Report
    Form 895-EP Notice of Statute Expiration
    Form 990-T Exempt Organization Business Income Tax Return
    Form 1040 U.S. Individual Income Tax Return
    Form 1065 U.S. Return of Partnership Income
    Form 1096 Annual Summary and Transmittal of U.S. Information Returns
    Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s, Insurance Contracts, etc
    Form 1120 U.S. Corporation Income Tax Return
    Form 1120-S U.S. Income Tax Return for an S Corporation
    Form 2848 Power of Attorney and Declaration of Representative
    Form 3198-A TE/GE Special Handling Notice
    Form 3210 Document Transmittal
    Form 3244-A Payment Posting Voucher - Examination
    Form 3870 Request for Adjustment
    Form 4549-E Income Tax Discrepancy Adjustments
    Form 5310-A Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business
    Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
    Form 5330 Return of Excise Taxes Related to Employee Benefit Plans
    Form 5464 Case Chronology Record
    Form 5498 IRA Contribution Information
    Form 5558 Application for Extension of Time to File Certain Employee Plan Returns
    Form 5500 Annual Return/Report of Employee Benefit Plan
    Form 5500, Schedule MB Multi-employer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information
    Form 5500, Schedule SB Single-Employer Defined Benefit Plan Actuarial Information
    Form 5599 TE/GE Examined Closing Record
    Form 5772 EP/EO Workpaper Summary
    Form 5773 EP/EO Workpaper Summary Continuation Sheet
    Form 8278 Assessment and Abatement of Miscellaneous Civil Penalties
    Form 8886 Reportable Transaction Disclosure Status
    Form 8955-SSA Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits
    Form 10329 Transmittal Sheet
    Pub 1 Your Rights as a Taxpayer
    Pub 5 Your Appeal Rights and How To Prepare a Protest If You Don't Agree
    Pub 594 The IRS Collection Process

     

Safeguarding Personally Identifiable Information (PII)

  1. When possible, mask the first five digits of a taxpayer’s SSN on letters, forms, notices, workpapers and emails.

    Example:

    XXX-XX-9999

    .

Related Resources

  1. IRM 20.1, Penalty Handbook

  2. Form 8278

Contact Information for Business Units

  1. Phone, efax, and email information:

    1. Classification: *Manager EO Classification (EOclass@irs.gov)

      Note:

      Classification & Case Assignment (C&CA) is a subfunction of Compliance Planning & Classification (CP&C), which is referred to in this IRM as Classification.

    2. Mandatory Review (manager):
      Phone: 609-858-7979
      Email:George.D.Brim@irs.gov

  2. Mailing addresses:

    1. Classification:
      IRS – TE/GE Referrals Group
      1100 Commerce St., Mail Code 4910DAL
      Dallas, TX 75242

    2. Mandatory Review (manager):
      IRS
      50 West State Street; 12th floor
      ATTN: EP:7694 GB
      Trenton, NJ 08608

    3. Mandatory Review (other):
      IRS - Mandatory Review
      ATTN: Samantha Nolan
      2970 Market Street, 2-H20-133
      Philadelphia, PA 19104

    4. TE/GE Closing Group:
      IRS - TE/GE Closing Group 7697
      2 Metrotech Center
      100 Myrtle Avenue, 6th Floor
      Brooklyn, NY 11201

      Note:

      Groups in Northeast and Mid-Atlantic Areas close all agreed cases on RCCMS and AIMS to Brooklyn

    5. TE/GE Closing Group:
      IRS - TE/GE Closing Group 7697
      31 Hopkins Plaza
      Room 1550
      Baltimore, MD 21201

      Note:

      Groups in Great Lakes, Gulf Coast and Pacific Coast Areas close all agreed cases on RCCMS and AIMS to Baltimore

Overview of EP Penalties

  1. EP penalties involve plans which are subject to ERISA.

  2. EP agents may assess the following penalties discussed in this section:

    1. IRC 6651(a)(1) and IRC 6651(a)(2) - Failure to timely file Form 5330, Form 990-T, or Form 5329 and pay the tax

    2. IRC 6651(f) - Fraudulent Failure to File

    3. IRC 6652(d)(1) - Failure to timely file Form 8955-SSA

    4. IRC 6652(d)(2) - Failure to report change in plan status

    5. IRC 6652(e) - Failure to timely file a Form 5500 series return; and failure to timely file Form 5310-A

    6. IRC 6652(h) - Failure to give notice to recipients of certain pension distributions

    7. IRC 6652(i) - Failure to give written explanation to recipients of certain qualifying rollover distributions

    8. IRC 6662 - Accuracy-related penalty on underpayments;

    9. IRC 6662A - Accuracy-related penalty on understatements with respect to Reportable Transactions

    10. IRC 6663 - Civil fraud

    11. IRC 6690 - Fraudulent statement or failure to furnish statement to plan participant

    12. IRC 6692 - Failure to timely file Form 5500 Schedule SB or MB

    13. IRC 6693 - Failure to provide reports on certain tax-favored accounts or annuities

    14. IRC 6704 - Failure to keep records necessary to meet reporting requirements

    15. IRC 6707A - Failure to include Reportable Transaction information with the return

    16. IRC 6721 - Failure to file correct information returns

    17. IRC 6722 - Failure to furnish correct payee statements

  3. Your manager’s approval via email, memo to file or signed comment on the CCR is required on all penalties discussed in this IRM except for IRC 6651(a) penalties.

    1. IRC 6751(b) requires that for the assessments of all Title 26 civil penalties, the immediate supervisor of the individual making the determination (or a higher level official the Secretary may designate) must personally approve the assessment in writing.

      Exception:

      You don’t need your manager’s approval to assess IRC 6651(a) penalties because they’re specifically exempted from this requirement per IRC 6751(b)(2).

    2. When you determine that penalties (except IRC 6651(a) penalties) should be assessed, obtain your manager’s approval.

      Note:

      You must secure your manager’s approval before the 30-Day Letter package is mailed to the taxpayer. If a 30-Day Letter isn’t required, then before the case is closed from the group to EP Mandatory Review or to the TE/GE Closing Group.

      Note:

      Document managerial approval on Form 5464 (CCR).

  4. Whenever "Form 5500" is used in this IRM, it refers to all Form 5500 series returns (unless specifically stated otherwise).

  5. Assess penalties under IRC 6662, IRC 6662A, and IRC 6663 on the Form 5599 in the applicable Form 5330, Form 990-T, Form 1040, or Form 1120 case file.

    Note:

    IRC 6651(a) penalties may be assessed via Form 5599 when a taxpayer executes a signed Form 870-EP.

    Caution:

    IRC 6651(a) is automatically assessed by the Service Center when a taxpayer files Form 5330 or Form 990-T (unless reasonable cause is granted). If the IRC 6651(a) penalties is also included on the Form 5599, the penalty is assessed twice.

  6. Assess all other penalties covered in this IRM on Form 8278.

    1. See Instructions to complete Form 8278 in each applicable penalty section below.

    2. Place Form 8278 in a separate "Penalty" folder which will accompany the exam file when it is closed to the TE/GE Closing Group.

    3. Use MFT Code 55 for assessments on an individual.

    4. Use MFT Code 13 for assessments on a business.

    5. See IRM 4.71.18, Exhibit 1 at Employee Plans Examination Exhibits for an example of Form 8278.

  7. When you prepare Form 8278, complete Form 3198-A and staple it to the outside of the "Penalty Folder" .

    1. Write, "Penalty Case" in red on the top of Form 3198-A.

    2. Input the agent and entity information on the top of the form.

    3. In the Special Features section of the form, check the "Other Instructions" box and provide instructions for each applicable penalty.

    4. See IRM 4.71.18, Exhibit 2 at Employee Plans Examination Exhibits for an example of Form 3198-A.

  8. Work IRC 6707A penalty cases as follows:

    1. Establish them as Non-Master File (NMF) returns on NMF AIMS.

    2. Establish each taxpayer and year on NMF AIMS and RCCMS.

    3. Close with a complete paper file per IRM 4.71.18.15, Failure to Include Reportable Transaction Information With the Return - IRC 6707A Penalties.

    4. Track time on WebETS.

  9. Prepare a separate "Penalty File" for penalties under IRC 6652, IRC 6690, IRC 6692, IRC 6693, and IRC 6704.

    1. The Penalty File is composed solely of Form 8278 and Form 3198-A.

    2. Don’t establish on RCCMS or AIMS or charge time on WebETS.

  10. Work IRC 6651, IRC 6662, IRC 6662A, and IRC 6663 penalties as part of the related Form 5330, 990-T or 1040/1120 case file. Do not prepare a related "Penalty File."

Penalty Relief

  1. IRM 20.1.1.3, Criteria for Relief from Penalties, discusses penalty relief. Penalty relief falls into separate categories. They are:

    1. Reasonable cause

    2. Statutory exceptions and administrative waivers

    3. Correction of service error

  2. IRM 20.1.1.3.3.4.3 discusses reliance on the advice of a tax advisor.

    1. Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated.

    2. Penalty relief criteria for relying on a tax advisor’s erroneous advice is generally limited to the accuracy-related penalties (IRC 6662 or IRC 6662A).

    3. The responsibility to file, pay, or deposit taxes cannot be excused based on reliance of advise from a tax profession. The court ruled that it requires no special training or effort on a taxpayer's part to ascertain a deadline and ensure that it is met. See United States v. Boyle, 469 U.S. 241 (1985).

  3. Penalty relief for most penalties must meet the reasonable cause standards found in IRM 20.1.1.3.2, Reasonable Cause.

    1. Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to offer penalty relief that would otherwise be assessed.

    2. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply.

    3. For penalties in which IRS may consider reasonable cause, we consider any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless couldn’t comply with a prescribed duty by the due date.

    Note:

    See IRM 4.71.18, Exhibit 36 at Employee Plans Examination Exhibits for an example of a Reasonable Cause Lead Sheet you may use as an examination workpaper.

Failure to File and Failure to Pay - IRC 6651(a)(1) & (2)

  1. When you determine that a delinquent Form 5330 or Form 990-T is due from a taxpayer during an examination, decide whether the failure to file and/or failure to pay penalties under IRC 6651(a)(1) and (2) apply.

