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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 1. Introduction and Penalty Relief (Cont. 1)

20.1.1  Introduction and Penalty Relief (Cont. 1)

20.1.1.3 
Relief From Penalties

20.1.1.3.4  (02-22-2008)
Requesting Penalty Relief

  1. The initial request for relief may occur either during or after an examination (but before a penalty is actually assessed), with a return that is either filed or paid late, or after assessment of the penalty(s) and notification issued to the taxpayer.

  2. When the request is received, carefully analyze the taxpayer’s reasons to determine if penalty relief is warranted. The burden of proving entitlement to relief is generally upon the taxpayer.

  3. Each request must be evaluated on its own merit including:

    1. The events or parties involved, and

    2. If the taxpayer exercised ordinary business care and prudence, but due to circumstances or events beyond the taxpayer’s control the taxpayer was unable to meet the tax requirement, or

    3. If other penalty relief criteria apply (such as a Statutory Exception or Administrative Waiver).

  4. The taxpayer’s obligation to meet the requirement is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late.

  5. Determine if the taxpayer’s explanation addresses the penalty imposed.

    1. The dates and explanations should clearly correspond with events on which the penalties are based to show that the taxpayer is entitled to relief from the penalty.

    2. Request additional information from the taxpayer to clarify any explanations if the dates and explanations do not correspond with the events on which the penalty is based.

  6. Review available IRS information in determining whether or not the taxpayer exercised ordinary business care and prudence. Check the preceding tax years (go back at least three years or twelve quarters) for payment patterns and the taxpayer’s overall compliance history.

    1. Assertion of the same penalty(s) in the taxpayer's history may indicate that the taxpayer is not exercising ordinary business care.

    2. If this is the taxpayer’s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for relief, since a first time failure to comply does not by itself establish reasonable cause. ( See IRM 20.1.1.3.5.1 for First-Time Abate)

  7. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance. The length of time between events may serve to cancel or reduce the event’s effect. Penalty relief may not be appropriate if, after considering all facts and circumstances, the taxpayer failed to correct their noncompliant behavior within a reasonable period of time.

  8. The following are examples where penalty relief may not be appropriate:

    1. The taxpayers claim that they were unable to comply with the filing requirement due to a death in the family. The death occurred several months prior to the due date of the return. The return was not filed until a year after the due date of the return.

    2. Taxpayers claim that they were unable to comply with the filing requirement because the records necessary for filing were in the control of a third party, i.e., a bankruptcy trustee or an accountant. The records were returned to the taxpayer well in advance of time the return was required to be filed. The return was not filed until several months after the records were returned.

    3. In both of the examples, the timing of the event may prevent the taxpayer from receiving penalty relief unless other factors justify the delay in filing.

  9. Consider if the taxpayer could have anticipated the event that caused the non-compliance. See IRM 20.1.1.3.1.2.

20.1.1.3.4.1  (02-22-2008)
Subsequent Requests for Penalty Relief

  1. A second or subsequent request for penalty relief may be received after the initial request for relief has been denied. The request is generally considered an appeal of the previous penalty relief denial.

  2. If the review of the account indicates that the taxpayer’s request for penalty relief was previously disallowed, review the circumstances of the previous denial:

    If And Then
    The taxpayer is submitting new information The facts presented in the new information meet penalty relief criteria ( See IRM 20.1.1.3) Abate the penalty(s) in accordance with See IRM 20.1.1.3.4.2.
    The facts presented in the new information do not meet penalty relief criteria Notify the taxpayer that you are unable to grant relief based on the new information provided and the information contained in the original disallowance.
    The facts presented do not meet penalty relief criteria and the taxpayer indicates a desire for appealing the decision. Forward the case to Appeals with all required information.
    The taxpayer is not submitting new information The taxpayer has not requested an appeal of the previous determination Inform the taxpayer we are unable to reconsider the penalty relief request.
    The taxpayer is requesting an appeal of the previous determination Forward the case to Appeals with all required information.
    It is unclear what the taxpayer wants Contact the taxpayer to request clarifying information.

