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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 10. Excise Tax Penalties and Miscellaneous Penalties

20.1.10  Excise Tax Penalties and Miscellaneous Penalties

20.1.10.1  (01-01-2006)
Overview

  1. This section of the consolidated penalty IRM discusses the excise tax penalties and miscellaneous penalties not included in the other chapters.

20.1.10.1.1  (01-01-2006)
Common Features

  1. In general, each penalty discussed in this chapter is unique and will stand alone unless otherwise indicated. Exceptions and additional information are noted in the discussions of the specific penalties. However, some general procedures will apply.

  2. Statute of Limitations.In general, the additions to tax, additional amounts, and assessable penalties in IRC sections 6651–6657 and IRC sections 6671–6723 are assessed, collected, and paid in the same manner as taxes. To the extent such an item pertains to a tax return, the assessment is subject to the period of limitation in IRC section 6501 (generally, three years from the later of the due date (unextended) or the filing of the return.

  3. Reasonable Cause.Determination as to whether or not reasonable cause exists must be based on a careful consideration of the facts and circumstances of each case prior to the assertion of a penalty. Examiners should consider any reason a taxpayer provides in conjunction with the guidelines, principles and evaluating factors identified in the Introduction and Penalty Relief Chapter. See IRM 20.1.1.3.1 , Reasonable Cause, as well as the applicable IRC section and Treasury Regulations relating to the specific penalty.

    Note:

    Relief from a penalty may also be provided through Statutory Exceptions, Administrative Waivers, and Correction of Service Error. See IRM 20.1.1.3, Relief from Penalties.

  4. Abatements.Information on penalty abatements and penalty reason codes (PRC) is discussed in IRM 20.1.1.3.

  5. Penalty Transaction Codes.See Exhibit 20.1.1–4 for a list of penalty transaction codes.

  6. Penalty Reference Numbers.See Exhibit 20.1.1–5 and 20.1.1–6 for a list of penalty reference numbers (PRN.)

20.1.10.1.2  (01-01-2006)
Who Asserts/
Assesses

  1. A service center or compliance function may determine that a penalty should be imposed.

    1. At a service center, the penalty may generate automatically, or

    2. Compliance functions consider the penalty during an examination or during personal contact with the taxpayer.

20.1.10.1.3  (01-01-2006)
Assertion/ Assessment

  1. Penalty reference numbers (PRNs) are used to assess non-tax return related penalties (conduct or information returns).

    1. The five hundred (500) series PRNs are usually generated as a result of computer matching programs and used to identify the failure.

    2. The six hundred (600) series PRNs are generally used to assess penalties as the result of an examination or other compliance activity.

    3. See Exhibit 20.1.1–5 and 20.1.1–6 for a complete list of current PRNs .

20.1.10.2  (01-01-2006)
IRC Section 6166 Extension of time for payment of estate tax where estate consists largely of interest in closely held business

  1. IRC section 6166 provides that the executor of an estate may make an election to pay in as many as 10 annual installments, that portion of the estate tax attributable to assets used in a qualifying closely held business. The first installment must be paid not more than five years after the due date for payment without regard to IRC section 6166 . If property qualifies for installments, only interest on the unpaid balance is due on the first four anniversary dates after the due date.

20.1.10.2.1  (01-01-2006)
IRC section 6166(g)(3) Failure to make payment of principal or interest

  1. IRC 6166(g)(3), Failure to make payment of principal or interest, provides that if an installment of principal and/or interest is not paid when due, but is paid within six months of the due date, there is imposed a penalty in an amount equal to five percent (5%) of the amount of the payment multiplied by the number of months (or fractions thereof) after the due date until the payment is received.

20.1.10.2.2  (01-01-2006)
Who Asserts/ Assesses

  1. The estate tax installment agreement is monitored in the Service Center Accounting Branch. The campus procedures for adjustment (assessment/abatement) will be the primary focus under this penalty section.

20.1.10.2.3  (01-01-2006)
Penalty Computation

  1. During the four-year principal deferral (or shorter period if elected by the executor), the Estate is billed for interest only.

