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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 7. Information Return Penalties (Cont. 1)

20.1.7  Information Return Penalties (Cont. 1)

20.1.7.3 
Failure to File Correct Information Returns IRC section 6721

20.1.7.3.4 
Failure to Timely File Information Returns

20.1.7.3.4.1  (11-16-2007)
Late Filing Penalty (Prior Year Returns)

  1. These instructions apply to late filed information returns received by the Campus with a due date prior to the current processing year. For processing year 2007, this would apply to returns filed for tax years 2005 and prior.

  2. Penalties for all prior year returns will continue to be assessed manually through IDRS to generate notice CP 215/CP 15 from the Civil Penalty Module (MFT 13/55). These notices will not be preceded by Notice 972CG.

  3. Receipt and Control will forward these returns to the area responsible for assessing the IRP penalties. ECC-MTB will also forward Form 4804 for assessment of the late filing penalty for returns filed either magnetically or electronically and provide the received date.

  4. Do not assess any penalties on Forms 1096 if the following conditions are present:

    1. Delinquent returns secured by Examination or Collection—with "Penalty Considered" coded on the form. Examination or Collection Compliance previously considered penalties on these returns. If not present, code an "E" in the first box under "Official Use Only" on Forms 1096 secured by Examination and a "C" in this box for forms secured by Collection.

    2. A Form 1096 "N" coded on the top the form indicates that penalties were considered by Receipt and Control.

    3. If any of these conditions exist, notate "Penalty Considered" (if not present) and forward the Forms 1096 and associated returns to the IRP unit in Receipt and Control for processing.

  5. If the returns were submitted with an explanation for the late filing, consider reasonable cause as appropriate.

  6. If the filer's explanation establishes reasonable cause and the penalty will not be assessed, with managerial approval, take the following actions:

    1. Using CC REQ54 file the correspondence and a copy of the Form 1096 as source documents.

    2. Send the filer Letter 1948C explaining our determinations,

    3. Circle out or line through the date stamp and the delinquent return indicator ( "X" in first box under "Official Use Only" ). Do not make any additional markings on the form.

    4. Annotate the 1096 "Reasonable Cause Established" and forward to the IRP unit in Receipt and Control for processing.

    5. ( Note: only the 3 most recent prior years can be processed through ISRP.) Penalties will be considered against earlier years although not processed through ISRP. After penalty consideration, send these returns to Files.

  7. If the filer's explanation does not establish reasonable cause and the penalty will be assessed, take the following actions:

    1. Research using IDRS to ensure that the maximum has not been reached before assessing any further penalties.

    2. Use reference number 500 to make assessments for late filed information returns.

    3. Create a case file containing a copy of the Form 1096/1099 or Form 4804 transmittal document and any postmarked material (if sent from ECC-MTB).

    4. Enter delinquent indicator "P" in the first box under "Official Use Only" on Form 1096 followed by the received date in MMDDYY order. Forward the original Form 1096 and associated returns to the IRP unit in Receipt and Control for processing.

    5. Forward the case file to Files for association with the adjustment document.

  8. Do not assess penalties against any Federal agency.

20.1.7.3.4.2  (11-16-2007)
Late Filing Penalty (Forms W–2)

  1. Late filed Forms W–2 are identified by the Social Security Administration (SSA). This information is posted to the Payer Master File (PMF) for the penalty program.

    1. Only Forms W–2/W–3 that are included in Notice 972CG (i.e., waiver or extension granted) will appear on the PMF. Other Forms W–2/W–3 submitted by employers are currently not posted to the PMF. These may be researched using CC BMFOLU, if necessary.

    2. Extensions and waivers for Forms W–2 that have been approved and meet penalty criteria will post to PMF, even if the forms are not subject to a penalty.

    3. For forms not listed on the waive or extension listing, refer to LEM 20.1.7

  2. The PMF records for late filed Forms W–2/W–3 will not include a received date but should include the entry "Late SSA" and penalty indicators 1, 2, or 3 to show whether the $15, $30, or $50 (respectively) penalty applies. This indicator does not appear on PMFOLD.

  3. SSA will date stamp Forms W–3 transmittals for delinquent Forms W–2 filed on paper.

  4. Microfilm copies of Forms W–3 will be forwarded to the Campus from Wage Information Retrieval System (WIRS)Unit.

20.1.7.3.4.3  (11-16-2007)
Receiving Responses (Failure to Timely File)

  1. Generally, filers must establish reasonable cause for the penalty to be abated.

  2. If the filer requests a copy of the Form 1096 which resulted in the penalty, request a microfilm print of the Form 1096 and send it to the filer. The DLN of the Form 1096 that resulted in the penalty can be found on the PMF transcript.