  3. Generally, a Campus Penalty Appeals Coordinator will forward the cases to the Appeals Office ( See IRM 20.1.1.4.1.). Cases transferred to the Appeals Office must include the following documents:

    • The letter requesting an appeal, signed by the taxpayer or an authorized Power of Attorney (POA) (with a valid Form 2848 on file. A Form 8821, or Form 2848 Level H, is not considered an authorized POA).

    • A copy of the previous denied penalty relief request (the TC 290 .00 in Blocking Series 98/99 Source Document). If the Source Document is not available, provide a copy of the Files charge-out information to Appeals.

    • A copy of the disallowance letter or a print of the RCA conclusion screen (852C, 853C, IDRS Print, 854C, 2413(P), 2414(P) or other disallowance letter).

    • A cover sheet ( Form 12835) identifying the tax period and the type and amount of each penalty.

    • Form 3210, Document Transmittal.

    Note:

    Ensure the case is being routed to the correct Appeals office as identified by the 3-digit Appeals Office Code. Consult the Campus Case Routing page on the Appeals web site.

  4. If the penalty was previously sustained in Appeals, forward the request to the appropriate Appeals office. (This may be identified by the presence of PRC 041/042 followed by a TC 290 for $0.00 with a blocking series 96X, -N Freeze code on the account.)

20.1.1.3.4.2  (02-22-2008)
Taxpayer Entitled to Relief

  1. If the taxpayer provides an explanation that supports their request for penalty relief, waive or abate the applicable penalty(s). If the explanation applies to only a portion of the penalty(s), only that portion of the penalty(s) should be waived or abated.

  2. Document the decision and the basis for providing relief according to functional guidelines. Attach a copy of the information to the original return (if available) or other transaction (input) document.

  3. Decisions with respect to penalties made by compliance personnel should not ordinarily be changed by personnel within another functional area. Before considering relief for any penalty(s) asserted by Compliance personnel, contact that office to determine if the case should be returned to the originating office.

  4. If relief is granted prior to assertion of the penalty(s), use computer condition codes to suppress the automatic assertion of the penalty(s). Functional areas that forward returns to be processed must request that the service center campus prevent the assessment of the penalty(s). This may be done by:

    1. Writing "Reasonable Cause" or "Penalty Relief" (as appropriate) in the preprinted penalty block on the return or on Form 4364, Delinquency Computations;

    2. Requesting the penalty assessment transaction code be input for zero amount;

    3. Editing a Computer Condition Code on the return; or

    4. Preparing other forms appropriate for forwarding returns or penalty computations for processing.

      Note:

      In addition, annotate the appropriate Penalty Reason Code on the respective form or return.

  5. If relief is granted after the assessment of a penalty, follow procedures for abating the penalty or the appropriate portion of the penalty. Adjustments to penalties that are due to reasonable cause must include Reason Code 062 and the appropriate PRC. See Exhibit 20.1.1-3.

  6. If relief is warranted for only a portion of the penalty, manually compute and assess or abate the applicable penalty amount. This will prevent automatic assertion of the penalty for the full amount. Follow applicable penalty procedures in IRM 20.1.

20.1.1.3.4.3  (02-22-2008)
Taxpayer Not Entitled to Relief

  1. If the criteria for penalty relief has not been established, determine if additional information would be helpful to evaluate the taxpayer’s request ( See IRM 20.1.1.3.1).

  2. If a final determination that the criteria for granting penalty relief was not established:

    1. Document the decision and its basis according to functional guidelines, and

    2. Attach a copy of the information to the original return (if available) or other transaction (input) document.

  3. Employees denying a request for pre-assessment relief (prior to assessment) or abatement (after assessment), must provide written notification to the taxpayer of the denial and of the taxpayer’s appeal rights, regardless of whether the request was received:

    1. In person,

    2. Over the phone, or

    3. In writing.

  4. The notice should include:

    1. A complete explanation of the IRS’s decision and the basis for denial;

    2. Information on the appeal procedures, including instructions on how to submit a written protest; and

    3. Power of attorney information.

  5. The IRS has developed standardized letters that are used by various offices. They include:

    • IDRS Correspondex Letter 0854C, which is generally used by Campuses and Area Offices. If the Reasonable Cause Assistant (RCA) is used ( See IRM 20.1.1.3.5), letters 0852C(BMF) and 0853C(IMF) are generated through RCA and IDRS.