  2. If the taxpayer fails to make the installment (interest) payment, CP 191, Notification to Service Center Accounting, to update the installment billing clerks file, will not generate. A manual review of the payment pending file will be necessary 45 days after the installment due date.

  3. If the review shows an unpaid installment, research:

    1. Master file and IDRS for misapplied payment, and

    2. Form 4768, Application for Extension of Time to File U.S. Estate Tax Return and/or Pay Estate Tax, for attached payment or another TIN.

  4. If no payment or extension is located:

    1. Compute the Late Installment (LI) Penalty on the unpaid installment (interest) at 5% per month (or fraction thereof) from the installment due date to the date of Notice and Demand. Input TC 240 on IDRS for LI Penalty .

    2. Compute interest on the unpaid installment (interest) from the installment due date to the date of Notice and Demand. Input TC 340 on IDRS for interest .

  5. Prepare and issue Form 6335, Unit Ledger Card, for the unpaid installment, including accrued penalty and interest.

  6. Suspense for 45 days.

  7. If after 90 days, no response is received from Service Center Collection Operation (SCCO), contact them to determine status of account.

20.1.10.2.4  (01-01-2006)
Assertion/ Assessment

  1. If the taxpayer fails to make the installment (principal and interest) payment, a manual review of the payment pending file will be necessary 45 days after the installment date.

    1. Compute Late Installment (LI) penalty on the unpaid installment (principal and interest) at 5% per month (or fraction thereof) from the installment due date to the date of Notice and Demand. Input TC 240 on IDRS for LI Penalty.

    2. Compute Failure to Pay (FTP) Penalty on the principal portion of the installment from the installment due date to the date of Notice and Demand. Input TC 270 on IDRS for FTP penalty.

    3. Compute interest (at the existing rate) on the unpaid installment (principal and interest) from the installment due date to the date of Notice and Demand. Input TC 340 on IDRS for interest.

    4. Use Hold Codes, Priority Codes, Posting Delay Codes and Penalty Reasons Codes as applicable. See IRM 21.5 and Document 6209 for additional information regarding these codes and indicators.

  2. Prepare and issue "Certified Letter" (return receipt requested) for the unpaid installment, accrued penalty and interest.

  3. Suspense for 45 days.

  4. If the payment is not received within 45 days of the Certified Letter, see IRM 4.25.2 .

20.1.10.2.5  (01-01-2006)
Penalty Relief

  1. No penalty relief provisions (including reasonable cause) exist.

    Note:

    Prior to the due date of the payment, the estate may seek an extension of the time for payment under IRC section 6161 , Extension of Time for Paying Tax.

20.1.10.3  (01-01-2006)
IRC Section 6652 Failure to file certain information returns, registration statements, etc.

  1. IRC Section 6652 provides a penalty for the failure to file certain information returns, registration forms, reports, certifications, etc.

20.1.10.3.1  (01-01-2006)
IRC section 6652(a) Returns with respect to certain payments aggregating less than $10

  1. Reserved.

  2. See LEM 20.1.10.3 .

20.1.10.3.2  (01-01-2006)
IRC section 6652(j) Failure to file certification with respect to certain residential rental projects

  1. IRC section 6652(j) provides a penalty of $100 per failure to provide the certification as required by IRC section 142(d)(7) Certification to Secretary .

    1. Form 8703, Annual Certification of a Residential Rental Project, is required to be filed by March 31 after the close of the calendar year for which the certification is made.

    2. Form 8610, Annual Low-Income Housing Credit Agencies Report, is required to be filed by February 28 of the year following the calendar year for which an allocation of credit is made.

20.1.10.3.3  (01-01-2006)
Who Asserts/ Assesses

  1. Currently, Philadelphia Service Center processes these forms in a special processing unit.

20.1.10.3.4  (01-01-2006)
Penalty Computation

  1. The penalty is subject to deficiency procedures.

20.1.10.3.5  (01-01-2006)
Assertion/ Assessment

  1. Procedures for adjustment (assessment/abatement) are in IRM 3.11.25 .

20.1.10.3.6  (01-01-2006)
Penalty Relief

  1. The Service does not apply the penalty when the failure to timely file Form 8703 or Form 8610 is due to reasonable cause and not willful neglect.