  3. If the SCRIPTS copy of the Form 1096 is not available after repeated attempts, follow procedures in LEM 20.1.7.3.4.3.

  4. Filers may request copies of transmittal Forms 4804 submitted with Forms 1099 etc., filed electronically or on magnetic media or provide received dates for electronic media or the documents may be required to answer the filer's question about the penalty assessment. These procedures will apply to responses to Notice 972CG and replies to any subsequent balance due notices.

    1. The Campus must contact ECC-MTB to request date stamped copies of these forms for late filed magnetic media or electronic returns.

      Note:

      ECC-MTB will continue to provide Forms 4804 in advance for the Campus to make certain manual assessments.

    2. ECC-MTB needs the filer's name, TIN, and the transmitter's control code (TCC) (available on the PMF transcript). Also provide the return type, number of returns, the received date and the DLN of the submission.

    3. ECC-MTB will furnish the forms within two weeks.

    4. Written requests should be submitted to ECC-MTB using Form 3210. ECC-MTB will also accept requests by FAX.

    5. Campuses should batch their requests and submit them to ECC-MTB no more than once a week except in extreme cases.

    6. Campuses should use their established ECC-MTB contact points to coordinate requests by mail or FAX.

    7. If necessary, contact the Headquarters Office for assistance.

    8. To prevent unauthorized disclosures, sanitize Forms 4804 to exclude all other filers' data before being mailed to the filer. This does not apply to the "transmitter" information on Form 4804.

    9. If ECC-MTB is not able to provide copies of Forms 4804 in disputed cases, follow procedures in LEM 20.1.7.3.4.3.

  5. If the filer requests a copy of Form W–3, send a photocopy to the filer. If Form W-3 is not available, follow the procedures in LEM 20.1.7.3.4.3.

  6. If the filer requests a copy of Form(s) W–2 filed on paper or if copies of Form(s) W–2 would help to resolve a case, they may be requested from WIRS (Inform the filer that it will take 6 weeks to receive copies of the documents. DO NOT submit a request to WIRS for Forms W–2 filed electronically. Follow procedures in LEM 20.1.7.3.4.3

    1. Campuses may use discretion to determine when sending paperwork that may be helpful, e.g., the paperwork shows the actual number of documents processed by SSA which equals the number of documents penalize.

    2. Campuses must ensure that the information on the paperwork applies only to the employer in question to prevent an unauthorized disclosure.

  7. Returns (Forms 1099) filed on magnetic media/electronically with unprocessable conditions are returned to the filer by ECC-MTB for corrections

  8. When a correction is required to change the return type, e.g. a return originally filed as INT income was actually DIV income, the filer must file two returns to make the correction.

    1. A corrected INT return is filed (with zero money amounts) to zero out the original INT return, and

    2. A replacement DIV return is filed as an original return.

  9. All current year late filing penalty cases are compared to the extensions of time to file that post to the PMF prior to the generation of penalty notices. See also LEM 20.1.7.3.4.3.

    1. However, if a filer responds with an approval letter from ECC-MTB granting an extension, check to see if the filer's TIN appears on the extension listing provided by ECC-MTB.

    2. If present, the penalty should be abated.

20.1.7.3.4.4  (11-16-2007)
Responses to Combined Annual Wage Reporting (CAWR)

  1. The Service assesses penalties for cases referred by the Social Security Administration (SSA) when there is a discrepancy between wages reported on Forms W-2 and what is reported to the Service on Forms 941. SSA will make two attempts to contact the employer to resolve the discrepancy. If SSA is unable to resolve the discrepancy, the cases are sent to the Service.

    • An SSA discrepancy is identified when the employer reports more Social Security Wages to the Service than to SSA.

    • An SSA discrepancy is resolved when the employer files missing Forms W-2, files Forms W-2C, reports adjustments to their Form 94X (Form 941C process) or submits other information to resolve the discrepancy.

    Upon receipt of these cases, please refer to CAWR IRM 4.19.4.

  2. Penalty Assessment: If the discrepancy is not resolved by filing missing Forms W-2, filing Forms W-2C, reporting adjustments to Form 94X (Form 941C process) , or providing an explanation of the discrepancy, the Service is directed to assess a penalty. Please follow instructions provided by IRM 4.19.4.

  3. The Late Filing penalty will be assessed for Forms W-2 secured by CAWR. Please follow instructions provided in IRM 4.19.4 relating to assessing the late filed penalty on these cases.

  4. The Failure to File penalty is assessed if Forms W-2 are not submitted or discrepancies are not resolved in response to the initial CAWR correspondence. If the failure to file penalty is applicable, please follow guidelines in IRM 4.19.4.

  5. Intentional Disregard: The penalty is assessed using Reference Number 549. Reference IRM 4.19.4.

  6. Forms W-3 involved in CAWR penalty assessments will not appear on PMFOL or the PMF transcript.

20.1.7.3.4.5  (11-16-2007)
Penalty for Failure to File on Magnetic or Electronic Media

  1. The Payer Master File (PMF) generates a penalty proposal notice when a filer fails to comply with the magnetic or electronic media filing requirements for information returns. Failure to file in the required manner, i.e., on magnetic media or in other electronic machine-readable form as provided under IRC Section 6011(e) and the regulations thereunder will result in a penalty.