    • ACS LT38, which is used by the Automated Collection System.

    • Pattern letters 2413(P) and 2414(P), which are used by Collection Area Offices.

  6. Functions that process returns through the Campus will need to alert the Campus of their decision to deny penalty relief. This can be done by writing "Penalty Relief Denied" in the appropriate preprinted penalty block on the return or on Form 4364, Delinquency Computations.

  7. If a request for penalty relief is denied after assessment, request or input TC 290 for zero amount, using blocking series 98/99 (Appeals uses blocking series 96) with Reason Code 062 and Hold Code 3.

20.1.1.3.5  (02-22-2008)
Reasonable Cause Assistant (RCA)

  1. The Reasonable Cause Assistant (RCA) will be used when considering penalty relief due to reasonable cause. RCA is to be used after normal case research has been performed, (i.e., applying missing deposits/payments, adjusting tax, or researching for missing extensions of time to file, etc.) for the following penalties:

    • IMF Failure to File (FTF) and Failure to Pay (FTP)

    • BMF Failure to Deposit (FTD).

  2. RCA is a decision-support interactive software program developed to reach a reasonable cause determination. RCA is accessed through the Desktop Integration (DI) Tools menu.

  3. Use of RCA will ensure consistent and equitable administration of penalty relief consideration.

  4. When an employee has determined that a taxpayer has requested penalty relief based on Reasonable Cause, whether the request was made by telephone or in writing, RCA will be accessed to determine if penalty relief will be granted.

20.1.1.3.5.1  (02-22-2008)
First Time Abate (FTA)

  1. RCA provides an option for penalty relief for the FTF, FTP, and/or FTD penalties if the taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty, TC 17X) have been assessed on the same MFT in the prior 3 years. This First-time Abate (FTA) aspect is an Administrative Waiver and does not carry any Oral Statement Authority (OSA) dollar threshold. See IRM 20.1.1.3.5.3 for additional OSA information. Also, FTA carries its own PRCs, 018 for non-RCA/manual lookback, or 020 for RCA being used to make the determination. See IRM 20.1.1.3.5.2.

  2. The reasonable cause explanation provided by the taxpayer will be considered after RCA performs the First-time Abate/Clean Compliance History analysis. If FTA criteria does not apply based on reasons shown in (3) below, then the taxpayer’s explanation will be used to determine if reasonable cause penalty relief criteria is met. If the RCA determination is to abate the penalty(s), penalty relief can be granted as appropriate per the RCA conclusion (i.e., Reasonable Cause, Official Disaster Relief area, IRS Error, Statutory and Administrative Waivers). Using the First-time Abate/Clean Compliance History analysis up front was based on a request from HQ Customer Accounts Services.

  3. A First Time Abate conclusion WILL NOT apply if any of the following criteria applies:

    1. Any tax period in the prior 3 years, for the same MFT, is in TDI Status 02 or 03, or IMF Status 04

    2. An unreversed penalty for a significant amount (See LEM 20.1.1) is present (except the ES penalty) on any tax period in the prior 3 years, for the same MFT, and a notice was issued showing the assessed penalty(s).

      Note:

      A module balance cleared with a TC 606 indicates a notice showing the assessed penalty(s) was not issued.

    3. Any penalty reversal on any tax period in the prior 3 years, for the same MFT, was input with Penalty Reason Code (PRC) 018, 020, or 021. See Exhibit 20.1.1-3.

    4. The FTD penalty is charged for EFTPS Avoidance. Taxpayers required by law to deposit using EFTPS have received multiple notifications from the Treasury Financial Agent (TFA) and the Electronic Tax Administration (ETA), prior to their required EFTPS start date. Use RCA for normal penalty relief consideration.