  2. Taxpayers who don’t file a tax return by the due date (including extensions), are subject to a IRC 6651(a)(1) penalty, unless the failure is due to reasonable cause and not willful neglect.

    1. Assert the 5% penalty on the amount subject to the penalty (the amount owed), not to exceed 25%, for each month, or part of, the return is filed late (IRC 6651(a)(1) ).

    2. Reduce the penalty under 6651(a)(1) by .5% per month when you also assert the failure to pay penalty under IRC 6651(a)(2). Thus, the maximum penalty under 6651(a)(1) is 22.5% (IRC 6651(c)(1).).

    3. Calculate the amount subject to the penalty (tax due minus any timely payments or credits).

  3. Taxpayers who fail to pay the tax due on any return by the due date for payment are subject to a failure to pay penalty under IRC 6651(a)(2), unless they show the failure to pay is due to reasonable cause and not willful neglect.

    1. For each month, or part of, that the tax remains unpaid, the penalty is generally .5% of the unpaid tax.

    2. The maximum penalty is 25% of the unpaid tax on the payment due date.

  4. If both IRC 6651(a)(1) and (2) penalties are being imposed, the maximum penalty is 47.5%.

  5. Use the template at IRM 4.71.18, Exhibit 17 at Employee Plans Examination Exhibits to help calculate IRC 6651(a)(1) & (2) penalties.

  6. See IRM 4.71.18, Exhibits 21 and 22 at Employee Plans Examination Exhibits for examples of the IRC 6651(a)(1) & (2) Lead Sheets you may use as an examination workpaper.

Assessment of IRC 6651 Penalties

  1. Ogden Campus automatically assesses IRC 6651 penalties when they process a delinquent Form 5330 or Form 990-T unless Form 3198-A instructs otherwise. See IRM 4.71.5.6.3, Processing Delinquent Forms 5330 Received from the Taxpayer, and IRM 4.71.10.4.3, Processing Forms 990-T Received from the Taxpayer.

  2. If you secure an executed Form 870-EP instead of a Form 5330 or Form 990-T, assess penalties on Form 5599 when you close the case to the TE/GE Closing Group. Complete Form 5599 as follows:

    1. Enter transaction code 160 for IRC 6651(a)(1) penalties, and transaction code 270 for IRC 6651(a)(2) penalties, with the corresponding penalty amount for each penalty on Form 5599 Item 12 – Penalties (+).

    2. Enter transaction code 300 and the amount of tax being assessed on Form 5599 Item 12 – Tax Liability Adjustment (+).

  3. Secure a BMFOLT print (through IDRS) for the applicable year and MFT (MFT 76 for Form 5330 and MFT 34 for Form 990-T) to determine if the Campus assessed penalties on a delinquent Form 5330 or Form 990-T.

    If penalties Then,
    Were not assessed on a delinquent return, but should have, processed per IRM 4.71.18.2.1 (1). Prepare Form 5599 per IRM 4.71.18.2.1 (2) to ensure that the TE/GE Closing Group assesses penalties when the case is closed
    Were erroneously assessed on a delinquent return, See IRM 4.71.18.2.2, Abatement of IRC 6651 Penalties

Abatement of IRC 6651 Penalties

  1. If the Ogden Campus mistakenly assesses penalties on a secured delinquent return and the case is still open, the TE/GE Closing Group can abate penalties. To have penalties abated, prepare Form 5599 as follows:

    1. Item 12 - Penalties (-), enter transaction code 161 for IRC 6651(a)(1) penalties, and transaction code 271 for IRC 6651(a)(2) penalties, with the corresponding amount of the penalty to be abated, and

    2. Item 12 - Tax Liability Adjustment (+), enter transaction code 300 and $0.

  2. If the Ogden Campus mistakenly assesses penalties on a secured delinquent return and the case is already closed when the incorrect assessment is discovered, contact the Manager of the TE/GE Closing Group to get penalties abated.

Failure to Timely File Form 8955-SSA - IRC 6652(d)(1) Penalties

  1. A plan administrator (as defined in IRC 414(g)) is assessed a penalty under IRC 6652(d)(1)for the failure to file a registration statement by the due date, as required by IRC 6057(a)(1). The plan administrator must use Form 8955-SSA as the registration statement.

  2. Plan administrators are granted an automatic extension of time to file Form 8955-SSA (without filing a Form 5558) until the due date of the federal income tax return of the employer if both:

    1. The plan year and the employer's tax year are the same.

    2. The employer has been granted an extension of time to file its federal income tax return after the normal due date for filing the Form 8955-SSA.

  3. Plans subject to this requirement include plans qualified under IRC 401(a) and annuities under IRC 403(b).

    Note:

    All plans subject to the vesting standards of section 203 of ERISA must file Form 8955-SSA.

  4. Plans not subject to this requirement include:

    1. IRC 414(d), government plans

    2. IRC 414(e), church plans where no IRC 410(d) election has been made

    3. Any plan which is established or maintained by a labor organization described in IRC 501(c)(5) and which has not provided employer contributions

    4. Any plan established and maintained by a society, order, or association described in IRC 501(c)(8) or IRC 501(c)(9), if none of the contributions are made by employers of participants in such plan

    5. Any plans exempt under ERISA section 201, such as top hat or excess benefit plans

    6. Plans that cover only owners and their spouses.

  5. Generally, under IRC 6057(a)a plan administrator must file a registration statement (Form 8955-SSA) for the plan year in which a plan participant:

    1. Separates from the plan’s covered service (if not reported in the year of separation, then in the subsequent year);

    2. Is entitled to a deferred vested benefit; and

    3. Did not receive his/her retirement benefit.

    Note:

    A plan participant is required to be reported on Form 8955-SSA only once (unless a revised Form 8955-SSA is required).

  6. Form 8955-SSA is filed with the IRS separately (not as an attachment to Form 5500). The IRS address is reflected in the Form 8955-SSA instructions. A Form 8955-SSA filing includes the:

    1. Plan name

    2. Plan administrator’s name and address

    3. Name and social security number for all plan participants that separated from service during the plan year that are entitled to a deferred vested benefit which was not paid.

    4. The nature, amount and form of deferred vested benefit.

    5. Other information the IRS may require in forms, instructions, and applicable guidance.

  7. Penalties under IRC 6652(d)(1) are assessed on BMF.

  8. The penalty for failing to file Form 8955-SSA by the due date (same due date as Form 5500), is:

    1. $1 for each participant for whom the required information wasn’t filed multiplied by the number of days the failure continues.

    2. The maximum penalty for any plan year is $5,000.

  9. For this penalty, not reporting either the participant's name or SSN is considered a failure to report the participant. Exceptions are granted for Foreign Nationals who aren’t required to have an SSN.

    1. Example 1: Form 8955-SSA contains 10 names, but only eight have an associated SSNs. The penalty is computed by multiplying $2 ($1 [penalty amount] X 2 [number of participants]) by the number of days the failure continues.

    2. Example 2: Form 8955-SSA contains 50 names, but shows 60 SSNs. Compute the penalty by multiplying $10 ($1 [penalty amount] X 10 [number of participants]) by the number of days the failure continues.

  10. The IRS may waive the penalty for failure to file under IRC 6652(d)(1) if the plan administrator can show reasonable cause existed.

  11. The plan administrator’s request for "penalty relief" based on reasonable cause must be in writing, give all the facts alleged as reasonable cause and contain the appropriate individual’s declaration that the statement is made under penalties of perjury.

  12. Complete Form 8278 when IRC 6652(d)(1) penalties are being assessed.

    1. Complete items 1 through 11.

    2. On the last line of section 9G, insert the penalty section and description under column 9(a), insert Penalty Reference Number 583, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 5 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6652(d)(1) penalties.

  13. See IRM 4.71.18, Exhibit 18 at Employee Plans Examination Exhibits for a template to help calculate IRC 6652(d)(1) penalties.

  14. See IRM 4.71.18, Exhibit 23 at Employee Plans Examination Exhibits for a sample IRC 6652(d)(1) Lead Sheet you may use as an examination workpaper.

Failure to Report Change in Plan Status - IRC 6652(d)(2) Penalties

  1. Plan administrators (as defined in IRC 414(g)):

    1. Are liable for a penalty under IRC 6652(d)(2) for not timely notifying the IRS of changes in the status of a plan as required in IRC 6057(b).

    2. Satisfy this notification requirement by filing Form 5500 with the required information by the due date of the Form 5500.

  2. IRC 6057(b) requires the plan administrator notify the IRS of any of these events:

    1. Change in the plan’s name

    2. Change in the plan administrator’s name or address

    3. Plan termination

    4. A plan merger or consolidation

    5. Division of the plan into two or more plans.

  3. Plans subject to this requirement include plans qualified under IRC 401(a) and annuities under IRC 403(b).

    Note:

    All plans subject to the vesting standards of section 203 of ERISA are subject to these requirements.

  4. Plans not subject to this requirement include:

    1. IRC 414(d) government plans

    2. IRC 414(e) church plans where no IRC 410(d) election was made

    3. A plan which is established or maintained by a labor organization described in IRC 501(c)(5) and has not provided employer contributions

    4. A plan established and maintained by a society, order, or association described in IRC 501(c)(8) or IRC 501(c)((9), if no part of the contributions are made by employers of participants in such plan

    5. Any plans exempt under ERISA section 102 such as top hat or excess benefits plans

    6. Plans that cover only owners and their spouses

  5. This penalty is assessed in addition to the IRC 6652(e) penalty for late filing Form 5500. See IRM 4.71.18.5.1, Failure to Timely File Form 5500 - IRC 6652(e) Penalties.

  6. The penalty for failing to file the form on the due date in the prescribed manner is:

    1. $1 for each failure multiplied by the number of days the failure continues.

    2. The penalty shall not exceed $1,000 for failure to file any notification.

      Example:

      Assume Form 5500 was filed 500 days late and the plan’s and administrator’s name changed. A penalty of $1,000 ($1 [penalty] X 2 [failures] X 500 [days]) under IRC 6652(d)(2)is applicable.

