8.11.4 Penalty Appeals (PENAP)

Manual Transmittal

November 20, 2014


(1) This transmits revised IRM 8.11.4, Penalties Worked in Appeals, Penalty Appeals (PENAP).

Material Changes

(1) Updated IRM , New Receipt Procedures for Appeals Technical Employees in accordance with the interim guidance AP-08-0814-0009, Implementation of the "Quick Look" Process in Appeals Campus Operations.

(2) Updated IRM, PENAP Consideration in accordance with the interim guidance AP-08-0714-0006, Implementation of the Appeals Judicial Approach and Culture (AJAC) Project Exam-Phase 2.

Effect on Other Documents

This IRM supersedes IRM 8.11.4 dated February 27, 2014. Incorporated Interim Guidance Memorandum AP-08-0814-0009, Implementation of the Quick Look Process in Appeals Campus Operations, which was issued August 11, 2014, into this IRM. Incorporated Interim Guidance Memorandum AP-08-0714-0004, Implementation of the Appeals Judicial Approach and Culture (AJAC) Project Examination and General Matters - Phase 2, which was issued July 2, 2014, into this IRM.



Effective Date


John V. Cardone
Director, Policy, Quality and Case Support

Penalty Appeals (PENAP) Program

  1. Penalty appeal (PENAP) procedures generally apply to penalties that have already been assessed. They are commonly referred to as "post assessed" penalties. In Appeals, these cases are controlled on the Appeals Centralized Database System (ACDS) as "PENAP" cases.

  2. Appeals centralized the consideration and processing of IRS campus-sourced PENAP cases originating from Compliance primarily in its Ogden Campus Appeals office. IRS field-sourced PENAP cases are generally worked in field Appeals offices.

  3. Appeals:

    1. assigns cases to designated Appeals Technical Employees (ATE), or

    2. forwards the case to a field Appeals office when the taxpayer requests a face-to-face conference.

  4. For purposes of this IRM, the term Appeals Technical Employee (ATE) is used to refer to the employee assigned to the case who has the authority to resolve or settle issues. Appeals Technical Employee is defined in IRM Exhibit 8.1.1-1, Common Terms Used in Appeals.

Identifying a PENAP Case

  1. The following table identifies the most common TC codes that may be included in the proposed penalty field at the return level which have a type code of "PENAP" , but the list is not all inclusive:

    Transaction Code Type of Penalty IRM Reference
    160 or 166 Failure to File IRM 20.1.2, Failure To File/Failure To Pay Penalties
    170 or 176 Estimated Tax Penalty IRM 20.1.3, Estimated Tax Penalties
    180 or 186 Deposit Penalty IRM 20.1.4, Failure to Deposit Penalty
    234 or 238 Daily Delinquency Penalty IRM, IRC 6652(c)(1) - Exempt Organization Returns and Related Penalty Provisions
    240 Return Related Penalties IRM 20.1.5., Return Related Penalties
    240 or 246 Information Return Penalties IRM 20.1.7, Information Return Penalties
    246 Failure to File Using Electronic Media IRM, Failure to File Partnership Return Using Electronic Media
    270 or 276 Failure to Pay IRM 20.1.2, Failure To File/Failure To Pay Penalties
    280 or 286 Bad Check IRM, IRC Section 6657 Bad Checks

Source of PENAP Cases

  1. Generally post-assessment penalty appeal cases are received from:

    • Wage and Investment (W&I)

    • Small Business/Self-Employed (SB/SE)

    • Large Business and International (LB&I)

  2. If the taxpayer submits a written protest to an assessed penalty, Compliance forwards the case to Appeals. Information on documents to be included with the case file are found in IRM, Subsequent Requests for Penalty Relief.

Carding PENAP Cases

  1. Carding PENAP Cases information has been moved to IRM 8.20.5.

Assignment of PENAP Cases

  1. Depending on the complexity of the penalty issue, the case may be handled by either the centralized Ogden Campus Appeals PENAP team or assigned to an Appeals Technical Employee (ATE) in a field office.

  2. The Appeals Team Manager (ATM) or designated official will take the following actions:

    • Assign case to an ATE on ACDS.

    • Send the ACDS uniform acknowledgment letter in accordance with IRM,Assignment of Work Units and Issuance of Letter 4141 , Uniform Acknowledgment Letter (UAL) and IRM 1.4.28-6, Pre-Selected Enclosures for the UAL Based Upon the Category and Type of Case .

      If the case is assigned to a... Then...
      Campus Appeals ATE Send Letter 4031, Campus Penalty Appeals Uniform Acknowledgement Letter, and include:
      • Pub 4576, Orientation to Penalty Appeals Process

      • Pub 4167, Appeals - Introduction to Alternative Dispute Resolution

      • Notice 1016, How to Stop Interest on Your Account.