  2. A penalty of $50 per return is proposed for each return filed on paper in excess of the magnetic media threshold. This criterion applies separately to each document type and separately for amended returns. The penalty should not be assessed if an undue hardship waiver was granted by ECC-MTB and posted to the PMF.

20.1.7.3.4.6  (11-16-2007)
Receiving Responses

  1. Filers may avoid a penalty by establishing reasonable cause for the failure. See IRM 20.1.7.9 for definitions of reasonable cause and IRM 20.1.7.9.2 for the special abatement conditions.

  2. All current year magnetic media and electronic penalty cases are compared to the waivers of the magnetic media filing requirement that post to the PMF prior to the generation of penalty notices.

    1. However, if a filer responds with anapproval letter from ECC-MTB granting a waiver of the magnetic media or electronic filing requirement, check to see if the filer's TIN appears on the waiver listing provided by ECC-MTB. If present, the penalty should be abated using the correct Penalty Reason Code (PRC).

    2. If the TIN is not on the waiver listing, further explanation is required.

  3. If the taxpayer's response indicates that duplicate data was provided on paper and magnetic or electronic media:

    1. First attempt to verify using the PMF transcript or PMFOL and any supporting documentation sent by the filer.

    2. If no supporting documentation is found on the PMF transcript or PMFOL, contact ECC-MTB and provide the filer's name, TIN, EIN, Transmitter Control Code (TCC) if available, tax year, type of return and the number of returns filed. See LEM 20.1.7.

  4. If the filer requests a copy of the Form(s) 1096 which resulted in the assessment on paper Forms 1098/1099, request a SCRIPS print of the Form(s) 1096 and send it to the filer. The DLN of the Form 1096 can be found on the PMF transcript and on PMFOLD.

  5. If the SCRIPS print of Form 1096 is not available after research, sanitize the page(s) of the PMF transcript containing the 1096 record(s) relevant to the penalty and send the filer a copy with an explanation.

  6. If the filer requests a copy of the Form(s) W-3 which resulted in the assessment on paper Forms W-2 send a photocopy to the filer.

    1. If the Form W-3 is not available, sanitize the page(s) of the PMF transcript containing the W-3 record(s) relevant to the penalty and send the filer a copy with an explanation.

    2. Do not submit a request to WIRS for copies of the Forms W-3.

  7. If the filer requests a copy of the Forms W-2 which resulted in the assessment, request the document from WIRS using the microfilm sequence number(s) provided on the PMF transcript. Indicate W-3 and all W-2s in the remarks area. Inform the filer that it will take about 6 weeks to obtain microfilm copies of the Forms W-2.

    1. When the Forms W-2 are received from WIRS, count to verify that the penalty agrees with the number of documents processed (eliminate blanks, voids, and subtotal forms).

    2. If the volume is lower than the penalty assessed, send the documents to the filer with Letter 1948C explaining that the penalty will be adjusted accordingly. (See LEM 20.1.7)

  8. The following information will be useful when working responses to Form W-2 electronic penalty cases. However, see LEM 20.1.73.4.6 for further information.

    1. If the filer questions why the number of Forms W-2 penalized does not agree with the volume entered on Form(s) W-3 by the filer, explain that the penalty is based on the actual number of return processed by SSA. Blanks, voids, and subtotal forms are not counted. In addition, the discrepancy may have occurred because the preparer entered an incorrect figure on Form W-3.

    2. If the response indicates that only magnetic media or electronic media was filed or if the filer does not seem to understand why the penalty was assessed, send a copy of the Form W-3 along with Letter 1948C explaining that the W-3 is a record of the paper forms filed with SSA.

    3. If the filer used a prior year Form W-3, check the signature date to determine what year the returns were submitted.

20.1.7.3.4.7  (11-16-2007)
Penalty for Failure to File in the Proper Format (Unprocessable Returns)

  1. The penalty for failure to file in the proper format is assessed for unprocessable paper returns and electronic returns identified by the Campus and ECC-MTB. This penalty is manually assessed by the Campus (CP215 or CP 15). It is not preceded by Notice 972CG.

    1. For both paper and electronic media, the documents are returned to the filer (during initial processing) along with a letter explaining the problem and requesting correction and resubmission by a specific date.

      Note:

      For paper returns, only a sample of the unprocessable returns are returned to the filer to identify the problem. However, the filer is asked to resubmit the entire submission.

    2. Filers are also advised of the applicable penalties for not resubmitting the returns timely. If processable returns are submitted beyond the date requested, the filer is subject to a late filing penalty.

    3. Returns are referred to the penalty unit for the improper format penalty if they are still unprocessable at the processing cut off for the year.