      Note:

      As discussed in IRM 4.71.18.5.1, Failure to Timely File Form 5500 - IRC 6652(e) Penalties, there would also be a penalty under IRC 6652(e) in the amount of $12,500 ($25 per day times 500 days).

  7. EP agent: Usually the penalty is assessed automatically on Master File when you file and process the Form 5500 return. Confirm the penalty’s assessment by inspecting an EMFOLT print. If the penalty applies and wasn’t assessed, complete Form 8278 to assess the IRC 6652(d)(2) penalty.

  8. The IRS may waive the penalty for a failure to file under IRC 6652(d)(2) if the plan administrator can show reasonable cause existed.

  9. The plan administrator’s request for "penalty relief" based on reasonable cause must be in writing, provide all the facts alleged as reasonable cause, and contain the appropriate individual’s declaration that the statement is made under penalties of perjury.

  10. Complete Form 8278 when IRC 6652(d)(2) penalties are being assessed.

    1. On page 3, complete items 1 through 11.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a), insert Penalty Reference Number 584, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 6 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6652(d) Penalties.

  11. See IRM 4.71.18, Exhibit 19 at Employee Plans Examination Exhibits for a template to help you calculate IRC 6652(d)(2) penalties.

  12. See IRM 4.71.18, Exhibit 24 at Employee Plans Examination Exhibits for a sample IRC 6652(d)(2) Lead Sheet you may use as an examination workpapers.

Information Required in Connection with Certain Plans of Deferred Compensation - IRC 6652(e) Penalties

  1. Plan administrators are subject to a penalty under IRC 6652(e) for failure to file annual returns and statements by the due date and in the prescribed manner required under:

    1. IRC 6058(a), for a Form 5500 series return

    2. IRC 6058(b), for a Form 5310-A

  2. The IRS may waive the penalty for a failure to provide the information required by IRC 6058 under IRC 6652(e) if the plan administrator can show reasonable cause existed. See IRM 4.71.18.5.3, IRC 6652(e) Penalty Relief and Abatement.

  3. See IRM 4.71.18, Exhibit 20 at Employee Plans Examination Exhibits for a template to help you calculate IRC 6652(e) penalties.

  4. See IRM 4.71.18, Exhibit 25 at Employee Plans Examination Exhibits for a sample IRC 6652(e) Lead Sheet you may use as an examination workpapers.

Failure to Timely File Form 5500 - IRC 6652(e) Penalties

  1. Generally, IRC 6058(a) requires plan sponsors or plan administrators to file a Form 5500 series return (Form 5500 or Form 5500-EZ), Annual Return/Report of Employee Benefit Plan.

  2. Plan sponsors/administrators must pay a penalty under RC 6652(e) for failure to file a Form 5500 series return by the due date and in the prescribed manner required under IRC 6058(a).

  3. Generally, the due date for the Form 5500 (and appropriate schedules) is the last day of the 7th month after the plan year ends.

  4. Plan sponsors/administrators may be granted a one time extension of time (up to 2 1/2 months) to file Form 5500 and its required schedules by filing Form 5558.

    1. Plan sponsors/administrators must file Form 5558 on or before the original due date of the Form 5500.

    2. A timely filed Form 5558 gives the employer (plan sponsor) up to the 15th day of the 10th month following the last day of the plan year (October 15th for a calendar year plan) to file Form 5500.

  5. Plans are automatically granted extensions of time to file Form 5500 and its required schedules until the extended due date of the employer’s federal income tax return and aren’t required to file Form 5558 if all the following conditions are met:

    1. The plan year and the employer's tax year are the same

    2. The employer has been granted an extension of time to file its federal income tax return to a date later than the normal due date for filing the Form 5500

    3. If not filed electronically (for example, a Form 5500-EZ), a copy of the extension of time to file the federal income tax return must be attached to the Form 5500-EZ.

      Reminder:

      A Form 5500-EZ can’t be filed electronically. IRS accepts only paper returns.

      Note:

      Plan administrators no longer need to attach a copy of the extension of time to file the federal income tax return to the Form 5500 or Form 5500-SF when filed electronically. However, they should keep a copy of the extension with the plan’s records.

  6. Plans granted an extension under the conditions in IRM 4.71.18.5.1 (5), can’t further extend the due date by filing a Form 5558.

  7. Beginning January 1, 2010, special extensions which grant up to one year for related disaster areas are available to Form 5500 filers.

  8. The penalty for failure to file a Form 5500 series return on the due date in the prescribed manner under IRC 6652(e) is:

    1. $25 per day that the return is late, up to a maximum of $15,000.

    2. Assessed on the plan administrator (as defined in IRC 414(g)) or the employer (who may be jointly or severally liable).

  9. EP agent: Usually, penalties under IRC 6652(e) are automatically assessed on Master File when you secure a delinquent return or file a substitute for return (SFR).

    1. To confirm the penalty assessment was handled correctly, review a current EMFOLT print. If the penalty applies and wasn’t assessed, complete Form 8278 to assess the IRC 6652(e) penalty.

    2. See IRM 4.71.1.21(4), Amended, Substitute and Secured Forms 5500, for instructions on processing a Form 5500 substitute for return (SFR).

    3. See IRM 4.71.18.5.3, IRC 6652(e) Penalty Relief and Abatement, for procedures to abate IRC 6652(e) penalties that are incorrectly assessed.

  10. Complete Form 8278 as follows:

    1. On page 3, complete items 1 through 11.

    2. On page 3, on the last line of item 9, insert the penalty section and description under column 9(a) ("Failure to timely file Form 5500" ), insert Penalty Reference Number 552, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

Failure to Timely File Form 5310-A - IRC 6652(e) Penalties

  1. Generally, plan administrators must file an actuarial statement of valuation evidencing compliance with IRC 401(a)(12)for a merger, consolidation or transfer of assets or liabilities from one plan to another ( IRC 6058(b)). The Form 5310-A was designated by the IRS as the form the plan administrator or sponsor must file to satisfy the requirements. Form 5310-A is filed:

    1. When there is a plan merger, consolidation, spinoff, or when there is a transfer of assets or liabilities to another plan.

    2. For a pension plan, profit-sharing plan, or a deferred compensation plan (except a multi-employer plan covered by PBGC insurance).

    3. At least 30 days prior to a plan merger, consolidation, spinoff, or transfer of liabilities to another plan.

      Note:

      The form is late if not filed at least 30 days before any of these referenced activities.

  2. The Form 5310-A instructions note that plan administrators shouldn’t file a Form 5310-A when :

    1. An eligible rollover is paid directly to an eligible retirement plan in a direct rollover as described in IRC 401(a)(31), Optional Direct Transfer of Eligible Rollover Distributions; or

    2. The plan merger or consolidation, spinoff, or transfer of plan assets or liabilities complies with 1.414(l)-1(d), Merger of Defined Contribution Plans; 1.414(l)-1(h), De Minimis Rule for Merger of Defined Benefit Plan; 1.414(I)-1(m), Spinoff of a Defined Contribution Plan; or 1.414(I)-1(n)(2), Spinoff of a Defined Benefit Plan, De Minimus Rule.

  3. The penalty under IRC 6652(e) for not filing Form 5310-A on the due date in the prescribed manner is:

    1. $25 per day that the return is late, up to a maximum of $15,000.

    2. Assessed on the plan administrator (as defined in IRC 414(g)).

  4. If a IRC 6652(e) penalty applies but didn’t get assessed when the delinquent or SFR was processed, complete Form 8278 to assess.

    1. On page 3, complete items 1 through 11.

    2. On page 3, on the last line of section 9, insert the penalty section and description under column 9(a) ("Failure to timely file Form 5310-A" ), insert Penalty Reference Number 552, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 1 at Employee Plans Examination Exhibits for an example of Form 8278.

IRC 6652(e) Penalty Relief and Abatement

  1. The IRS may waive the penalty under IRC 6652(e) if the plan administrator can show reasonable cause.

    1. The plan administrator must request "penalty relief" based on reasonable cause in writing, provide all the facts alleged as reasonable cause and send a declaration by the appropriate individual that the statement is made under penalties of perjury.

    2. In Alton OB-GYN, Ltd. v. United States, 789 F. 2d 515 (7th Circuit 1986), the taxpayer’s reliance on a bank, as plan trustee, to handle ministerial duties of taxpayer’s pension and profit-sharing plans, did not constitute reasonable cause for the failure to timely file the required Form 5500 series return.

    3. See IRM 20.1.1.3.2 and Exhibit 20.1.8-3 for a discussion of reasonable cause penalty relief.

  2. If you discover that late filing penalties were incorrectly assessed on Forms 5500 and need to be abated:

    1. Secure an EMFOLT print for the applicable return,

    2. Contact one of EP Exam points of contact designated to contact the Service Center.

      Note:

      EP Exam will have at least three points of contact; one in the TE/GE Closing Group, one in Classification and one in EP Mandatory Review. Contact the managers of these units for the point of contact.

    3. Email or fax the EMFOLT print for the applicable return to the point of contact.

  3. The point of contact will review the EMFOLT print and determine if penalties should be abated.

  4. If the point of contact determines penalties should be abated, he/she completes Form 3870 and emails it to the designated person in the Ogden Campus to abate the penalties.

    Reminder:

    Do not contact the Ogden Campus directly. Go through your point of contact.

Failure to Give Notice to Recipients of Certain Pension Distributions - IRC 6652(h) Penalties

  1. IRC 6652(h) imposes a penalty on a payor for each failure to give notice concerning withholding to recipients of distributions from an employer’s deferred compensation plan or an IRA as required by IRC 3405(e)(10)(B).

  2. Generally, under IRC 3405(e)(10)(B) the payor of any type of payment listed below must provide the payee a notice that they may elect not to have withholding taken from the payment:

    1. Any annuity or similar periodic payment, or

    2. Any distribution which is not in the form of an annuity or a periodic distribution.

  3. The payor must transmit the notice of election to the payee :

    1. No earlier than six months before the first payment

    2. No later than the date the first payment is made

    Note:

    For periodic payments, notice must also be provided at least once in each calendar year of the right to make and revoke the election.