20.1.10.3.7  (01-01-2006)
IRC section 6652(k) Failure to make reports required under section 1202

  1. See LEM 20.1.10.3.2 .

20.1.10.3.8  (01-01-2006)
IRC section 6652(l) Failure to file return with respect to certain corporate transactions

  1. See LEM 20.1.10.3.3 .

20.1.10.4  (01-01-2006)
IRC section 6653 Failure to pay stamp tax

  1. IRC section 6653 is administered by the Bureau of Alcohol, Tobacco and Firearms.

20.1.10.5  (01-01-2006)
IRC section 6657 Bad checks/Insufficient Funds

  1. IRC section 6657 provides for the assertion of a penalty when a taxpayer’s payment is dishonored.

  2. These payments can be in the form of a check or money order.

20.1.10.5.1  (01-01-2006)
Who Asserts/ Assesses

  1. Generally, this penalty will be assessed by the campuses using the following penalty transaction codes (TC).

    1. TC 280—Manual assessment of a bad check penalty, or

    2. TC 286—Computer generated assessment of a bad check penalty initiated by the posting of any one of the following TC's: 611, 621, 651, 661, 671, 681, 691 or 721.

20.1.10.5.2  (01-01-2006)
Penalty Computation

  1. The amount of the penalty is the lesser of:

    1. two percent (2%) of the amount of the payment, or

    2. if the amount of the dishonored payment is less than $750, then the penalty is $15, or the amount of the payment (whichever is less.)

20.1.10.5.3  (01-01-2006)
Assertion/Assessment

  1. A dishonored payment is identified on master file/IDRS when the payment/deposit is reversed.

    1. For example, a payment received with a return is identified as a TC 610. If the payment received with the return was dishonored when presented to the bank, it would be identified on master file / IDRS as a TC 611.

    2. When a payment/deposit received by the Treasury is dishonored, the payment will be reversed and one of the following TCs will post to master file: TC 611, 621, 641, 651, 661, 671, 681, 691, or 721.

    3. The penalty associated with the dishonored payment will be identified on master file / IDRS as a TC 280 or TC 286.

  2. A notice will be sent to the taxpayer informing him/her of the dishonored payment and any applicable penalty and interest assessed. The bad check penalty notice serves as an avenue to educate the taxpayer and encourage his/her future compliance.

20.1.10.5.4  (01-01-2006)
Penalty Relief

  1. The taxpayer may request penalty abatement by providing a reason why the payment was dishonored. Review the request for abatement (the bank letter and/or other correspondence/information) to determine if the penalty should be reversed. The taxpayer should provide written documentation to support the request. See IRM 20.1.1.3 , Relief from Penalties.

  2. If it is determined that the penalty should be abated:

    1. Input TC 281 on IDRS for the amount of the penalty assessed on that payment.

    2. Indicate the reason for the penalty abatement in the adjustment remarks area.

    3. Use the appropriate reason code, penalty reason code, hold code, priority code, and/ or posting delay code, as required.

    4. Notify the taxpayer that the penalty has been eliminated. If a CP notice is not generated, use Letter 0608C , Dishonored Check Penalty Explained, or telephone contact.

      Note:

      TC 287 is computer generated, and reverses the TC 280 or 286 when the Collection status code is 06, the module balance is debit, and the net 28X amount equals the module balance.

  3. If it is determined that the penalty should not be abated:

    1. Provide the taxpayer with a written explanation, using Letter 0854C, Penalty Waiver or Abatement Disallowed/Appeals Procedure Explained, or an equivalent denial letter.

    2. Input on IDRS TC 290, Blocking Series (BLK) 98/99, RC 062.

20.1.10.5.4.1  (01-01-2006)
Penalty Request With No TC 150

  1. When the taxpayer requests penalty relief and the taxpayer's return has not posted (no TC 150), a bad check penalty abatement (TC 281, which generates with a TC 290 .00) can still be input on IDRS.