    4. The penalty will be assessed at $50 per return and is computed by multiplying the number of unprocessable returns by $50. See LEM 20.1.7.3.4.7. The de minimus exception does not apply to the improper format penalty.

  2. The Correspondence unit will receive copies and unsatisfactory responses to Letters 1865C from Receipt and Control along with the payee documents that cannot be processed. If unable to resolve, send to IRP penalty unit for penalty consideration with an explanation on the transmittal that the taxpayer failed to respond adequately.

  3. ECC-MTB will refer Forms 4804 to the Campus for assessment of the penalty. The case is referred to the Campus for the penalty only if the filer does not return the file to ECC-MTB or if the file was returned but was still unprocessable at the end of the processing year.

  4. ECC-MTB will refer to the Campus any unresolved, unreturned solicitations for corrected magnetic or electronic media (ECC-MTB will purge the case and upon nonreceipt will notify the Campus of the DLN) . The Campus will send CP215 to the submitter assessing the proposed penalty amounts. Any corrected tapes will be submitted to ECC-MTB from the Campus asking for input as to the correctness of the assessment.

  5. If it appears that the filer only corrected the sample of unprocessable paper returns that were mailed with Letter 1865C, the Campus may contact the filer to clarify that the entire submission must be resubmitted (per Letter 1865C). Allow the filer 30 days to respond before assessing the penalty.

  6. Prior to assessing the penalty for unprocessable magnetic or electronic media returns (Form 4804), check IDRS for the presence of a late filing or magnetic or electronic media penalty assessed for the same number of returns filed on paper.

    1. If an assessment is present, request a PMF transcript for manual assessments to determine if the penalty is for the same returns.

    2. If confirmed, notate the date and Penalty Considered on the 4804, associate with the closed case and refile. See LEM 20.1.7.

    3. If it is determined that the previous assessment is for different returns, assess the penalty based on the information on Forms 4804/4802.

  7. Only the actual returns which cannot be processed will be subject to the failure to file in the proper format penalty. Receipt and Control will separate the submission into processable and unprocessable.

    1. Any processable returns will have been input with original Form 1096.

    2. The unprocessable returns will be forwarded to the Penalty Unit for assessment action with a photocopy of Form 1096.

      Note:

      The "Total number of documents" filed on Form 1096 should have been changed by Receipt and Control to reflect the number of unprocessable documents subject to penalty.

    3. Verify the number of unprocessable documents subject to penalty by excluding voided and blank forms, and returns not required to be filed by law based on the dollar amount reported or exempt status.

    4. ECC-MTB will count the entire submission as unprocessable and, if the number of documents cannot be discerned, will propose the maximum penalty with affirmation from Headquarter Operations. Prior year submissions will also be considered.

    If returns are received from Receipt and Control which are processable, return the entire submission to the IRP Unit in Receipt and Control with an explanation.

  8. The penalty is to be assessed on the Civil Penalty Module.

    1. If the unprocessable returns were also filed late the first time they were filed, check PMFOL to see if an extension was also granted, for the return type and tax year in question. If an extension was also granted, use reference number 503. If an extension was not granted, use reference number 506.

    2. If a sufficient number of returns were submitted to require magnetic or electronic media filing, check PMFOL to see if a waiver was granted for the return type and tax year in question. See LEM 20.1.73.4.7. If a magnetic media waiver was also granted, use reference number 503. If a waiver was not granted, use reference number 508.

    3. If the returns were filed late and the volume was large enough to require magnetic media filing, check for the extension and waiver. If both were granted, use reference number 503. If neither was granted, use reference number 511. If an extension was granted but no waiver, use reference number 508. If a waiver was granted but no extension, use reference number 506.

  9. If the assessment is input on or before July 1 of filing year, the Campus should include a quick note with the notice. The quick note should contain the following statement: The penalty was assessed at $50 per return but it will be reduced if the corrected forms are submitted on or before August 1, 20XX.

  10. Processable returns (paper) resubmitted after the date requested in Letter 1865C should be processed unless the penalty amount is less than $500 (10 submissions calculated at $50 per submission).

  11. Unprocessable returns (paper) should be forward via transmittal to the IRP penalty unit for penalty consideration. The letter sent to the taxpayer should be attached to the transmittal. The transmittal should clearly note that the returns are submitted for penalty consideration due to lack of response from taxpayer.

20.1.7.3.4.8  (11-16-2007)
Receiving Responses (Unprocessable Returns)

  1. Generally filers must establish reasonable cause for the penalty to be abated. See IRM 20.1.7.9.1 for definitions of reasonable cause and IRM 20.1.7.9.2.9 for the special abatement conditions. See LEM 20.1.7.3.4.8, for further instructions.

  2. If the filer submits corrected returns in response to the penalty notice, Receipt and Control will notate the CP15/215 Processable returns submitted and also notate the received date and the number of returns submitted.