  4. The penalty under IRC 6652(h) is $10 for each failure to give notice, up to a maximum penalty of $5,000 for all such failures per calendar year.

  5. The IRS may waive the penalty under IRC 6652(h) if the payor can demonstrate that the failure was due to reasonable cause and not willful neglect.

  6. Complete Form 8278 to assess IRC 6652(h) penalties.

    1. Complete items 1 through 11.

    2. On the last line of section 9G, insert the penalty section and description under column 9(a), insert Penalty Reference Number 585, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 3 at Employee Plans Examination Exhibits for an example of Form 8278.

  7. See IRM 4.71.18, Exhibit 26 at Employee Plans Examination Exhibits for an example of the IRC 6652(h) Lead Sheet you may use in your examination workpapers.

Failure to Give Written Explanation to Recipients of Certain Qualifying Rollover Distributions - IRC 6652(i) Penalties

  1. Plan administrators (as defined in IRC 414(g)) are liable for a penalty under IRC 6652(i) for each failure to timely provide a written explanation of an eligible rollover distribution as required by IRC 402(f). Generally, IRC 6652(i) applies to retirement plans under IRC 401(a), IRC 408(a), IRC 408(b), IRC 403(a), and IRC 403(b).

  2. Generally, IRC 402(f) requires plan administrators of qualified plans to provide a written explanation to recipients of eligible rollover distributions that explains:

    1. The rules under which a recipient may elect a direct rollover to an eligible retirement plan

    2. Withholding of income tax if there is no direct rollover

    3. The rules which permit tax deferral on the distribution if it is rolled over into an eligible retirement plan within 60 days of distribution

    4. If applicable, information about IRC 402(d)

    5. Other rules applicable to exempt trusts (IRC 402(e))

  3. An eligible rollover distribution means any distribution to an employee of all or part of the balance to the credit of the employee in a qualified trust, other than certain periodic payments, hardship distributions, and distributions required by IRC 401(a)(9).

  4. The plan administrator must provide an explanation between 30 and 180 days before the date of the distribution.

  5. The penalty under IRC 6652(i) is $100 for each failure to provide a written explanation, up to a maximum penalty of $50,000 for all failures per calendar year.

  6. Complete Form 8278 when you assess IRC 6652(i) penalties.

    1. Complete items 1 through 11.

    2. On the last line of section 9G, insert the penalty section and description under column 9(a), insert Penalty Reference Number 586, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 4 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6652(i) penalties.

  7. See IRM 4.71.18, Exhibit 27 at Employee Plans Examination Exhibits for a sample IRC 6652(i) Lead Sheet that you may use as an examination workpaper.

Accuracy-Related Penalty for Forms 1040/1120 Discrepancy Adjustments - IRC 6662

  1. When you make a discrepancy adjustment on Form 1040 or Form 1120 resulting from a Form 5500 examination, determine whether to assess penalties.

  2. The most commonly applied penalty on a discrepancy adjustment case is the 20% negligence penalty under IRC 6662(a)

  3. When you determine that penalties apply for a Form 1040 or Form 1120 discrepancy adjustment:

    1. Get your group manager’s written approval for any penalty under IRC 6662. See IRC 6751(b).

    2. Document managerial approval in the case file on Form 5464.

    3. Apply any applicable penalties through the penalty menu in RGS. The program automatically computes the penalties and prints an explanation of the penalties assessed on the Form 4549-E report.

    4. When imposing IRC 6662 penalties, notify the taxpayer in writing that penalties are being assessed.

    5. When proposing IRC 6662 penalties, include a penalty write-up as part of the Revenue Agent Report (RAR) issued with the "30-Day Letter" (Letter 3605).

    6. Include IRC 6662 penalty calculations as an attachment to the RAR.

    7. Include a brief discussion of the applicability of penalties in the workpapers and whether or not penalties are being assessed.

  4. To prepare the case for penalty assessment, enter transaction code 680 and the amount of IRC 6662 penalties that are being assessed on Form 5599, Item 15– Increase in Adjustment Dollars (+) prepared for the Form 1040 or 1120 discrepancy adjustment.

  5. See IRM 4.71.4 for Form 1040/1120 discrepancy adjustment procedures.

  6. See IRM 4.71.18, Exhibits 28, 29 and 30 at Employee Plans Examination Exhibits for examples of IRC 6662 Lead Sheets that may be use in your examination workpapers.

Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions - IRC 6662A

  1. If a taxpayer has a Reportable Transaction that was properly disclosed and resulted in an understatement of tax for any tax year 20% of the amount of the understatement is added to the tax per IRC 6662A.

  2. The percentage increases from 20% to 30% if the Reportable Transaction is not properly disclosed (IRM 6662A(c) ).

    Note:

    The term Reportable Transaction is defined below in IRM 4.71.18.15 (6) and (7), Failure to Include Reportable Transaction Information With the Return - IRC 6707A Penalties.

  3. "Reportable Transaction understatement" per IRC 6662A(b)(1) means the sum of--

    1. The product of -
      (i) the amount of the increase (if any) in taxable income which results from a difference between the proper tax treatment of an item to which this section applies and the taxpayer's treatment of that item (as shown on the taxpayer's return of tax), and
      (ii) the highest rate of tax imposed by section 1 (section 11 for a taxpayer which is a corporation), and

    2. The amount of the decrease (if any) in the aggregate amount of credits determined under subtitle A which results from a difference between the taxpayer's treatment of an item to which this section applies (as shown on the taxpayer's return of tax) and the proper tax treatment of that item.

    3. Any reduction of the excess of deductions allowed for the taxable year over gross income for that year, and any reduction in the amount of capital losses which would (without considering section 1211) be allowed for that year, are treated as an increase in taxable income in determining the amount in (a) above.

  4. IRC 6662A applies to any item which is attributable to:

    1. Any Listed Transaction, and

    2. Any Reportable Transaction (other than a Listed Transaction) if a significant purpose of that transaction is the avoidance or evasion of federal income tax.

  5. If IRS Appeals rejects the proposed assessment of an IRC 6707A penalty because they determined that the transaction in question was not a Reportable Transaction, then the IRC 6662A penalty doesn’t apply, however, the IRC 6662(a) does.

  6. As requested by IRS Counsel, if you determine both IRC 6662A and IRC 6662(a) penalties apply, write the RAR with IRC 6662A as the primary issue and IRC 6662(a) as the alternative issue.

  7. IRC 6662A penalties don’t apply if the civil fraud penalties under IRC 6663 are applied.

  8. To prepare the case for penalty assessment, enter transaction code 681 and the amount of IRC 6662A penalties that are being assessed on Form 5599, Item 15– Increase in Adjustment Dollars (+) prepared for the Form 1040 or 1120 discrepancy adjustment.

Civil Fraud and Fraudulent Failure to File penalties – IRC 6663 and IRC 6651(f)

  1. IRC 6663 and IRC 6651(f) penalties may apply to EP cases. Most of EP’s fraud cases tie back to:

    • trust assets

    • prohibited transactions

    • unrelated business taxable income

    • related discrepancy adjustments.

  2. The civil fraud penalty is 75% of the portion of the tax underpayment which is attributable to fraud (IRC 6663).

    1. If any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud except for that portion of the underpayment which the taxpayer shows by the preponderance of evidence is not attributable to fraud.

    2. The civil fraud penalty is asserted against the additional tax due to fraud that results from the examination of a filed return. In other words, the taxpayer has filed the return but has under-reported his or her tax due and they knowingly and deliberately evaded taxes owed to the federal government.

    3. IRC 6663 penalties are discussed in detail in IRM 20.1.5.14, IRC 6663, Civil Fraud Penalty, and IRM 25.1.6, Civil Fraud.

  3. Per IRC 6651(f), a fraudulent failure to file (FFTF) penalty may also be asserted.

    1. If fraud is the reason the return was filed late, the return is subject to a late filing penalty of 15% per month or part of the month, up to a maximum of 75%.

      Reminder:

      The non-fraud penalty rate is 5% per month for each month or part of a month the return is late with a maximum penalty of 25% of the amount subject to IRC 6651(a)(1).

      .

    2. The FFTF penalty is asserted against the entire tax required to be shown on an unfiled or late filed return. The penalty results in a larger failure to file penalty due to evidence of fraudulent intent not to file a return and to evade taxes that the taxpayer knows are owed to the federal government.

    3. The FFTF penalty is discussed in detail in IRM 20.1.2.2.7.5, Fraudulent Failure to File—IRC 6651(f), and IRM 25.1.7, Failure to File.

  4. The EP Fraud Subject Matter Expert (EP Fraud SME) or the TEGE Fraud Specialist must be involved with the assertion of any type of fraud penalty. Consult with the EP Fraud SME before you assess penalties under IRC 6663 or IRC 6651(f).

    Note:

    Find contact information for the EP Fraud SME and the TEGE Fraud Specialist on the TEGE Home Page at the Fraud Contacts link.

  5. Your group manager must be involved in the decision to assert the civil fraud penalty. The decision whether to assert the civil fraud penalty is the shared responsibility of the agent, the group manager, the EP Fraud SME, the TEGE Fraud Specialist and Area Counsel. If you can’t reach agreement on assertion of the civil fraud penalty, the group manager makes the final decision.

  6. Involve Area Counsel early in the process. Be sure to fully disclose all facts of the case in the penalty discussion. Counsel must give written approval before you assess the FFTF penalty.

  7. To prepare the case for penalty assessment, enter transaction code 320 and the amount of IRC 6663 or IRC 6651(f) penalties that are being assessed on Form 5599, Item 12– Penalties (+).

Fraudulent Statement or Failure to Furnish Statement to Plan Participant - IRC 6690 Penalties

  1. The penalty under IRC 6690 is $50 for each act or failure (no maximum amount) on a plan administrator who either:

    1. Willfully fails to furnish a statement to a plan participant showing the information at the time and in the manner required by IRC 6057(e)

    2. Willfully furnishes a false or fraudulent statement.

  2. Generally, the individual statement to a participant required by IRC 6057(e) must include the following:

    1. A description of the participant’s deferred vested retirement benefit

    2. Information filed for the participant on Form 8955-SSA

    3. Notice to the participant of any benefits that are forfeitable in the event the participant dies before a certain date. See IRC 6057(a).