      Field Appeals ATE Send Letter 4141, Acknowledgement Letter, and include:
      • Pub 4227, Overview of the Appeals Process

      • Pub 4167, Introduction to Alternative Dispute Resolution

      • Notice 1016, How to Stop Interest on Your Account.

New Receipt Procedures for Appeals Technical Employees

  1. Account and Processing Support (APS) controls the case on ACDS. Refer to IRMIRM 8.20.5, Appeals Case Processing Manual, Appeals Centralized Database System (ACDS), for a description of the ACDS fields.

  2. Upon receipt of the case, the ATE must follow the procedures outlined in IRM, New Receipt Procedures for Appeals Technical Employees. This includes, but is not limited to:

    • Determining the statute of limitations and validating the statute-related fields on ACDS within five (5) business days of receipt of the case in accordance with IRM (1) and IRM 8.21.3Appeals Technical Employees Statute Responsibility.

    • Validating the Case Summary Card (CSC) information and making updates, if necessary, in accordance with IRM (2) and IRM (3).

    • Ensuring the Uniform Acknowledgment Letter (UAL) and enclosure(s) were sent to the taxpayer and a copy to the authorized representative (if applicable) and that it was documented in the CAR. See IRM, Assignment of Work Units and Issuance of Letter 4141(CG), Uniform Acknowledgment Letter (UAL), for more information on the UAL procedures.

  3. Within 5 business days of receipt, ATEs will verify the information on the case summary card including the following:

    • TYPE code for all Penalty Appeals cases is " PENAP" .

    • Each MFT is established as a separate work unit.

    • AIMS indicator = E

    • ACDS return field for STATDATE (statute date) or CODE (statute code) - The information based on the following table:

      Description Statute Date Statute Code
      Penalties have been assessed Blank


      if statute date is blank, then see IRM 8.21.2, Exhibit 2-1 for valid statute code.

      Penalties ARE NOT assessed Valid statute date Blank
    • PropdPen (proposed penalty) - The total dollar amount of the penalty for each tax period is rounded to the nearest dollar amount, not in dollars and cents.


      If there is more than one penalty for each tax period, total the amount for each period and enter the sum for the respective period to the nearest dollar amount, not in dollars and cents.

  4. Campus ATEs working IRS Campus sourced PENAP cases must also follow the Quick Look process:

    Quick Look Process
    Step Action
    1. Quick Look Screening:

    Within five (5) business days of receipt of a Quick Look case, screen the case to:
    1. Determine if it is complete and ready for Appeals consideration.

      • If yes, continue Quick Look screening procedures step 2, below.

      • If no, return the case as a premature referral.

    2. Identify whether the case, in the ATE’s judgment, has a potential for quick resolution.

      • If yes, follow the Quick Look tracking and direct phone contact steps below.

      • If no, work the case following normal procedures.


      PENAP cases with these issues may have a potential for quick resolution. This list is not all inclusive.
      a. Inability to Pay
      b. Ignorance of the Law
      c. Reliance on a third party
      d. Requests for first time abate
      e. Payment designation

    2. Quick Look Tracking:

    ACDS Field - LOC7 - Enter:
    • QL - Input the literal "QL" into the ACDS LOC7 field to identify a case that meets Quick Look criteria, for tracking purposes.

    • QLX - If you later determine the case does not meet Quick Look criteria, change the literal "QL" to "QLX" and work the case following normal procedures.


      Change the literal "QL" to "QLX" and work the case following normal procedures if you are unable to contact the taxpayer or representative or you determine the case does not have a potential for quick resolution.

    3. Quick Look Direct Phone Contact:
    1. Start the Quick Look case as soon as possible, in first in first out (FIFO) order, between regular cases to maximize efficiency and time utilization, and

    2. Within thirty (30) to forty-five (45) calendar days of receipt, make direct phone contact with the taxpayer or representative.


    Appeals Team Managers will be reasonable in extending the Quick Look screening or Quick Look direct contact time frames if circumstances (e.g. leave, workload, or other priorities) prevent the ATE from meeting them. If the ATM extends the time frames for screening or direct contact, the ATE will document this decision in the Case Activity Record.

PENAP Consideration

  1. Review the case and contact the taxpayer for further clarification if needed to provide prompt resolution.


    No contact is required if the case is fully conceded based upon the information in the file. The closing letter to the taxpayer confirms the decision to fully abate the penalty.


    Appeals will resolve campus-sourced PENAP cases worked in a Campus Appeals office as expeditiously as possible, generally within 90 days of receipt.

  2. Apply reasonable cause criteria when considering a PENAP case. See IRM, Reasonable Cause, for more information on reasonable cause.