    1. Review the filer's response to determine if the explanation establishes reasonable cause.

    2. If the filer's explanation does not establish reasonable cause, and the received date indicates that the $50 penalty should be reduced (see LEM 20.1.7), recalculate the penalty at $15 or $30 per return as appropriate. The penalty should only be adjusted for the number of processable returns received as noted on the CP15/215.

    3. Also include the following explanation: We received your corrected information returns on _. The penalty you were previously assessed for filing unprocessable Forms _ has been reduced to $XX.XX per return. You will receive an adjusted balance due notice.

  3. If the filer submits processable returns in response to the notice but the explanation provided does not meet reasonable cause, disallow the claim.

20.1.7.3.4.9  (11-16-2007)
Penalty for Missing and Incorrect TINs

  1. Filers who file an information return with a missing TIN, or a TIN determined to be incorrect or not currently issued by the Service, are subject to a penalty of $50 per return.

  2. After the TIN validation process is performed to identify payee records with missing and incorrect TINs/names, this data is transmitted to the Payer Master File for inclusion in the penalty proposal notice.

  3. See Exhibit 20.1.7–5 for details on how the Service performs TIN validation to determine which TINs are incorrect or not currently issued.

    Note:

    When a TIN is identified as incorrect, either the TIN or name may be incorrect.

  4. A paper or tape listing of payee records with missing or incorrect TINs is sent to the filer along with the proposal notice. Publication 1586, Reasonable Cause Regulations and Requirements as They Apply to Missing and Incorrect TINs, is also included in this mailing. It provides a detailed explanation of the action the filer is required to take upon receiving the listing.

  5. For a payer making a reportable payment to a payee, the payer must make an initial solicitation for the payee's TIN at the time the account is opened.

  6. If the payer does not receive a TIN as a result of the initial solicitation, he/she must complete a first annual solicitation by December 31 of the year in which the account was opened, or by January 31 of the following year if the account was opened in December.

  7. If the payee does not receive a TIN as a result of the first annual solicitation, he/she must complete a second annual solicitation by December 31 of the year immediately following the calendar year in which the account was opened.

  8. Filers are required to review payee accounts to verify whether or not they have completed the required solicitations (request TINs from payees) to show reasonable cause to have the penalty waived or abated.

20.1.7.3.4.10  (11-16-2007)
Receiving Responses (Missing and Incorrect TINs)

  1. See IRM 20.1.7.9.2 for the general solicitation requirements for TINs and the general reasonable cause criteria in IRM 20.1.7.9.2 to determine if the penalty should be waived or abated.

  2. Also see LEM 20.1.7 for the special abatement criteria.

  3. If the filer's response indicates they do not understand why they received the notice and/or what actions they are required to take, provide a brief explanation in Letter 1948C and refer them to the Publication 1586.

  4. If the filer has included corrected returns for prior years in response to the notice, advise the filer that corrections for name/TINs are not required for prior years. Filers should be advised to update their records and reflect the correct data on any returns filed in the future. However, an employer should file a Form W-2C, Corrected Wage and Tax Statement, even if the employer is only filing Form W-2C to correct an employee's SSN.

  5. If corrected returns are provided for current year returns, route them to the Receipt and Control Function for processing.

    Note:

    Filers are required to submit other corrections for information returns (e.g., money amounts) for current year returns.

  6. If the filer submits examples of garbled information on the TIN listing apologize for the inconvenience and advise that no action is necessary.

  7. Filers must compare the listings of incorrect and/or not currently issued TINs received from the Service with their records to determine if the name/TIN combination included on the listings agrees or disagrees with their records.

  8. In general, if an account number is provided on the listing, the filer need only identify any account or accounts with that corresponding number or designation that has the same name/TIN combination. If no account number is provided, the filer must use reasonable care to identify all accounts that relate to the same incorrect name/TIN combination.

  9. If the name/TIN combination on the listing agrees with their records, the filer must perform the required annual solicitation if not completed previously.

  10. If the name/TIN combination on the listing disagrees with its records, the filer must determine whether:

    1. An error was made when filing the information return. If so, the filer must include the correct information on any future information returns. However, an employer should file a Form W-2C, Corrected Wage and Tax Statement, even if the employer is only filing Form W-2C to correct an employee's SSN.

    2. The information in their records has changed since filing the information return. If so, the filer must include that information on any future information returns,

    3. The Service changed the information during processing. If so, the filer should notate their records and take no further action.

    4. In all the instances outlined above, the filer should notate their records and provide this information in their reply to the 972CG Notice.

20.1.7.3.4.11  (11-16-2007)
Notice 972CG, Notice of Proposed Civil Penalty

  1. Notice 972CG, Notice of Proposed Civil Penalty, is mailed to give filers an opportunity to establish reasonable cause for waiver of penalties prior to assessment. The notice includes proposed penalties for failure to file timely, failure to file on magnetic or electronic media and missing and incorrect TINs. Notice 972CG is assigned the reference number which corresponds to the penalty proposed, e.g. reference number 500 for the failure to file timely penalty.