    5. A CP 235 was issued in any tax period in the three-year penalty history for the same MFT. A tax period in which a CP 235 was issued is identified with the literal "FTD PEN WAIVER CD" and value of "24" on CC BMFOL definer ‘R’. RCA will consider the issuance of a CP 235 in the automatic check of the three-year penalty history.

    6. A CP 276A or 276B was issued in any tax period in the three-year penalty history for the same MFT. These notices are issued to alert the taxpayer they made one or more late deposits but IRS waived the FTD penalty per LEM 20.1.4.1.5.1 criteria. A tax period in which a CP 276A or 276B was issued is identified with the literal "FTD PEN WAIVER CD" and value of "25" on CC BMFOL definer 'R'. RCA will consider the issuance of a CP 276A or 276B in the three-year penalty history check.

  4. When checking the three-year penalty history, RCA does not recognize any module(s) that have moved to the retention register. This should not be a problem when using RCA on current tax periods; however, when using RCA for an older tax period, the employee must manually review any tax period(s) in the three-year penalty history that has gone to the retention register.

  5. If RCA determines a "First -Time Abate" is applicable, Correspondex letters 3502C for BMF FTD penalty relief, or 3503C for IMF FTF and/or FTP penalty relief can be generated through RCA and IDRS. Both letters contain a paragraph automatically selected by RCA informing the taxpayer that the penalty(s) was removed based on their history of compliance. The following is an example of this paragraph:

    We are pleased to inform you that your request to remove the (use applicable penalty, i.e. Failure to File, Failure to Pay, or Failure to Deposit) penalty(s) has been granted. However, this action has been taken based solely on your compliance history rather than on the information you provided. This type of penalty removal is a one-time consideration available only for a first-time penalty charge. Any future (Failure to File, Failure to Pay, Failure to Deposit) penalties will only be removed based on your providing information that meets reasonable cause criteria. You should receive a notice of penalty adjustment within the next few weeks.

    Note:

    Include an explanation that educates the taxpayer how to be compliant in the future.

  6. First-time abatement may be considered for FTF and/or FTP on all forms. The employee must check the three prior years and document the clean compliance history. If RCA is not used to consider first-time relief and relief is granted, use PRC 018 when making the adjustment. Notify the taxpayer that the penalty removal was based on their history of compliance rather than on the information they provided (see example paragraph above). Also include an explanation that educates the taxpayer about how to be compliant in the future.

    Note:

    If RCA does not offer FTA relief because the FTD penalty was charged for EFTPS Avoidance, FTA relief can still be granted for the FTF and/or FTP penalties, if applicable.

  7. If the tax is not paid in full on the tax period when the request for abatement is received, allow First-time Abate/Clean Compliance History on the Failure to Pay (FTP) penalty amount assessed. Use RC 062 with the TC 271 and PRC 018 or 020. This will allow the FTP penalty to start up when the TC 271 posts to Master File on the remaining tax due. While the First-time abatement is due to an Administrative Waiver, not Reasonable Cause, the RC 062 will not restrict the tax period and is to be used in this instance only. The proper use of the PRC will allow for the tracking of first-time/compliance history abatements.

    Note:

    The employee will need to use the open paragraph in the 3502C or 3503C letter to inform the taxpayer that the FTP penalty will start accruing again on the unpaid taxes and will continue until the tax is paid in full. After the tax is paid in full, the taxpayer may come back in requesting reasonable cause abatement of the additional FTP penalty.

  8. If the tax is fully paid, the First-time Abate/Clean Compliance History adjustment to the FTP (TC 271) may be done using RC 065 (IMF Accounts) with PRC 018 or 020 as the restrictive action won't have a negative affect. Adjustment notices will be sent in both abatement instances.

  9. RCA will also display a First-time Abate window on a BMF account when the taxpayer has a change in deposit frequency. Employees need to be aware this is different than a First-time Abate for a good compliance history and use the appropriate PRC when removing the penalty for a first-time change in deposit frequency.