  3. Also consider hazards of litigation to settle PENAP cases. See IRM, Hazards of Litigation.

  4. Also consider:

    • Statutory exceptions, see IRM

    • Administrative waivers, see IRM and

    • Service errors, see IRM

  5. See IRM, Assessed Penalty Settlement Authority.


    A $25,000 limitation may apply.

  6. Prepare ACDS Letter 3324 - Proposal for Partial Abatement. This letter is issued prior to closing the case and provides the taxpayer 30 days to provide additional information supporting the request. If you do not receive a response within the time allotted, then send Letter 4774, PENAP Follow-Up Letter, which gives the taxpayer an additional 15 days to respond.

  7. Taxpayers may provide new information and/or evidence to Appeals. New information is defined in IRM, Taxpayer Provides New Information. If the new information or evidence is relevant to the penalty and requires investigative action or additional analysis, then return the case to the originating function for consideration, releasing jurisdiction. See IRM, Jurisdiction Released, for additional information. Please refer to the exception in IRM

  8. In resolving disputes, Appeals may consider new theories and/or alternative legal arguments that support the parties' positions when evaluating the hazards of litigation in a case. However, do not develop evidence that is not in the case file to support the new theory or argument. See IRM, Taxpayer Raise New Theory or Alternative Legal Argument.

  9. Use a judicial approach in deciding penalty appeal cases. Provide general guidance to taxpayers on establishing reasonable cause. Do not request specific documents or develop the taxpayer’s position.


    Do not make a written request for a list of specific documents in the Letter 3324.


    When requested by a taxpayer in a conference, provide general guidance as to the type of information that might establish reasonable cause given the facts of their case. Refer to IRM for Standards and Authorities.

  10. Many documents received during a PENAP consideration may not meet the definition of “new information”. Many penalties are assessed without deficiency procedures and reasonable cause needs to be established for the abatement of these penalties. Documents received during a PENAP consideration are generally not voluminous or require additional development, and in many instances, are corroborating the taxpayer’s testimony. You should consider the probative value of any evidence that does not meet the definition of “new information” above and apply hazards of litigation in making a determination.

Closing Actions for Appeals Technical Employee

  1. This section discusses the process used by the Appeals Technical Employee to close PENAP cases.

  2. Use ACDS APGolf to generate all forms and letters.

  3. Prepare the Appeals Case Memo (ACM). The ACM should outline the facts and circumstances supporting sustention or abatement of the penalty. This could include, but is not limited to:

    • Taxpayer's filing history

    • Citing case law

    • Hazards of litigation

    IRM 8.6.2 Appeals Case Memo Procedures, provides additional information on the preparation of ACMs.

  4. Prepare the ACDS customized Form 5402, Appeals Transmittal and Case Memo:

    • Show the affected tax periods included in the case

    • Route the case to the APS unit who will process the adjustments

    • List penalty transaction codes

    • Provide a Form 5402 to adjust the taxpayers account based on the case determination

    • Input penalty adjustment amounts on the Form 5402 using the exact dollars and cents when making full abatements

    • Include special instructions related to processing the case

    • Notate the remarks section of the Form 5402 when a certified claim disallowance letter had been issued (Letter 1363 and/or Letter 1364), instructing APS to enter this information in the Notes field on ACDS. The reason for this requirement is to ensure duplicate certified letters are not issued which may erroneously extend the two year period to file suit with the applicable court.

    • Enter proper reason code on the Form 5402:
      40 - Complete removal of penalty,
      41 - Appeals sustains penalty, and
      42 - Appeals partial abatement of penalty.

    • Sign the Form 5402.


      If the ATE has settlement authority based upon DO 8-2 or DO 8-8, see IRM (2) Assessed Penalty Settlement Authority. For DO 8-2 or 8-8, see IRM 1.2.47, Servicewide Policies and Authorities, Delegation of Authorities for the Appeals Process.

  5. The Closing Codes for PENAP cases are:

    Determination Made Closing Code
    Sustained (penalties are not removed) 14
    Abated (penalties are fully removed) 15
    Partially Abated (only part of the penalties are removed) 16
  6. Prepare the applicable ACDS closing letters:

    • Letter 1277 - Penalty Abatement Denied. Use the narrative section to provide the reason for denying the abatement request in full or in part,

    • Letter 1278 - Penalty Fully Abated,

  7. Sign and mail the closing letters:

    The Appeals Technical Employee has delegated settlement authority The ATE will sign and mail the closing letters
    The Appeals Technical Employee does not have delegated settlement authority APS will mail the closing letters after the Appeals Team Manager/Team Leader has approved the decision.
  8. In rare situations, resolution of the case will involve a specific matter closing agreement. See IRM 8.13.1, Processing Closing Agreements in Appeals.

APS Closing Procedures

  1. APS Closing Procedures has been moved to IRM 8.20.7, Closing Procedures for PENAP Case.