  2. Filers are allowed 45 days to respond to the notice and to submit an explanation as to why the penalty should be waived. Filers may also submit a payment if they fully or partially agree or sign a consent to allow the Service to send a bill for the balance due. *NOTE-The decision to assess or not assess the penalty should not be made based on the amount of payment received. Reasonable Cause Criteria must be applied in all instances.

  3. The penalty will be assessed against filers who do not submit a satisfactory explanation or who fail to respond to the notice. All penalties will be manually assessed.

  4. Notice 972CG is not posted to the master file or shown on any IDRS or CFOL Command Codes. Campuses may open an IDRS control base on MFT 13 or 55 after mailing the notices immediately upon receipt of a reply. This will prevent a delay in taking necessary interim or closing actions after the response is reviewed. When the control base is opened enter Notice 972CG or 972CGREPLY in the ACTIVITY and OTHER as the category code. (Special Category Code CVPN should be established for these cases).

  5. Campuses should maintain a suspense file for Notice 972CG which contains the:

    • Notice,

    • TIN listing (if applicable)

    • CP215/15A, Summary of Your 20XX Information Return Penalties.

    • These file should be maintained in TIN order.

    • Files should be maintained for 180 days.

20.1.7.3.4.11.1  (11-16-2007)
Receiving Responses (Notice 972CG)

  1. Review responses to Notice 972CG to determine if the penalty should be waived for reasonable cause in the same manner as replies to penalty assessment notice (CP215/15). See the appropriate section in IRM 20.1.7.3 to respond to replies for penalties proposed for late filing, magnetic media, and TINs.

  2. See IRM 20.1.7.9.1 for reasonable cause criteria and IRM 20.1.7.9.2.9 for special abatement conditions.

  3. Filers may be granted an extension for up 30 days to respond to the notice. For notices that were initially undeliverable, or required a recreate (see IRM 20.1.7.1.6.3.4), the new notice date is the date stamped when the notice is mailed a second time. See LEM 20.1.7.

  4. Campuses must review replies fully and give filers the opportunity to submit additional information regarding their case before making a decision of whether or not to assess the penalty.

  5. If the explanation establishes reasonable cause:

    1. Send letter 1948C explaining the decision.

    2. Input a TC 290.00 on MFT 13 or 55, using Blocking Series 15, for BMF accounts or on MFT 55 using BS 05 for IMF accounts.

    3. Use Reason Code (RC) 62 and/or the appropriate 4th position Reason Code, Hold Code (HC) 3, Penalty Reference Number (PRN) from the Notice 972CG and amount 0.00 .

    4. File Notice 972CG, correspondence, and a print of the Letter 1948C with your adjustment document.

  6. If the filer agrees with part of the penalty and establishes reasonable cause for the remainder (reasonable cause not denied for any amounts)

    1. Send letter 1948C explaining the decision, an explanation of how to avoid future penalties and that the balance due notice will follow (if not paid in full). Use Reason Code 62 and the appropriate Penalty Reason Code.

    2. Input the assessment on MFT 13 or 55 for the agreed penalty amount using BS 52 if it's a first assessment on the module, or BS 53 if a previous adjustment is already present.

    3. Use Reason Code 62 and/or the appropriate 4th position reason code for the amount being waived, HC 3, PRN from 972CG and penalty amount for the part of the penalty being assessed.

    4. Monitor the assessment to ensure that it posts.

  7. If the explanation does not establish reasonable cause or the abatement request is partially denied:

    1. Input the assessment for any penalty amount for which the filer did not provide an acceptable explanation.

    2. Do not use Reason Code 62 if the penalty is being assessed in full, and use Hold Code 0.

    3. If waiver or abatement is partially denied, use the appropriate Reason Code(s) for the portion being waived/abated and Hold Code 3. Use the PRN from the 972CG.

    4. Input a separate transaction using TC 290, 0 , BS 98, RC 62 in the 1st position, do not enter a 4th position code and HC 3. To delay the posting of the second transaction for one cycle, use Posting Code Delay Code 1 with this transaction.

    5. Send Letter 854C stating the reason(s) the explanation was not accepted. Also state the penalty amount assessed and that a balance due notice will follow. Correspondence should only be sent to the responsible individual and not to a joint account.

    6. File the case.

    7. Monitor the assessments to ensure that they post.

    8. See (12)-(16) below before assessing the penalty if the reply indicates that the filer is no longer in business or there was a change in business organization, i.e. partnership to corporation. (Assess the penalty unless criteria in (12)-(16) below applies.)

  8. Use care when adjusting penalty amounts when two or more penalties (late, magnetic media, or TIN) apply to the same document.