  2. If the penalty relief request is denied on an account where a return has not posted (no TC 150), the TC 290 .00, BLK 98/99 can still be input on IDRS.

20.1.10.5.5  (01-01-2006)
Reasonable Cause

  1. In addition to the reasons discussed in IRM 20.1.1.3 , the following should be accepted as reasonable cause for dishonored payments.

    1. The taxpayer furnished evidence that their bank account contained sufficient funds at the time the payment was submitted, but due to a bank error the payment was dishonored (in this situation, the bank should provide a letter of explanation), or

    2. A payment was not honored because of the death of the taxpayer after the date the payment was issued/originated, or

    3. Payment was stopped on the advice or recommendation of an IRS employee.

  2. No penalty will be assessed on third party checks involving cash register seized property.

  3. See LEM 20.1.10.5

20.1.10.6  (01-01-2006)
IRC section 6674 Fraudulent statement or failure to furnish statement to employee

  1. IRC section 6674 provides for a penalty for a willful failure to furnish ( IRC section 6051 or IRC section 6053(b))) for willfully furnishing a false or fraudulent statement to an employee (Reg 31.6051–1 or 31.6053–2).

    1. IRC section 6051, Receipts for employees

    2. IRC section 6053(b), Statements furnished by employers

20.1.10.6.1  (01-01-2006)
Who Asserts/ Assesses

  1. When an indication of willful failure is discovered, the investigating Compliance office will suspend the inquiry and report findings to the Criminal Investigation function.

20.1.10.6.2  (01-01-2006)
Penalty Computation

  1. The penalty is $50 for each willful failure to provide, or for furnishing, a false or fraudulent statement.

20.1.10.6.3  (01-01-2006)
Assertion / Assessment

  1. Examination will assert the civil penalty.

20.1.10.6.4  (01-01-2006)
Penalty Relief

  1. Reasonable cause provisions do not apply to IRC section 6674 . See IRM 20.1.1.3 .

20.1.10.7  (01-01-2006)
IRC section 6675 Excessive claims with respect to the use of certain fuels

  1. IRC section 6675 provides for a penalty if an excessive claim is filed for certain federal excise taxes.

    1. IRC section 6420 — Gasoline used on farms;

    2. IRC section 6421 — Gasoline used for certain non-highway purposes, used by local transit systems, or sold for certain exempt purposes;

    3. IRC section 6427 — Fuels not used for taxable purposes.

20.1.10.7.1  (01-01-2006)
Penalty Computation

  1. The penalty is an amount equal to the greater of:

    1. Two times the excessive amount; or

    2. $10.

  2. The penalty does not apply to excessive credit taken for such taxes on an income tax return.

  3. The penalty may apply to excessive payment on the claim.

20.1.10.7.2  (01-01-2006)
Assertion / Assessment

  1. Reserved.

20.1.10.7.3  (01-01-2006)
Penalty Relief

  1. Reasonable cause does apply. See IRM 20.1.1.3.

20.1.10.8  (01-01-2006)
IRC section 6697 Assessable penalties with respect to liability for tax of regulated investment companies

  1. IRC section 6697 provides for a penalty to be imposed on a regulated investment company or a real estate investment trust which uses the deficiency dividend procedure of IRC section 860, Deduction for deficiency dividends, to retain its qualified status.

20.1.10.8.1  (01-01-2006)
Penalty Computation

  1. The amount of the penalty is equal to the interest charge paid by the trust on the deficiency dividend.

  2. The penalty may not exceed 50% of the deficiency dividend deduction allowed by IRC section 860(a) , Deduction for deficiency dividends (General rule.)

20.1.10.8.2  (01-01-2006)
Assertion / Assessment

  1. The penalty may be assessed and collected without the normal deficiency procedure.

20.1.10.8.3  (01-01-2006)
Penalty Relief

  1. Reasonable cause does not apply. See IRM 20.1.1.3 .

20.1.10.9  (01-01-2006)
IRC section 6702 Frivolous income tax return

  1. IRC section 6702 provides for an immediate assessment of a $500 civil penalty against individuals who file frivolous income tax returns or frivolous amended income tax returns. The penalty is not based on tax liability. An underpayment of tax or understatement of liability is not essential for the penalty to be imposed in addition to any other penalty. The intent of the law is to stop the flow of returns, amended returns, and documents that purport to be returns, and contain altered line items, and/or claim clearly unallowable deductions or credits based on a frivolous position.

  2. The penalty can be asserted on a frivolous Form 1040, Form 1040X, Amended Return, Form 843, Claim, and others that:

    1. Do not contain sufficient information to judge the correctness of the tax, or

    2. Contain information that on its face indicates the self-assessment is incorrect, and

    3. The conduct referred to in (a) or (b) is due to a position that is frivolous, or a desire to delay or impede the administration of the tax laws.

  3. Some of the schemes that may cause the assertion of the penalty are described in Notice 2005–30, 2005–14 Internal Revenue Bulletin 827 .

  4. The frivolous return penalty is not applied against partnerships, corporations or estates.

  5. Statute of Limitations. A frivolous return:

    1. Does not constitute a valid return when the Service is unable to process the return, therefore, the IRC section 6702 penalty may be assessed at any time.

    2. Does constitute a valid return when the Service is able to process the return. Therefore, the IRC section 6702 penalty must be assessed within 3 years after the return was filed.

20.1.10.9.1  (01-01-2006)
Who Asserts / Assesses

  1. Generally, the service center identifies frivolous returns and assesses the penalty.

  2. If the field receives a return that warrants a frivolous return penalty, the employee should indicate this on a Form 3198, Special Handling Notice, attached to the original return.

20.1.10.9.2  (01-01-2006)
Penalty Computation

  1. The civil penalty is $500 per frivolous document.

  2. A taxpayer can have multiple penalties; however, for a joint return, only one $500 penalty per frivolous document is assessed against the husband and wife.

  3. See LEM 20.1.10 .

20.1.10.9.3  (01-01-2006)
Assertion / Assessment

  1. A Form 8728, Computation and Assessment of Miscellaneous Penalties, will be completed and used for assessment unless the penalty is related to a joint return. Form 5734, Non-Master File Assessment Voucher, will be used for the joint assessment of the penalty. See IRM Part 5.1.1 , Collection Process, for further information.

  2. See Exhibit 20.1.1–6, for the applicable penalty reference numbers (PRN 665–673).

    Note:

    After January 24, 2005, IRC Section 6702 can only be assessed with PRN 666.

20.1.10.9.4  (01-01-2006)
Penalty Relief

  1. Taxpayers seeking judicial review of the imposition of the penalty must first pay the entire penalty and file a claim for refund. A Letter of Disallowance is sent to the taxpayer and the taxpayer can file suit contesting this penalty in the district court or U.S. Court of Federal Claims.

20.1.10.10  (01-01-2006)
IRC section 6705 Failure by broker to provide notice to payers

  1. IRC section 6705 provides a $500 penalty for the failure by a broker to provide notice to payers that a payee is subject to backup withholding.

  2. Under IRC section 3406(d)(2)(B) , Broker notifies payor, a broker who acquires a readily tradable instrument for a payee (customer) must notify the payor of such instrument within 15 days of the acquisition that the payee is subject to backup withholding if any of the following conditions exist:

    1. The payee fails to furnish the TIN to the broker, or

    2. The IRS notifies the broker that the TIN is incorrect , or

    3. The payee has not provided the broker with a certification that the payee is not subject to backup withholding, or

    4. The IRS notified the broker before the acquisition that the payee is subject to backup withholding.

  3. Any broker who intentionally fails to provide the required notice is subject to the penalty of $500 for each such failure.

20.1.10.10.1  (01-01-2006)
Who Asserts / Assesses

  1. Compliance employees request the assessment of the penalty using Form 8278.


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