  3. The plan administrator must provide the statement to the individual by the due date (including extensions) for the Form 8955-SSA that reports information with respect to the individual.

  4. The penalty is assessed on Master File (MFT 74).

  5. Because the penalty under IRC 6690 is imposed on a willful failure to provide the statement, or a willful furnishing of a false or fraudulent statement, it’s ineligible for reasonable cause consideration.

  6. Complete Form 8278 when IRC 6690 penalties are being assessed.

    1. Complete items 1 through 11.

    2. On the last line of section 9G, insert the penalty section and description under column 9(a), insert Penalty Reference Number 168, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 7 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6690 penalties.

  7. See IRM 4.71.18, Exhibit 31 at Employee Plans Examination Exhibits for an example of the IRC 6690 Lead Sheet you may use in your examination workpapers.

Failure to Timely File Form 5500 Schedule SB or Schedule MB - IRC 6692 Penalties

  1. IRC 6692 imposes a penalty of $1,000 for each failure to file (without a maximum amount) on the plan administrator of a defined benefit plan subject to IRC 412, Minimum Funding Standard, when the plan administrator fails to file an actuarial report (Form 5500, Schedule SB or MB), in the time and manner as required by IRC 6059. If more than one plan administrator is responsible for the failure, all are jointly and severally liable.

  2. The penalty under IRC 6692 is imposed if the plan administrator fails to file Schedule SB or Schedule MB; required attachments for certain Form 5500 (series) filings.

  3. The penalty also applies if:

    1. An enrolled actuary failed to sign the Schedule SB or MB,

    2. There is a failure to provide a material item of information required by Schedule SB or MB, or

    3. There is a failure to provide base information required by the actuarial report upon an actuarial valuation made in the time and manner required by IRC 412(c)(9).

  4. Usually, the penalty is automatically assessed on Master File when the Form 5500 return is filed and processed. To confirm the penalty assessment was handled correctly, review a current EMFOLT print. If the penalty applies and wasn’t assessed, complete Form 8278 to assess the IRC 6692 penalty.

  5. The IRS may waive the IRC 6692 penalty if the responsible party can show that the failure was due to reasonable cause.

    Note:

    An actuary’s failure to give the plan administrator a complete Schedule SB or MB on time is not reasonable cause.

  6. The plan administrator must request "penalty relief" based on reasonable cause in writing, provide all the facts alleged as reasonable cause and send the appropriate individual’s declaration that the statement is made under penalties of perjury.

  7. Complete Form 8278 when IRC 6692 penalties are being assessed.

    1. Complete items 1 through 11.

    2. On the last line of section 9G, insert the penalty section and description under column 9(a), insert Penalty Reference Number 169, complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 8 at Employee Plans Examination Exhibits for a sample of Form 8278 for IRC 6692 penalties.

  8. See IRM 4.71.18, Exhibit 32 at Employee Plans Examination Exhibits for a sample IRC 6692 Lead Sheet you may use as an examination workpaper.

Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities - IRC 6693 Penalties

  1. Penalties may be assessed on Individual Retirement Arrangements under IRC 408(a), Individual Retirement Annuities under IRC 408(b) such as those in Simplified Employee Pensions (SEPs) under IRC 408(k) or a Simple Retirement Accounts (SIMPLE IRAs) under IRC 408(p) (IRC 6693).

  2. Penalties under IRC 6693 are established on Master File either on the employer or trustee for failure to file reports required under:

    1. IRC 408(i) and IRC 408(l) for IRAs (accounts and annuities)

    2. IRC 6693(a) for SEPs and IRC 6693(c) for SIMPLE IRA plans.

  3. Complete Form 8278 to assert IRC 6693 penalties by ensuring:

    1. Items 1 through 11 are complete.

    2. That sections 9G, on the Penalty Code Section 6693(c) line (next to penalty reference number 573) 9(c) (Number of Violations), and 9(d) (Amount Assessed) are complete.

      Note:

      This applies to penalties under both IRC 6693(a) and IRC 6693(c). IRC 6693(a) penalties are also asserted on this line.

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 9 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6693 penalties.

  4. See IRM 4.71.18, Exhibits 33, 34, and 35 at Employee Plans Examination Exhibits for sample IRC 6693 Lead Sheets you may use as examination workpapers.

Penalties Under IRC 6693(a)

  1. IRC 6693(a) imposes a penalty of $50 for each failure to furnish a report required by IRC 408(i) or IRC 408(l) for IRAs including SEPs and SIMPLE IRA plans.

    IRC Section Responsible Party Requirements Due Date of Report
    IRC 408(i) Each trustee or issuer must file and furnish:
    1. Annual calendar year reports on Form 5498 on the status of the IRA.

    2. A statement containing the Form 5498 required information plus the value of the IRA at the end of the calendar year.

      Note:

      The trustee/issuer may use a copy of the Form 5498 to satisfy this requirement.

    3. Disclosure statements and copies of the governing instruments to "benefited individuals " (the individual for whom an IRA is established).

    1. May 31

    2. the next Jan. 31.

    IRC 408(l) Employers who adopt/make contributions to a SEP must give employees:
    1. a report when they adopt the SEP showing: its adoption, contribution requirements, and allocation basis.

    2. a written statement each calendar year indicating the amount of employer contribution to the employee’s IRA.

      Note:

      The employer satisfies this requirement if the information is on the employee’s W–2 for the calendar year in which the contribution is made.

    1. by a reasonable time after the later of:

      • employee’s date of hire

      • SEP adoption date.

    2. May 31 (except for SIMPLE IRAs).

  2. IRS may waive penalties under IRC 6693 if the responsible party shows that the failure is due to reasonable cause.

Penalties Under IRC 6693(c)

  1. The trustee, IRA issuer or employer is subject to a $50 penalty each day they don’t furnish certain information required under IRC 408(i)and IRC 408(l)(2) to participants in SIMPLE IRA plans described in IRC 408(p) (IRC 6693(c)).

    IRC Section Responsible Party Requirements Due Date
    IRC 408(l)(2)
    1. Trustee or SIMPLE IRA issuer must furnish the employer each calendar year: a summary description containing information about the SIMPLE IRA plan, the employer maintaining the plan, and the trustee or issuer.

    2. Employer must notify eligible employees of their right to participate in the plan. The notice must include a copy of the applicable summary description.

    1. In time for the employer to meet the IRC 408(l)(2) notice requirement. In most cases this will be shortly before November 2nd of each calendar year.

    2. Before the 60-day election period (during which eligible employees can make or change salary deferral elections) per IRC 408(p)(5)(C).

    IRC 408(i) The trustee or SIMPLE IRA issuer each calendar year, must provide the SIMPLE IRA owners a statement showing the account balance at 12/31 and the account activity during the calendar year. They can use a copy of the Form 5498 to satisfy this requirement. By 31 days after the end of the calendar year.
  2. IRS may waive penalties under IRC 6693 if the responsible party can show that the failure is due to reasonable cause.

  3. The IRC 6693(c) penalty imposed on a trustee or an employer does not apply when;

    1. The trustee timely provides the required information directly to the employee covered by the SIMPLE IRA plan.

    2. The employee covered by the SIMPLE IRA plan has selected his or her own trustee and the information about that trustee is unavailable when the employer is required to provide the notice containing such information to the employee and the employer takes steps to ensure the missing information reaches the employee as soon as reasonably possible.

Failure to Keep Records Necessary to Meet Reporting Requirements - IRC 6704 Penalties

  1. The plan administrator (as defined in IRC 414(g)) and any person issuing any contract under which designated distributions may be made, must under IRC 6047(d) make returns and reports on that plan or contract to:

    • The Secretary

    • The participants

    • The beneficiaries

  2. IRC 6704(a) imposes a penalty on any person who:

    1. Has a duty to report or may have duty to report any information under IRC 6047(d), and

    2. Fails to keep these records to provide the necessary data base for either current reporting or future reporting.

  3. The penalty under IRC 6704(b) is $50, per each calendar year, multiplied by the number of individuals for whom the failure occurred (up to a maximum of $50,000).

  4. Penalties under IRC 6704(c)(1) may be waived if the responsible party shows the failure is due to reasonable cause and not willful neglect.

  5. The responsible party must request "penalty relief" due to reasonable cause in writing and provide all the facts to substantiate reasonable cause. The statement must contain the responsible party’s declaration that the statement is made under penalties of perjury.

  6. Complete Form 8278 to assert IRC 6704 penalties by ensuring:

    1. Items 1 through 11 are complete.

    2. That sections 9G, on the Penalty Code Section 6704 line (next to penalty reference number 639), 9(c) (Number of Violations), and 9(d) (Amount Assessed) are complete.

    3. The agent and manager must sign and date the form.

    4. Place Form 8278 in a separate "Penalty File" with Form 3198-A with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    5. See IRM 4.71.18, Exhibit 10 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6704 penalties.

Failure to Include Reportable Transaction Information With the Return - IRC 6707A Penalties

  1. The IRC 6707A penalty is:

    1. For failing to include on any statement or return (including an amended return) any information required to be disclosed under IRC 6011 and associated regulations on Reportable Transactions (see IRM 4.71.18.15 (6)(a) below.)

    2. In addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement of tax.

    3. A stand-alone penalty, meaning it does not require an associated income tax examination.

  2. Taxpayers that are publicly traded companies are required to disclose their liability for IRC 6707A penalties in public reports filed with the Securities and Exchange Commission (IRC 6707A(e).

  3. Unlike most other penalties, the IRC 6707A penalty contains no reasonable cause exception in many instances.

    1. The penalty canbe rescinded for a Listed Transaction (see IRM 4.71.18.15 (6)(b) below).

    2. The Commissioner (or his delegate) may rescind the imposition of the penalty for a Reportable Transaction that is not a Listed Transaction if it would promote compliance with the tax laws and effective tax administration.