    Example:

    If 500 Forms 1099–DIV were filed late (April 5) and fifty of these returns had incorrect TINs, the proposed penalty on Notice 972CG would be calculated at 50 x $50 (TINs) plus 450 x $15 (late). If the filer submits a satisfactory explanation for the 50 incorrect TINs, but not for filing late, the penalty should be recalculated at 500 x $15 for the CP215/15 notice.

  9. If a payment was received, the amount will be notated on the response page by the Deposit function. Acknowledge any payment received in correspondence with the filer.

  10. If a full payment is received and there are no disagreed items or a partial payment is received and the filer submits a satisfactory explanation for the remainder, input the adjustment on MFT 13 or 55. Use Hold Code 3

  11. See LEM 20.7.1 for purge dates

  12. If Freeze Code —Z is on the account, send the case to Criminal Investigation. Do not assess the penalty.

  13. Prior to assessing the penalty, check for undeliverables or no response cases.

  14. Use BMFOL to check Form 941 (MFT 01) modules for the presence of Collection Compliance transaction:

    1. A TC 530 with CC10 (defunct corporation),

    2. TC 530 with CC07 (bankrupt/insolvent corporation), (See IRM 20.1.7.9.6 for more information on bankruptcies.) or

    3. TC 480/7890 (Offer in Compromise pending (OIC)).

    4. If a TC 530 with either closing code is present, do not assess the penalty.

  15. Check the tax year in question and subsequent years. If an unreversed TC 480 is present, check for the case file assignment number and notify the responsible Collection Compliance function of the pending assessment. Collection Compliance must include this assessment in the OIC.

  16. A TC 480 may be reversed with:

    1. TC 481 — OIC requested,

    2. TC 482 — OIC withdrawn, or

    3. TC 483 — Correction of an erroneous TC 480.

    Note:

    Since it is not unusual to have more than one TC 480 posted in a module, a careful review of the entire module should be done before taking any action.

  17. Also, apply the criteria in (14) if a filer's response to Notice 972CG indicates they are either a defunct or bankrupt corporation; check for the appropriate transaction code.

  18. Each Campus should have available for monitoring, monthly as well as cumulative totals for each category.

    1. Number of Notice 972CG mailed and referred to Exam (RTC/FDIC Notices during mailout), total Notices mailed and referred to Exam.

    2. Number of receipts (replies) Notice 972CG.

    3. Number of replies/no responses as follows: (1) Reasonable Cause Waiver Granted, (2) Reasonable Cause Waiver Denied — assessment for full amount, (3) Reasonable Cause Waiver Partially Denied — Partial Assessment, (4) Penalty Waived for Other than Reasonable Cause, (5) Partially Agreed — no disallowed items, (6) Fully Agreed, (7) Case closed to Exam, (8) Purged-assessment input for no reply and undeliverable cases, (9) Open replies (Cum receipts minus items 5–10), (10) No reply suspense (line 3 minus CUM receipts minus line 12), (11) Total of items 5 through 14 on report.

    4. Receipts (Replies) to CP 215/15.

    5. Abatements (after CP215/15): Full, Partial Referrals to Appeals, Number (abatements) requested or done by Appeals.

    6. Only count notices in one category.

    7. The monthly report should continue until the Campus has purged no reply cases and resolved all open cases (reply received) for Notice 972CG. The penalty analyst will notify the unit when to stop reporting for abatements of CP215/15.

20.1.7.4  (11-16-2007)
Failure to Furnish Correct Payee Statements IRC Section 6722

  1. IRC section 6722 provides for a penalty when a payee statement is not timely or correctly furnished, The $50 penalty is imposed for each failure to:

    1. Furnish a payee statement on or before the due date to the person to whom the statement must be furnished,

    2. Furnish all information required, and

    3. Furnish correct information.

  2. No more than one penalty will be imposed per payee statement, even though a statement may contain more than one failure.

  3. For purposes of IRC section 6722, the term payee statement means any statement required to be furnished as described in Reg. 301.6722–1(d)(2).

  4. The total amount imposed on any filer for all failures to furnish a payee statement during any calendar year shall not exceed $100,000.

  5. A composite substitute payee statement is a single document created by the filer to reflect several types of payments made to the same payee. Each composite statement shall be treated as though each type of payment (or other required information) were a separate statement with each type of payment being subject to the penalty.

  6. This statement must be on a form acceptable to the Service. See Publication 1179, Specifications for Paper Document Reporting and Paper Substitutes for Forms 1096, 1098, 1099 Series, and Forms 5498 and W-2G. See Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3.

  7. The $50 penalty for failure to furnish payee statements is not reduced if returns are corrected or filed after the due date.

  8. The IRC section 6722 penalty should not be imposed if an error or omission is inconsequential.

20.1.7.4.1  (11-16-2007)
Intentional Disregard

  1. The Intentional Disregard of the Rules and Regulations Penalty applies when the facts and circumstances show that the filer knowingly or willfully failed to comply with the requirements of IRC sections 6722.