20.1.1.3.5.2  (02-22-2008)
Penalty Reason Codes

  1. When removing a penalty(s) based on First-time Abate criteria, use the following Penalty Reason Codes (PRC’s) in the 4th Reason Code (RC) position on CC ADJ54:

    1. PRC 020 will be used when using RCA and RCA determines FTA relief applies. RC 065 is also required on IMF accounts.

    2. PRC 018 will be used when considering First-time Abate penalty relief where RCA is not available, and for BMF FTF and/or FTP penalties if FTA for the FTD penalty does not apply (since RCA is currently not programmed for BMF FTF and/or FTP penalty consideration).

    3. A First-time abatement is not due to Reasonable Cause, so RC 062 is not used. See the FTP Exception in IRM 20.1.1.3.5.1.

  2. When removing the penalty(s) for a reason other than the First-time Abate, use the appropriate PRC in the 4th position in accordance with the PRC chart ( See Exhibit 20.1.1-3.). If reasonable cause has been established, use RC 062in the 1st, 2nd, or 3rd RC position and the appropriate PRC in the 4th position.

20.1.1.3.5.3  (02-22-2008)
Increase in Oral Statement Ceiling

  1. Beginning January 1, 2002, the Oral Statement Ceiling for Failure to File, Failure to Pay, and Failure to Deposit penalties was increased. Refer to LEM 20.1.1.3.

    Note:

    The Reasonable Cause Assistant (RCA) will be used where available. Where RCA is not available, employees should receive managerial approval to allow for the oral abatement of penalties when reasonable cause criteria is met. The ceiling also applies to BMF FTF and FTP penalties (even though RCA is not programmed to consider these penalties at this time).

20.1.1.3.5.4  (02-22-2008)
Oral Statement Ceiling Exceeded

  1. A signed, written statement is not required to deny a penalty relief request, regardless of the penalty amount(s). Therefore, users will not be required to obtain a signed, written statement before accessing RCA in Oral Mode. If the RCA determination is to abate the penalty(s) and the oral ceiling threshold is exceeded, RCA will display a message stating a signed, written statement is required to allow the abatement, in addition to any other documentation required. See IRM 20.1.1.3.5.5.

    1. If RCA determines the penalty should be sustained, follow established RCA Sustain procedures.

    2. If RCA determines the penalty should be abated, request a signed, written statement.

20.1.1.3.5.5  (02-22-2008)
Documentation

  1. Specific circumstances within RCA require the taxpayer to provide documentation to support their claim before a penalty relief determination can be reached. Other circumstances will allow the employee to accept "Credible Information" , either orally or in writing.

    1. "Credible Information" must explain facts and circumstances showing the taxpayer exercised ordinary business care and prudence, and cite specific dates for the non-compliance. All information, including dates, must substantiate why the taxpayer was unable to comply.

    2. RCA has been programmed to include reasonable and specific time frames to allow for filing and/or paying taxes after the event that prevented compliance ended. See IRM 20.1.1.3.1.2.

20.1.1.3.5.6  (02-22-2008)
Attaching RCA Determination

  1. When RCA reaches a conclusion to either abate (remove) or sustain (deny) the penalty relief request, the program automatically displays a print dialog to allow printing the determination, which includes all information input by the RCA user. This print must be attached as a source document. See IRM 21.5.2, Adjustment Guidelines, for additional information.

  2. See LEM 20.1.1.3 for additional information concerning unsigned and oral requests.

20.1.1.3.5.7  (02-22-2008)
Reasonable Cause Penalty Relief Request Prior to Penalty Assessment

  1. Currently, RCA is unable to consider penalty relief on IMF accounts when a TC 150 has not posted. However, RCA can consider FTF and/or FTP penalty relief on IMF accounts if a TC 150 has posted, but no penalties have been assessed, or if the penalties have been fully reversed. It can also consider FTD penalty relief on BMF accounts with or without a posted TC 150.