      Note:

      A decision to rescind must be accompanied by a record describing the facts, reasons for the decision, and the amount rescinded.

    3. While a taxpayer may challenge (through Appeals and/or through tax court) the IRS’s determination that it engaged in a Reportable Transaction or that it failed to timely and adequately disclose its participation in such a transaction, it cannot seek such review of the Commissioner’s refusal to rescind the penalty.

  4. The IRS is required to submit an annual report to Congress summarizing the application of the IRC 6707A penalty and the rescission provision.

  5. Determining whether the IRC 6707A penalty applies can impact your determination of the IRC 6662A penalty (“Reportable Transaction Understatement”), covered in IRM 4.71.18.9, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions - IRC 6662A.

  6. Definitions of key terms used in this section are as follows:

    1. A Reportable Transaction is defined in IRC 6707A(c) as a transaction that the IRS determined, under the IRC 6011 regulations, is a type having a potential for tax avoidance or evasion.

    2. A Listed Transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a Listed Transaction and are therefore subject to the disclosure requirements per 26 CFR 1.6011-4.

  7. In addition to the definition in IRM 4.71.18.15 (6)(a) above, a Reportable Transactions is further defined in 26 CFR 1.6011-4 to include:

    1. Listed Transactions

    2. Confidential transactions

    3. Transactions with contractual protection

    4. Certain loss transactions

    5. Transactions of interest

  8. The IRC 6707A penalty related to a Listed Transaction is 75% of the decrease in tax shown on the return as a result of the Reportable Transaction (or which would have resulted from that transaction if that transaction were respected for federal tax purposes) with the following maximum and minimum limits :

    1. The maximum penalty is $100,000 for each year in the case of a natural person.

    2. The maximum penalty is $200,000 for each year in any other case.

    3. The minimum penalty is $5,000 for a natural person and $10,000 for all other taxpayers.

  9. For a Schedule C Business, the IRC 6707A penalty related to a Listed Transaction is on the Form 1040 filer.

    1. The penalty can be applied for each year.

    2. If Form 1040 is jointly filed, the penalty is applied to each spouse individually if both spouses "participated" in the transaction.

    3. If only one spouse has "participated" in the transaction, only propose the penalty against the spouse who participated.

    4. If each spouse was independently involved in the transaction, propose a maximum $100,000 or a minimum $5,000 penalty against each spouse. Set up a penalty case in the name and SSN of each spouse.

  10. For a Form 1120, the IRC 6707A penalty related to a Listed Transaction is on the Form 1120 filer only.

  11. For a Form 1065 or Form 1120-S, the IRC 6707A penalty related to a Listed Transaction is on the Form 1065 or 1120-S filer and on each partner or shareholder's Form 1040.

    1. The penalty on the Form 1065 or Form 1120-S is a maximum of $200,000 or a minimum of $10,000 each year.

    2. The penalty on each partner's or shareholder's Form 1040 is a maximum of $100,000 or a minimum of $5,000. If a joint Form 1040 return is filed, see IRM 4.71.18.15 (9) above to determine whether to apply a penalty to each spouse.

  12. The penalty for failing to furnish information for a Reportable Transaction that is not a Listed Transactions is 75% of the decrease in tax shown on the return as a result of the Reportable Transaction (or which would have resulted from such transaction if that transaction were respected for federal tax purposes) with the following maximum and minimum limits :

    1. The maximum penalty is $10,000 for each year in the case of a natural person (see IRM 4.71.18.15 (9) for more details).

    2. The maximum penalty is $50,000 for each year in any other case.

    3. The minimum penalty is $5,000 for a natural person and $10,000 for all other taxpayers.

  13. If a Reportable Transaction exists, IRC 6011 requires that the transaction be reported on the applicable tax returns (for example Forms 1040, 1120, 1120-S, or 1065) of the entities involved in the transaction.

    Note:

    Form 5500 is not subject to IRC 6707A penalties.

  14. Taxpayers must file a disclosure with Office of Tax Shelter Analysis (OTSA) per 26 CFR 1.6011-4(e).

    1. A taxpayer filing a Form 8886 with a return for the first time is required to file a duplicate copy with OTSA at the same time.

    2. The requirement to file Form 8886 arises for a return for the taxable year in which participation in a Reportable Transaction begins.

    3. The requirement to file a duplicate disclosure statement with OTSA applies only to the initial year the Form 8886 is filed.

  15. The following two examples show how the IRC 6707A penalty for failure to comply with the requirement to file a Reportable Transaction Disclosure Statement applies:

    1. Example 1: Taxpayer T is required to attach a Form 8886 to his 2017 tax return and send a copy to OTSA when he files his return, but fails to do either. Taxpayer T is subject to a single penalty under IRC 6707A for failure to disclose because Taxpayer T didn’t comply with the disclosure requirements of IRC 6011. A penalty under IRC 6707A also would apply if Taxpayer T didn’t comply with only one of the two requirements.

    2. Example 2: Assume the same facts as Example 1, except that Taxpayer T later amends his 2017 return to reflect his participation in the Reportable Transaction, but still fails to attach a Form 8886 to the amended return as required by 26 CFR 1.6011-4(e)(1) of this chapter. Taxpayer T is subject to an additional penalty under IRC 6707A for failing to disclose a Reportable Transaction.

  16. Under the current regulations, filing an amended return to include a disclosure (Form 8886), doesn’t cure the initial failure to file a disclosure with the original return unless the taxpayer files the amended return before the due date of the original return (whether extended or not).

    1. Example 3: Assume Taxpayer T’s extended due date is August 15th. On June 1, he files a return but doesn’t include the required disclosure. On September 1 (after the due date of the return), he files an amended return with the disclosure. He is still liable for the penalty. It doesn’t matter that he attempted to fix the problem or whether he attempted to do so before or after the IRS discovered his participation.

    2. Example 4: Assume the same facts as Example 3 except that Taxpayer T filed the amended return before August 15th. The amended return would be considered a "superseding return" treated as the original return. Because this "superseding return" was filed with the required disclosure before the due date (as extended), Taxpayer T is not liable for the IRC 6707A penalty.

  17. The IRC 6707A penalty is not imposed:

    1. Until a taxpayer files a return and fails to provide the required disclosure statement.

    2. When a taxpayer hasn’t filed a return, even if its due date passed.

    3. When a taxpayer doesn’t timely file a return (or required disclosure statement)) but later files it with the required disclosure statement.

  18. Whether a taxpayer was required to disclose under the IRC 6011 regulations depends on what version of those regulations was in effect when the taxpayer entered into the transaction.

    1. The version of the regulations that applies to a transaction when the taxpayer entered into the transaction continues to apply to the taxpayer, even if the regulations are subsequently modified.

    2. When the IRC 6011 regulations don’t impose a disclosure requirement, the IRC 6707A penalty can’t apply.

    3. Therefore, even if a taxpayer files a tax return after October 22, 2004, reflecting participation in a listed or non-listed Reportable Transaction and fails to file a Form 8886, they may not be subject to the Section 6707A penalty.

    4. If a taxpayer entered into the transaction before 2001, it would be subject to the disclosure regulations only if it was a corporation and the taxpayer reasonably estimated that the transaction would reduce the taxpayer's federal income tax liability by more than $1 million in any single taxable year or by a total of more than $2 million for any combination of taxable years. This rule is often referred to as the "old rule" .

    5. If the taxpayer entered into the transaction on or after January 1, 2001, but before January 1, 2003 and filed its tax return reporting the transaction (i.e. reflecting the tax impact of that transaction) on or before June 14, 2002, the taxpayer is subject to the provisions listed in d) above ("the old rule" ). In other words, the taxpayer is subject to the disclosure rules only if it was a corporation and the transaction reduced the taxpayer’s federal income tax liability by the threshold amounts listed under the “old rule” above.

    6. If the taxpayer entered into the transaction on or after January 1, 2001 and did not file its tax return reporting the transaction (i.e. reflecting the tax impact of that transaction) on or before June 14, 2002, the taxpayer is subject to the disclosure rules if it was a corporation, individual, trust, partnership, or S corporation. However, taxpayers other than corporations were only subject to the disclosure rules with respect to Listed Transactions. Listed Transactions no longer had to meet the projected tax effect test.

    7. All taxpayers required to file a tax return are subject to the disclosure rules for all Reportable Transactions, including Listed Transactions if the transaction is entered into on or after January 1, 2003.

  19. If the taxpayer didn’t file Form 8886 with the applicable tax return(s) and OTSA, and the applicable transaction is a Listed Transaction, IRC 6501(c)(10) controls the statute of limitations of assessment.

    1. Generally, the statute of limitations period for IRC 6707A is determined by the statute of limitations for the applicable tax return(s) (Forms 1040, 1120 1120-S or 1065), which is the later of three years from the date the return is filed or due.

    2. If the normal statute has expired, you must contact Counsel to see if they’ll support an extended statute under IRC 6501(c)(10). Pursue an extended statute only with Counsel’s written concurrence. Include Counsel’s email or memo with their approval in the penalty case file.

  20. Taxpayers have pre-assessment appeal rights for IRC 6707A penalties.

    1. To secure pre-assessment appeal rights, the taxpayer must file a timely, written protest to the 30-Day letter.

    2. Unlike other cases that EP Exam sends to Appeals, the IRC 6707A penalty case remains open in the examination group while Appeals considers the penalty.

Processing IRC 6707A Penalties

  1. A taxpayer’s liability for the IRC 6707A penalty may be determined through examination of the taxpayer’s return or through the investigation of a promoter or preparer.

    1. If discovered though a promoter/preparer investigation, you may determine the taxpayer’s liability for the penalty without opening an examination on the taxpayer.

    2. Pursuit of the IRC 6707A penalty neither constitutes an examination of the tax return to which the penalty is applied, nor does it prevent IRS from subsequently examining the return.