  2. Intentional disregard occurs when a filer who knows, or should know of a rule or regulation, chooses to ignore its requirements. The facts should show the filer:

    1. Was required to provide a statement,

    2. Knew or should have known of the requirement to provide the statement, and

    3. Consciously chose not to provide the statement or recklessly disregarded (i.e. ignored) the duty to provide the statement.

  3. Treas. Reg. 301.6721–1(f)(3)(i) provides that a pattern of failures indicates intentional disregard. The greater the number of failures, the greater the likelihood some of those failures could be due to intentional disregard. Additional indications of the existence of intentional disregard are:

    1. Did the filer correct the failure promptly after the discovery of the failure,

    2. Did the filer correct the failure within thirty days after notification of the failure by the Service,

    3. Did the filer avoid an administrative inconvenience, and

    4. Was the cost of compliance greater than the IRC section 6722(a) penalty.

  4. Intentional disregard may exist when it would be less expensive to pay the penalty under 6722(a) rather than comply with the requirement to provide a statement. Treas. Reg. 301.6722–1(c)(2). Check payee's prior history of compliance to determine intentional disregard.

  5. The Intentional Disregard of the Rules and Regulations Penalty amounts to:

    1. $100 for each payee statement required to be filed, or if greater:

    2. 10 percent of the amount of income required to be reported on payee statements for dividends, patronage dividends, interest, fishing boat operators, royalties, and wage and tax statement, or

    3. 5 percent of the amount required to be reported on the payee statements for brokers, exchange of partnership interest, or disposition of donated property payments.

  6. Form 8300 Penalty. The Intentional Disregard penalty for failing to provide a payor of cash with a statement as required by IRC sections 6050I(e) is the greater of $100 or 10 percent of the amount required to be provided on the statement.

    1. These penalties are asserted by field Examination personnel.

    2. The taxpayer may be offered an administrative preassessment appeal.

  7. There is no maximum dollar limitation for the Intentional Disregard of the Rules and Regulations Penalty under IRC section 6722.

  8. No more than one penalty per failure can be imposed, even if there is more than one failure on the same statement.

20.1.7.4.2  (11-16-2007)
Exceptions and Special Rules

  1. The penalty shall not be assessed if an error or omission is inconsequential. An error or omission is inconsequential when the failure does not prevent:

    1. The timely receipt of correct information, or

    2. The payee from putting the information to its intended use.

  2. Errors or omissions are never considered inconsequential if they relate to:

    1. A dollar amount,

    2. A significant item in the payee address,

    3. Use of the appropriate form for the information provided, whether or not it is an acceptable substitute for the official IRS form, and/or

    4. The delivery of the information return to the payee either in person or by first class mail (in a mailer which alerts the payee that the statement is enclosed) under the following: IRC section 6042(c), Returns Regarding Payments of Dividends and Corporate Earnings and Profits, IRC section 6044(e), Returns Regarding Payments of Patronage Dividends, IRC section 6049(c), Returns Regarding Payments of Interest, and or IRC section 6050N(b), Returns Regarding Payments of Royalties.

20.1.7.5  (11-16-2007)
Failure to Comply with Other Information Reporting Requirements IRC Section 6723

  1. For any information return or payee statement due (without regard to extensions) , a penalty of $50 per failure will be imposed for each failure to provide all the required information timely.

  2. No more than one penalty can be imposed for the same return. For example, if a return has more than one error or omission and the penalty amount for those failures differs, the penalty will be imposed at the higher amount.

  3. A penalty of $50 is imposed for failure to comply timely with specified information reporting requirements or for each failure to include correct information. The maximum penalty for failure to comply with all specified information reporting requirements is $100,000 per year.

  4. Multiple penalties may be imposed on one document if the failures relate to more than one of the following requirements:

    1. IRC section 6050K(c)1–notification of exchange of partnership interest,

    2. IRC section 6109–supplying identifying numbers, (1) includes his/her TIN on a return, statement or document other than an information return or payee statement, (2) furnishes his or her TIN to another person, (3) the TIN of any other person whose number is required to be shown on a return, statement of document other than an information return or payee statement, (4) the TIN of a return preparer.

    3. IRC section 215–Alimony, etc., Payments, (1) the person receiving separate maintenance is required to furnish his or her TIN to the individual making separate maintenance payments, and (2) the person making the separate maintenance payment is required to furnish on their return the TIN of the person receiving the separate maintenance payment.

    4. IRC section 6109(e)-Furnishing Number for Certain Dependents, Include on his/her return, the TIN for any dependent who is claimed as an exemption on an income tax return, and has reached 1 year of age before the close of the taxable year.

  5. However, no more than one penalty per document may be imposed if the failure could be penalized for both :

    • Failure to timely comply, or

    • Failure to include all the required information.

20.1.7.5.1  (11-16-2007)
Intentional Disregard