  2. While the reasons for accessing RCA under these conditions vary, this functionality is most beneficial for:

    1. BMF CP 207(or 207L ) replies where the taxpayer knows they made one or more deposits late and request reasonable cause penalty relief prior to assessment of the FTD penalty, OR

    2. IMF accounts where the taxpayer is liable for accrued, but unassessed, FTP penalty (generally per IRC section 6651(a)(3)) and the taxpayer requests FTP penalty relief based on reasonable cause.

  3. For CP 207and 207Lreplies (see IRM 20.1.4.11.5), use CC FTDPN to compute the appropriate penalty prior to accessing RCA.

    1. If a penalty applies, access RCA for a penalty relief determination.

    2. If RCA determines reasonable cause criteria has been met, input a TC 180 for zero, BLK 14, RC 062, and the appropriate PRC in the 4th RC position. (This action is required to avoid sending the taxpayer unnecessary notices)

    3. If RCA determines reasonable cause criteria has not been met, follow normal CP 207 assessment procedures and normal penalty relief request denial procedures.

  4. On IMF accounts, certain account conditions can result in the taxpayer receiving a balance due notice that includes an accrued FTP penalty charge but no TC 27X is present on the account. RCA can be accessed for a penalty relief determination in this situation, but RCA only recognizes assessed penalty amounts and may display a message that penalties applicable to RCA are not present.

    1. Although not necessary, a TC 290 for .00 with Priority Code (PC) 5 can be input to allow Master File to post the accrued FTP.

    2. If the RCA determination is to 'abate' the FTP penalty and a TC 290 .00 with PC 5 has not been input, input a TC 270 for .00 with applicable PRC (and RC 062 for reasonable cause, if applicable).


    Note:

    For either IMF or BMF condition referenced here, RCA WILL NOT perform the systemic First-time Abate (FTA) check. See IRM 20.1.1.3.5.1 for FTA criteria for a manual FTA determination.

20.1.1.3.5.8  (02-22-2008)
RCA Letter Generation

  1. If RCA determines reasonable cause has not been established, Correspondex Letter 0852C(BMF) or Letter 0853C(IMF) can be issued through RCA providing reason(s) for denial and explaining the appeal procedures.

    1. Special Insert and Return Address Codes are required on the Letter 0852Cand Letter 0853C to generate the appropriate Appeals Coordinator's name and return address. Enter the codes established by your local Campus User Support function (normally used on Letter 0854C) These codes are also available by selecting the 'Campus Penalty Appeal Coordinators' link under the "Who/Where" tab on SERP.

    2. If the codes entered do not generate the correct information, report the problem to your local User Support function.

  2. RCA will transmit the required paragraphs and fill-ins to CC LPAGE. To generate the letter, RCA provides two options:

    1. Review/Manual Transmit(Recommended) - Allows a review of the letter to ensure an appropriate explanation and all letter information is correct. Requires manual transmission of the letter. After reviewing the letter, return to the first CC LPAGE screen and transmit.

    2. No Review/Systemic Transmit - After transmitting the appropriate paragraphs and fill-ins to CC LPAGE, RCA will automatically transmit the letter. The letter cannot be reviewed or changed with this option.


    Regardless of the option selected, the originator must ensure "Request Completed" is displayed on IDRS to ensure the letter transmitted. RCA cannot make this determination.

20.1.1.3.5.9  (02-22-2008)
RCA for BMF

  1. RCA cannot consider BMF FTP and FTF penalty relief at this time. However, because most BMF accounts that have been penalized for FTF and FTP penalties also include FTD penalties, RCA should be used to consider penalty relief for the FTD penalty.

    1. If the same reasons are used for requesting FTF and FTP penalty relief (as they usually are), the RCA conclusion should apply to all three penalties.

    2. If the RCA conclusion is to sustain the penalty and Letter 0852Cis issued, RCA provides an option to automatically insert a paragraph stating the FTD denial reason also applies to FTF and/or FTP (or an open paragraph can be inserted to notify the taxpayer the denial applies to the FTF and/or FTP penalties in addition to the FTD penalty.)