  2. The IRC 6707A penalty may be imposed if you obtain sufficient evidence to support a conclusion that the taxpayer participated in a Reportable Transaction, had a duty to disclose that participation, and failed to properly disclose. There must also be sufficient factual information to support the calculation of the penalty amount. This is true even if:

    1. An income tax examination (such as a discrepancy adjustment) results in no change in tax liability.

    2. IRS doesn’t open an income tax examination.

  3. If EP is involved in a concurrent examination with SB/SE or LB&I, then the penalty case file will be under the jurisdiction of the SB/SE or LB&I agent; otherwise EP has jurisdiction.

  4. When there is a concurrent examination with SB/SE or LB&I, the EP agent will:

    1. Analyze and write up whether a transaction is substantially similar to a Listed Transaction.

    2. Contact the SB/SE or LB&I agent and provide any information that will help develop the penalty case.

    3. If SB/SE or LB&I works the IRC 6707A penalty case, see IRM 4.71.18.15.3, Transferring an IRC 6707A Penalty Case to SB/SE or LB&I, for the applicable procedures.

  5. When working a penalty case, determine if the applicable taxpayer timely reported the Reportable Transaction (Listed Transaction) by:

    1. Obtaining the original tax returns to determine if the Form 8886 was attached to the returns.

    2. Verifying the Form 8886 was filed with OTSA.

  6. Document the 5500 file accordingly (detail the steps you took to verify the filing). Clearly show in your file when a IRC 6707A penalty case is:

    1. Not opened because Form 8886 was filed with the return(s) and OTSA.

    2. Opened because Form 8886 was not filed with the return(s) or OTSA (or both).

  7. If you determine that a taxpayer either has failed to properly disclose a Reportable Transaction on Form 8886 or has not timely filed the Form 8886, get your group manager’s and Area Manager’s approval before opening an IRC 6707A penalty examination.

    1. Complete "Case Overview and Record of Approval of IRC 6707A Penalty" .

    2. Submit the case file and the approval form to your group manager for written approval of the imposition of the penalty within 10 calendar days of your determination that the penalty applies.

  8. Group manager:

    1. Review the case development and if you approve, electronically sign and date the approval form.

    2. If SBSE or LB&I pursues the IRC 6707A penalty, return the case file to the agent to process.

    3. If EP pursues the IRC 6707A penalty, forward the package to his or her Area Manager.

    4. If the IRC 6707A penalty is the maximum penalty allowable under 6707A (the penalty was determined under IRC 6707A(b)(2)), forward the file to the Director, EP Examinations for approval.

    5. The EP Area Manager or Director, EP Examinations, as appropriate, will review the case development and approve in writing the assertion of the penalty on the approval form.

    6. See IRM 4.71.18, Exhibit 11 at Employee Plans Examination Exhibits for a copy of the approval form.

  9. Agent: When you receive approval:

    1. Prepare a separate case file for the IRC 6707A penalty for each affected taxpayer and each affected year.

    2. Establish each individual taxpayer and each year on NMF AIMS and RCCMS.

      Note:

      Unlike other penalty cases, IRC 6707A penalty cases are worked as Non-Return Units (NRU) and are established on NMF AIMS per IRM 4.71.17, Non-Return Unit Examinations.

  10. IRC 6707A penalty case files contain the same items as other types of EP exams like a case chronology record, Form 5772 workpapers and correspondence between the agent and the taxpayer or POA.

  11. If only one spouse has participated in a Reportable Transaction (only one spouse is subject to the IRC 6707A penalty), propose the penalty against the participant-spouse.

    1. Determine the decrease in tax shown on the return as a result of this transaction (or which would have resulted from such transaction if this transaction were respected for federal tax purposes) and determine the penalty amount under IRC 6707A(b)(1).

    2. Apply the minimum and maximum penalty amounts as listed above and in IRC 6707A(b)(2) and (3).

  12. If both spouses participated in a Reportable Transaction (e.g., both spouses are subject to the IRC 6707A penalty), propose the penalty against each spouse (the agent should open separate IRC 6707A cases for the husband and wife).

    1. Determine the decrease in tax shown on the return as a result of the transaction (or which would have resulted from that transaction if that transaction were respected for federal tax purposes) and determine the penalty under IRC 6707A(b)(1).

    2. Allocate the penalty determined under (a) above, 50% to each spouse, unless the taxpayers provide clear evidence supporting an alternative allocation (e.g., the taxpayers provide a K-1 indicating ownership percentage).

    3. Apply the minimum and maximum provisions of IRC 6707A(b)(2) and (3) to each spouse separately.

  13. Use the EP form letter developed to notify the taxpayer that the IRS is opening an IRC 6707A investigation. See IRM 4.71.18, Exhibit 12 at Employee Plans Examination Exhibits for a copy of the letter.

  14. The letter will be sent by:

    1. The EP agent, if EP is pursuing the penalty.

    2. The SBSE or LB&I agent, if SBSE or LB&I is pursuing the penalty.

  15. The penalty case file will contain:

    1. All relevant documents or other evidence that demonstrates that the transaction was a Reportable Transaction (transactional documents), email, other correspondence, opinions about whether the transaction is a Reportable Transaction or promotional material.

    2. Where applicable, any evidence about why a disclosure is deficient, including the Form 8886 and any other evidence about the time or manner of filing the Form 8886.

  16. When Form 2848 is secured for an IRC 6707A penalty case, item 3 of the form must reflect "Income Tax and Civil Penalties" in order for the Service to recognize the individual as a representative for both the income tax return and the penalty.

    Note:

    If "Civil Penalties" is not reflected on the form, the individual won’t be recognized as having the proper authority to represent the taxpayer on the penalty case.

  17. After all the written approvals are obtained to assert the IRC 6707A penalty (see IRM 4.71.18.15.1 (7)), prepare and mail (via certified mail) the 30-Day letter (Letter 4143) and the appropriate forms and publications as follows:

    • Form 870-EP with the amount of the IRC 6707A penalty listed

    • RAR

    • Computation Workpapers (Form 4549-E used to determine the "tax effect" from participating in the transaction)

      Note:

      This Form 4549-E should be clearly marked in red at the top of the first page: "For IRC 6707A penalty computation purposes only" .

      )

    • Publication 1

    • Publication 5

    • Publication 594

  18. Generally, the 30-Day letter (Letter 4143) for the penalty case should be issued by the group with at least 270 days remaining on the period of limitations on assessment. This will allow sufficient time for the:

    1. Taxpayer to respond to the 30-Day letter issued by the agent and extend the statute of limitations, if less than one year remains on the statute.

      Note:

      Appeals won’t accept a case if less one year remains on the statute of limitations.

      Note:

      See IRM 4.71.9.8, Securing Consents for IRC 6707A Penalties, for further instructions on extending the statute.

    2. Agent to send the unagreed case to Mandatory Review to issue the 90-Day Letter if the taxpayer does not Protest to Appeals or won’t extend the statute of limitations.

      Note:

      If the taxpayer refuses to extend the statute and all relevant facts to support the penalty are established, send the unagreed case to Mandatory Review with at least 210 days remaining on the period of limitations on assessment.

      Note:

      Prior to closing any cases to Mandatory Review, the field group manager must call the Manager, EP Mandatory Review to discuss the case, the statute of limitations, and to obtain mailing instructions.

  19. If you receive a valid Protest to Appeals, the group will send the case directly to Appeals. See IRM 4.71.5.9.3, Cases to Appeals, for general procedures when sending a case to Appeals.

  20. Prior to closing a case to Mandatory Review for issuance of a 90-Day Letter, the field group manager must call the Manager, EP Mandatory Review to discuss the case and obtain mailing instructions. See IRM 4.71.18.1.5, Contact Information for Business Units.

  21. When developing an IRC 6707A penalty case with an income tax examination (a discrepancy adjustment) don’t arbitrarily keep one case open to allow the other case to "catch up" if:

    1. You established all relevant facts to support the penalty before the 30-Day Letter is issued for the IRC 6707A penalty OR you don’t need to conclude the IRC 6707A penalty investigation before 30-Day Letter is issued for the income tax examination.

    2. You’ve developed the penalty case enough to determine whether IRC 6662A applies before issuing the 30-Day Letter on the income tax exam.

    3. 30-Day letters for both the income tax and IRC 6707A penalty case(s) should be issued at the same time.

  22. If, after opening an IRC 6707A penalty investigation and contacting the taxpayer, IRS determines that the IRC 6707A penalty doesn’t apply:

    1. Issue a no-change letter specifically addressing this penalty. See IRM 4.71.18, Exhibit 13 at Employee Plans Examination Exhibits for a copy of the letter.

    2. Prepare the Form 3198-A and in the "Other Instructions" section of the form, include the following comment: "IRC 6707A penalty closed No Change. Closing letter has been issued to taxpayer by Group Manager."

    3. Comment in RCCMS Closing Record: "It has been determined that the 6707A penalty does not apply. No assessment is to be made. Case is closed as a No Change. A hard copy of the case file will follow. Case is on NMF AIMS."

    4. Prepare Form 5599 per IRM 4.71.18.15.1 (26) for the NMF AIMS controls and save a copy in the Office Docs folder in RCCMS. The disposal code is 02 in item 13 and there should be no entry in item 15

    5. Close the case per IRM 4.71.18.15.1 (27) and (28).

  23. The penalty is "agreed" if the taxpayer signs Form 870-EP with the penalty amount listed.

  24. If the taxpayer makes a payment for penalties due, follow the instructions in IRM 4.71.4.5.1(5) through (9), Agreed Tax Change, with the following exceptions:

    1. Show on Form 3244-A the proper MFT as 13 (if the entity is a business) or 55 (for an individual taxpayer) and use TC 640 advance payment code. See IRM 4.71.18, Exhibit 14 at Employee Plans Examination Exhibits for an example of Form 3244-A.

    2. Include on Form 3210"Reference Number 648" next to the MFT and the appropriate statement: "This check is for payment of a CIVIL PENALTY - IRC 6707A - to be posted to the BMFOL" or "This check is for payment of a CIVIL PENALTY - IRC 6707A - to be posted to the IMFOL" . See IRM 4.71.18, Exhibit 15 at Employee Plans Examination Exhibits for an example of Form 3210.

  25. Complete Form 8278 to assert IRC 6707A penalties.

    1. Complete items 1 through 11.

    2. In section 9E, on the Penalty Code Section 6707A line (next to penalty reference number 648), complete 9(c) (Number of Violations) and 9(d) (Amount Assessed).

    3. The agent and manager must sign and date the form.

    4. See IRM 4.71.18, Exhibit 16 at Employee Plans Examination Exhibits for an example of Form 8278 completed for an IRC 6707A penalty case.

  26. Complete the following line items on Form 5599 for all IRC 6707A examinations:

    1. P7-18: Enter the taxpayer’s TIN followed by a "N" .

    2. P21-22: The MFT is 99.

    3. P24-29: Enter the tax period.

    4. P31-34: Enter the name control.

    5. C: Enter the name of the taxpayer.

    6. Item 13: Enter the applicable disposal code: 02 if case is closed "no change" ; 03 if the penalty is agreed (taxpayer signs Form 870-EP); 07 if the taxpayer protests to Appeals; 10 if the taxpayer neither protests nor signs Form 870-EP; 13 if the penalty case is transferred to SB/SE or LB&I.

    7. Item 14: Enter the statute expiration date.

    8. Item 15: Enter the penalty amount with reference code 648.

    9. Item 28: Enter the examiner’s time on the case.

    10. Item 30: Enter the technique code:
      4 – Field exam - full scope
      7 – Field exam - limited scope/focused audit

    11. Item 31: Enter the examiner’s grade.

    12. Item 32: Enter the grade of the case in the blocks from left to right as two digits (i.e., Grade 9= 09)

    13. Item 33: Enter the examiner’s last name; leave a space and then first initial.

    14. Item 40: Enter the applicable project code.

    15. Item 42: Enter the ARDI code, if applicable.

    16. Item 48: Enter the EP Special Project Code Definer, if applicable.

    17. Item 50: Enter the examiner’s group code.

    Note:

    See IRM 4.71.18 Exhibit 9 at Employee Plans Examination Exhibits for an example of a completed Form 5599.

  27. When the case is ready to close, complete:

    1. All of the appropriate RCCMS closing actions; however, do not check the "Update AIMS" box.

    2. Form 5595 for an update to the case for Status Code 51 on NMF AIMS and place it in the paper case file.

    3. Case assembly of all case files per IRM 4.71.18.15.4, IRC 6707A Penalty Case File Assembly.

  28. Close IRC 6707A penalty cases to:

    1. EP Mandatory Review if "unagreed" .

      Note:

      Prior to closing any cases to Mandatory Review, the field group manager must call the Manager, EP Mandatory Review to discuss the case and obtain mailing instructions.

      Note:

      See IRM 4.71.18.1.5, Contact Information for Business Units.

    2. The TE/GE Closing Group if "agreed" or "no change" . See IRM 4.71.18.1.5, Contact Information for Business Units.

Statute of Limitations for Assessing IRC 6707A Penalties

  1. Generally, the statute of limitations for purposes of IRC 6707A is determined by the statute of limitations for the applicable tax return(s) (Forms 1040, 1120, 1120-S or 1065), which is the later of three years from the date the return is filed or due.

  2. If Form 8886, Reportable Transaction Disclosure Statement, is not filed with the applicable tax return(s) and the OTSA, IRC 6501(c)(10) will control the statute of limitations for purposes of penalty assessment.

    Note:

    Pursue IRC 6501(c)(10) only with Counsel’s written concurrence and include Counsel’s approval in the penalty case file.

  3. When securing an extension on a Form 1120, Form 1120-S, Form 1065, or Form 1040 return (the return for the taxpayer for which the penalty is being applied), prepare Form 872 per IRM 4.71.9.8, Securing Consents for IRC 6707A Penalties.

  4. If you’re extending:

    1. Both the income tax statute and IRC 6707A penalty statute, list "Income and IRC 6707A Penalty" on the Kind of tax line of Form 872

    2. Only the IRC 6707A penalty statute, list "IRC 6707A Penalty " on the Kind of tax line of Form 872.

  5. Add an additional paragraph (6) to the consent that reads as follows: "Without otherwise limiting the applicability of this agreement, this agreement also extends to the expiration date identified in paragraph (1) above, the period of limitations for assessing any penalty pursuant to IRC 6707A, Penalty For Failure to Include Reportable Transaction Information with the Return, with respect to the taxpayers, kind of tax and tax periods identified above."

  6. See IRM 4.71.9.8, Securing Consents for IRC 6707A Penalties, for more detailed information on statute of limitations procedures for IRC 6707A.

Transferring an IRC 6707A Penalty Case to SB/SE or LB&I

  1. When there is a concurrent examination in SB/SE or LB&I and either SB/SE or LB&I decides to work the IRC 6707A penalty exam:

    1. Keep a copy of the RAR, the Case Overview and Record of Approval of IRC 6707A Penalty form, and the Acknowledged copy of the Form 3210 in the workpapers of the 5500 case file under Form 5772, Section R – Penalties.

    2. Manually prepare a Form 3210, addressed to the SBSE/LB&I agent assigned the collateral case and mail the IRC 6707A penalty case file to the SBSE/LB&I agent.

    3. When you receive the Acknowledged copy of the Form 3210, add this comment in the RCCMS Closing Record: "Referral was made to SBSE (or LB&I). There will be no hard copy case file to follow. Please close controls in RCCMS and on NMF AIMS."

    4. Complete Form 5595, electronically sign the form and save a copy in the Office Documents folder in RCCMS.

    5. Prepare Form 5599 per IRM 4.71.18.15 (9), Processing IRC 6707A Penalties, (except use disposal code 13 and the penalty amount is $0) for the NMF AIMS controls and save a copy in the Office Documents folder in RCCMS.

    6. Close the RCCMS file to the TE/GE Closing Group.

IRC 6707A Penalty Case File Assembly

  1. Assemble IRC 6707A penalty exam cases the same as Form 5500 exams with these exceptions.

  2. Place the following items on the outside of the case file from top to bottom as applicable:

    1. Form 10329 (top item). Use only if there are multiple years and/or related taxpayers)

    2. Signed Form 895-EP

    3. Form 3198-A identifying the type of case in the "Other Instructions" section (e.g., "IRC 6707A Penalty Case File - 412(i)" )

  3. Place the following items on the inside right-hand side of the case file from top to bottom as applicable:

    1. Form 5595 to update to status 20 (if going to Mandatory Review) or 51 (if going to the TE/GE Closing Group)

    2. Form 5599

    3. Case Overview and Record of Approval of IRC 6707A Penalty form with applicable signatures

    4. Completed Form 8278

    5. Form 870-EP (if secured)

    6. Copy of the 30-Day letter (Letter 4143) and Penalty RAR

    7. Form 2848 (if applicable)

      Note:

      To be valid, Form 2848 must specifically refer to "IRC 6707A Penalties" .

    8. Original Form 872 if secured for the penalty, or copy if the Form 872 for the income tax return included the penalty

    9. Form 5772

    10. Form 5773 (or its equivalent)

    11. Form 5464

    12. Copies of any workpapers that relate to the development of the 6707A penalty

    13. Copy of the corresponding Form 5500

    14. Copy of the corporate tax return (i.e., Form 1120, 1120-S, or 1065) or Form 1040 that the penalty relates to with the amount of the deduction highlighted

    15. If the transaction is a Listed Transaction under Rev. Rul. 2004-20: a copy of the Actuarial Hand-off Memo and Summary, a copy of the plan document with the benefit section tabbed, a copy of the adoption agreement if different from the plan document with benefit section tabbed, a copy of any insurance policies, and a copy of promotional and marketing materials and brochures if available

    16. Copy of the IRC 6707A opening letter and any other correspondence relating to the penalty

    Note:

    The workpapers must be fully developed with all the documents listed above. A file with just a copy of the approved Form 886-A (Revenue Agent Report) is not acceptable.

  4. If the case involves more than one tax year, the main file will contain all the information listed in IRM 4.71.18.15.4 (3). Include in the files for the related years, at a minimum:

    1. Form 5599

    2. Case Overview and Record of Approval of IRC 6707A Penalty form

    3. Form 8278

    4. Form 2848 (if applicable) and

    5. Copy of the 30-Day Letter (Letter 4143) and Penalty RAR

Failure to File Correct Information Returns - IRC 6721 and IRC 6722 Penalties

  1. IRC 6721 imposes a penalty on the trustee for failure to file Form 1099-R, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

  2. Form 1099-R is due at the end of February following the year of distribution if a paper copy is filed or by March 31st if filed electronically.

  3. The IRC 6721 penalty amounts are:

    1. $30 (per return) if correctly filed after the due date but within 30 days

    2. $60 (per return) if correctly filed after 30 days but before August 1st of the year following distribution

    3. $100 ( per return) if filed after August 1st or not at all

  4. IRC 6722 imposes a penalty on the trustee for failure to accurately file Form 1099-R, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

  5. The IRC 6722 penalty amounts are:

    1. $30 (per return) if incorrectly filed but corrected after the due date but within 30 days

    2. $60 (per return) if incorrectly filed but corrected after 30 days but before August 1st of the year following distribution

    3. $100 ( per return) if filed after August 1st or not at all

    4. $250 (per return) if there is an intentional disregard to accurately report

  6. Complete Form 8278 when IRC 6721 or IRC 6722 penalties are being assessed.

    1. Complete items 1 through 11.

    2. For IRC 6721 penalties, the Penalty Reference Number is 600 or 607 as applicable.

    3. For IRC 6722 penalties, the Penalty Reference Number is 612.

    4. Complete 9F(c) (Number of Violations) and 9F(d) (Amount Assessed).

    5. The agent and manager must sign and date the form.

    6. Place Form 8278 in a separate "Penalty File" with Form 3198-A and follow the instructions in IRM 4.71.18.1.6 (7) through (9), Overview of EP Penalties.

    7. See IRM 4.71.18, Exhibit 1 at Employee Plans Examination Exhibits for an example of Form 8278 for IRC 6721 penalties.