    3. If more than one penalty is involved, only one IDRS adjustment should be made. Use the PRC that would be applicable for the FTD penalty abatement.

20.1.1.4  (02-22-2008)
Methods of Appealing Penalties

  1. Various administrative and legislative remedies are provided for taxpayers who disagree with the IRS’s determination that they are liable for a particular penalty. Generally, when a taxpayer disagrees with our determination regarding a penalty, they have the right to an administrative appeal.

  2. Taxpayers have the right to challenge the assertion or assessment of a penalty, and generally may do so at any stage in the penalty process. Taxpayers may request:

    1. A review of the penalty prior to assessment (e.g. deficiency procedures),

    2. A penalty abatement after it is assessed, and either before or after it is paid (post-assessment review), or

    3. An abatement and refund after payment (claim for refund).

  3. Taxpayers may indicate their disagreement with the IRS either verbally or in writing, or if the penalty has already been paid, by filing a claim for refund or credit.

  4. If agreement cannot be reached at the area field office or the service center campus, the taxpayer may request a conference with the employee’s immediate manager, or (in most cases) the taxpayer may request that the case be forwarded to Appeals. Taxpayers should provide a written request for consideration by Appeals.

  5. The taxpayer may also file suit in court. Depending on the procedural circumstances of the taxpayer’s case, the taxpayer may petition the United States Tax Court or file a complaint with either the United States District Court having jurisdiction, or the United States Court of Federal Claims (as appropriate). See IRM 8.20, Appeals Records and Processing Manual.

20.1.1.4.1  (02-22-2008)
The Appeals Function

  1. The Appeals Office is an independent administrative body within the IRS that is the only formal internal level of appeal.

  2. The review of a penalty determination by Appeals is not automatic. Appeals will only review a penalty if the request for relief has been previously denied by an IRS employee and the taxpayer requests an appeal.

  3. In addition, Appeals may make a determination that the taxpayer did not commit the prohibited action or failure to act for which the penalty is asserted (charged). Issues of basic liability for a penalty may be considered in the appeals process, and should be considered before considering if reasonable cause or other relief criteria exists.

  4. Appeals has the authority to settle penalties for less than the full amount based on the hazards of litigation.

20.1.1.4.1.1  (02-22-2008)
Preassessment Appeals

  1. Generally, Appeals will consider the appropriateness of the following type of penalties prior to assessment:

    1. Penalties that are asserted by the IRS in the course of an examination of a taxpayer’s income tax return;

    2. Penalties that are granted a specific pre-assessment appeal right such as the Trust Fund Recovery penalty under IRC section 6672 (see IRM 4.23, Employment Tax Handbook, for Trust Fund Recovery penalty guidelines) or the preparer penalties under IRC section 6694 (see IRM 20.1.6 for an overview of preparer penalties), and/or

    3. The intentional disregard penalty of IRC section 6721(e) when it is asserted for failures to comply with the cash reporting requirements of IRC section 6050I.

  2. Generally, if Appeals considers a penalty before it is assessed, Appeals will not reconsider the same penalty after it is assessed.

    1. However, at its discretion, Appeals may reconsider its prior decision if evidence becomes available that indicates further consideration is warranted.

    2. Taxpayers may also pay the penalty previously upheld by Appeals, and file a claim for refund. The claim for refund may be transferred to Appeals, if denied at the service center campus level.

  3. More detailed Appeals procedures are described in the Appeals Returns Processing and Control Handbook. Also see IRM 8.11.1 , Penalties.

20.1.1.4.1.2  (02-22-2008)
Post-Assessment Appeals

  1. To request abatement of a penalty after assessment, the taxpayer must submit a written request to the IRS.

  2. The employee must consider all the facts and circumstances to determine if the taxpayer’s explanation meets the penalty relief criteria. See IRM 20.1.1.3.

  3. If a taxpayer orally requests the abatement of a penalty, instruct the taxpayer to submit the request in writing.

  4. If a taxpayer orally requests an appeal of a decision, instruct the taxpayer to submit the request in writing.

20.1.1.4.2  (02-22-2008)
Deficiency Procedures

  1. IRC section 6211 generally defines a deficiency as the excess of the correct amount of income tax, estate tax, or gift tax owed, less the sum of the tax amount shown on the return, plus the amounts previously assessed (or collected without assessment) as a deficiency, less the amount of rebates. In general, deficiency procedures are used when additional income, estate, or gift taxes, and/or related penalties are proposed. The IRS generally:

    1. Cannot assess an additional amount of income tax, estate tax, or gift tax, including related penalties, unless it complies with deficiency procedures;

    2. Can assess additional amounts of employment tax and certain excise tax, and related penalties, without providing a notice of deficiency;

    3. Can assess penalties not related to a tax (e.g., IRC sections 6700, 6701, 6702) without providing a notice of deficiency;

    4. Can assess estimated tax penalties (IRC sections 6654 and 6655) if a return was filed for the tax year, without providing a notice of deficiency; and

    5. Can assess the failure to file and failure to pay penalties ( IRC section 6651) applicable to the portion of the tax liability that is not a tax deficiency, without providing a notice of deficiency.

      Example:

      Taxpayer files the return one month late and reports and pays a tax of $4,000. During an audit, the IRS determines a tax deficiency of $1,000. The Failure to File penalty (FTF) is 5 percent per month (for up to 5 months) of the amount of tax. The total FTF penalty is $250 (5 percent of $5,000 for one month). If the taxpayer contests the deficiency, the taxpayer will be entitled to a notice of deficiency for $1,050 ($1,000 tax deficiency and $50 FTF penalty (5 percent of $1,000). The remaining $200 failure to file penalty which was attributable to the original tax assessment is not part of the deficiency and is collectible by immediate assessment.

  2. A penalty is subject to deficiency procedures if the related tax underpayment being assessed is subject to deficiency procedures. For example, if the negligence penalty was assessed on an underpayment of income tax, the deficiency procedures would apply to the negligence penalty as well as the income tax deficiency. However, if the penalty was the result of an underpayment of employment tax, deficiency procedures would not apply to the penalty.

    1. The taxes and related penalties subject to deficiency procedures include income tax, estate tax, and gift tax, as well as certain excise taxes.

    2. The taxes and related penalties not subject to deficiency procedures include employment taxes imposed by Subtitle C of the IRC, and certain excise taxes.

  3. The procedure called "notice of deficiency" , see IRC section 6212, provides the taxpayer a method of appealing tax and/or penalties to the United States Tax Court prior to their assessment.

20.1.1.4.2.1  (02-22-2008)
Non-Deficiency Procedures

  1. Most employment taxes and excise taxes are not subject to deficiency procedures. No statutory notice of deficiency is issued and the taxpayer cannot petition the Tax Court.

  2. Generally, non-deficiency procedures are as follows:

    IF AND THEN
    a. Penalties are proposed the taxpayer agrees the penalties are assessed.
    b. Penalties are proposed the taxpayer disagrees a 30-day letter is issued andthe taxpayer may file a protest with Appeals.
    c. Appeals sustains the penalty proposal   the penalties are assessed.

  3. If penalties are assessed and the taxpayer cannot or does not file a protest with Appeals, the taxpayer must pay the penalty, then file a claim for credit or refund.

  4. If a 30-day letter was not issued, or if a claim for refund was denied, the taxpayer should be given the opportunity for an appeal.

20.1.1.5  (02-22-2008)
Master File Indicators

  1. Master File indicators are listed in the following subsections.

    1. Master File Penalty Reason Codes

    2. Penalty Transaction Codes

    3. Penalty Reference Numbers

20.1.1.5.1  (02-22-2008)
Master File Reason Codes

  1. Penalty Reason Codes (PRC’s) were adopted to enable the IRS to track penalties. Accurate reporting of these reason codes is vital. PRCs provide the basis for determining a taxpayer’s compliance history and the foundation for analyzing trends in penalty abatements. PRCs are used with both BMF and IMF document code 54 and 47 transactions.

  2. PRCs are divided into two categories: