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PENALTY SPECIAL REPORT

Analysis of IRS’ Penalty Cancellation and Appeals Guidelines

by Daniel J. Pilla

Copyright © 2001 Winning Publications, Inc All rights reserved

In its 1984 Strategic Plan, IRS Document 6941, the Internal Revenue Service announced its goal to dramatically increase audit coverage and tax collections. At the same time, IRS set out to cut the time and cost involved in such collections. While the effort to become more efficient may seem laudable, the overall plan had ominous implications.

Two aspects of the multi-faceted plan are of particular interest. First, the plan called for the new audits to be pointed primarily at middle-income Americans. You ‘and l—not big business, organized crime, or others typically associated with tax cheating—are the principle targets. The reason for this is quite simple: middle-income Americans are the least defended of all taxpayers, leaving them most vulnerable to IRS attack.

Even though this plan was issued long ago, the IRS’ overall strategy has not changed. And while the agency went to sleep during 1999 and much of 2000 to allow it to "restructure," it is back in business and following the general goals of the plan issued years earlier. In recent issues of this newsletter, I exposed the IRS’ present plans to continue its attack upon middle-income taxpayers.

The second aspect of the 1984 plan was a goal to "create and maintain a sense of presence" in the lives of all Americans. One of the chief steps in the agency’s efforts to create and maintain presence was to establish and carry forth its "computer-generated contact ’programs to increase presence." IRS Plan at page 67.

By the term "presence," the IRS means simply to create a condition in which every citizen looks over his shoulder. It is not unlike the element of fear Hitler worked hard to create. If modern-day computer power were available to the Nazis, surely they would have used it in much the same way as contemplated by the IRS. That is, to spy upon every move made by every citizen.

The IRS’ 1984 plan envisioned turning loose its computers upon Americans with a simple two-pronged thrust: a) establish "presence" and b) collect more money with the expenditure of the least possible time, manpower and finances. In essence, this describes a mail-order campaign to collect more revenue.

In the years to follow 1984, the IRS increased the number of computer-generated notices quite substantially. The revenue collected from such notices rose by the billions. My experience with these notices led me to conclude that a large number of them were simply bogus. In fact, in light of the language of the 1984 plan, I warned Americans as early as 1986 that we must expect to be "put to the test" by the IRS. I warned that we must expect the IRS to force us to jump through all the necessary hoops in order to ensure that we will not over pay our taxes.

These warnings were expressed in my first book, The Naked Truth, and on national radio. Less than eighteen months after that book hit the street, the General Accounting Office of the US Government did a study of the IRS’ computer notice program. The results of the study were released in July of 1988, and found that 48 percent of IRWS notices were "incorrect, unresponsive, unclear or incomplete." "IRS Needs to Improve Handling of Taxpayer Correspondence," GAO Report GGD-88-101, July 1988.

Shockingly, the report revealed that in 68 percent of the cases studied, IRS failed to comply with procedures designed to foster good taxpayer relations. And why not? Why would the IRS be at all concerned about good taxpayer relations when the sole purpose of the increased computer-generated contacts was to "create and maintain a sense of presence?"

More recent studies of the IRS’ computer notices show not much has changed. According to a GAO study of forty-seven of the most common computer notices used by the IRS, thirty-one of those notices—66% of those studied—used inspecific language, unclear references, inconsistent terminology, illogical presentation of material, and inspecific information and guidance. "IRS Notices Can be Improved," GAO Report GGD-95-6, December, 1994.

Even the "kinder and gentler" IRS continues to have problems with computer notices and penalty assessments. According to the National Taxpayer Advocate’s "Fiscal Year 2000 Annual Report to Congress," the "clarity and tone of IRS communications" is the third most common problem encountered by citizens.

At the heart of this process then and today are penalty notices. The Internal Revenue code lists approximately 140 different penalty provisions. Indiscriminate use of these potent tools leads to billions of additional revenue each year. Concerns over penalty administration is number nine on the Taxpayer Advocate’s current list of the twenty most common problems citizens have with the agency. The chart on the top right portion of this page indicates how penalty assessments have increased over the years since shortly after implementing the IRS’ plan.

As you can plainly see, there has been a steady increase in the number of penalties issued by the IRS. And while no data is shown for years subsequent to 1998, I can tell you there are no appreciable difference in the total number of penalties assessed in the later years. That is to say, the IRS continues to assess between thirty-three to thirty-four million penalties against individuals and business annually.

The literal explosion in the number of penalty assessments has been cause for great concern over the years. This is partly attributable to the rise in the number of penalty provisions within the code. For example, there were just thirteen penalty provisions in the 1954 tax code. By 1988, the number had grown to about 150. This increase led to the first full scale congressional inquiry into penalty administration, which happened during 1988 and into 1989. Congress is presently in the process of once again considering major changes to the penalty aspects of the tax code.

The result of the 1989 inquiry was that Congress passed the penalty aspects of the tax code. Improved Penalty Administration and Compliance Tax Act of 1989 (IMPACT). The purpose of IMPACT was to reduce the number of penalty provisions, simplify penalty administration and most importantly, structure a penalty system that did not allow the IRS to issue multiple penalties for essentially the same act. Such a practice, known as "penalty stacking," was responsible for penalty assessments that reached and often exceeded 55 percent of the tax due.

But IMPACT was designed to reduce the number of penalty provisions within the code, not the number of penalties assessed by the IRS. In fact, the number of individual penalty provisions did drop slightly after IMPACT (from about 150 to about 140). But, as the chart shows, there was no substantial drop in penalty assessments from 1989 to 1990. Moreover, there has been no drop in the number of penalties overall, from 1990 forward. As you can see, total penalty assessments rose steadily during that period.

  Chart of Penalty Assessmants  
Year Penalties Assessed Dollars Assessed
  In Millions In Billions
1988 26.589 $6.042
1989 29.907 $7.107
1990 29.667 $6.079
1991 32.769 $6.520
1992 33.704 $8.875
1993 32.966 $7.969
1994 Data Not Available  
1995 34.013 $10.065
1996 33.984 $7.486
1997 33.486 $8.067
1998 34.157 $7.490

What is more, IMPACT did not address the indiscriminate manner in which the IRS uses its penalty tools. Before IMPACT, the burden of proof with regard to the propriety of all but a precious few penalty provisions was on the citizen. That means the taxpayer must prove the penalty assessment was improper. The IRS did not have to prove its actions were legal. This important legal nuance was not changed by IMPACT. Citizens continue to carry the burden of proof on virtually all civil penalties they might face. This is true despite the alleged shift of the burden of proof created in 1998 by the IRS Restructuring and Reform Act. That provision of law applies only when a tax case is "in court," and then only if the citizen complies with extensive disclosure rules set forth in the statute. The question of penalties rarely ends up in court.

Because the burden of proof remains on the citizen, the IRS is virtually free to assess a penalty against any person for any reason. Once assessed, it is removed only after the citizen makes a showing sufficient to persuade the IRS that the assessment was improper.

Nothing in IMPACT or the Restructuring Act changes this realty. Thus, in order to have any hope of canceling a penalty, the citizen must understand his rights, the applicable procedures and how to present a penalty cancellation case to the IRS.

In my book How to Get Tax Amnesty, I discuss the many changes the IRS made to its collection attitude, including the specific programs available to allow one to reduce or eliminate tax debt. Two changes were the adoption of a comprehensive penalty policy and the development of a penalty handbook. The policy and handbook are designed to standardize penalty assessments and abatements. The goal was to ensure that penalties would not be used for improper purposes and that once assessed, a citizen will have every opportunity to present a defense to an open-minded reviewer.

The various points of that penalty policy are detailed in How to Get Tax Amnesty. Under the policy, a person is more likely than ever to win an abatement of penalties. In the following pages of this report, I detail the IRS Penalty Policy Statement and provide copies of relevant pages of the Penalty Handbook as set forth in the IRS Manual.

The Current Status of Penalty Assessments

The eight years of the Clinton Administration presented a serious contradiction with regard to the question of penalties. On the one hand, the IRS adopted sweeping changes to its penalty assessment and abatement system. As mentioned, these changes were intended to make what was a very arbitrary system somewhat more fair and consistent.

On the other hand, Clinton used penalties not for deterrent purposes as they were intended, but rather, to raise more money. In Clinton’s 1993 tax and budget proposal, he specified that $8.3 billion in additional revenue needed to fund his programs would come directly from enhanced penalty assessments. This represented a 25 percent increase in penalty revenue during the term of Clinton’s presidency.

The years of pressure I brought to bear upon the IRS forced it to abandon its arbitrary penalty assessment process. It forced the agency to develop a fairer means of hearing and considering abatement requests. The ink was not dry on the IRS’ Penalty Handbook when Clinton took office. The Clinton directive to collect $8.3 billion using penalty assessments flew right in the face of the philosophy expressed by the IRS. When this proposal was first introduced, I predicted an onslaught of penalty assessments. This prediction was published in the June, 1994, issue of this newsletter, in which I alerted the public to what would be a substantial penalty attack. As the chart shows, the Clinton era saw a steady rise in the number of penalty assessments and an overall rise in the amount of money collected from penalties. Without a doubt, Clinton’s goal of increasing penalty revenue by 25 percent was indeed met.

Clinton’s legacy aside, it remains true that the IRS’ current policy dictates that penalties should not be used for the purposes of raising revenue. Rather, penalties are intended mainly to punish non-compliance and to provide a deterrent to potential non-compliance. Ills within this context that penalty abatement efforts must focus upon one’s good faith and reasonable cause behavior, as opposed to a deliberate attempt to cheat or deceive the IRS.

Internal Revenue Manual section 120.1.1.2.1, the "Penalty Handbook," provides in part:
"(1) Taxpayers in the United States assess their tax liabilities against themselves and pay them voluntarily. This system of assessment and payment is based on the principle of voluntary compliance. Voluntary compliance exists when taxpayers conform to the law without compulsion or threat.
"(2) Compliant self-assessment requires a taxpayer to know the rules for filing returns and paying taxes. The Service is responsible for providing information to taxpayers, which includes:
• Written materials that clearly explain the rules.
• Forms that permit the self-computation of tax liability.
"(3) In addition to (2) above, the Service must also provide a means to preserve and enhance our voluntary compliance by fairly, consistently, and accurately administering a system of penalties.
"(4) Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury, impose remedial charges against taxpayers, and indirectly fund enforcement costs. However, these results are not reasons for creating or imposing penalties.
"(5) Penalties advance the mission of the Service when they encourage voluntary compliance. The Service has formalized this obligation to the public in its Mission Statement.
"(6) Compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.
"(7) Penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.
"(8) The Service has the obligation to advance the fairness and effectiveness of the tax system. Penalties should:
• Be severe enough to deter noncompliance.
• Encourage noncompliant taxpayers to comply.
• Be objectively proportioned to the offense.
• Be used as an opportunity to educate taxpayers and encourage their future
compliance.
"(9) Service personnel may educate taxpayers and encourage their future compliance by:
"(a) Discussing causes for the delinquency and listening to taxpayer’s reasons and concerns for noncompliance,
"(b) Ensuring that taxpayers understand their filing and paying responsibilities, and
"(c) Being alert to information received in discussions with taxpayers that indicate possible reasons for abatement of a penalty.
"(10) Penalties should relate to the standards of behavior they encourage. Penalties best aid voluntary compliance if they support belief in the fairness and effectiveness of the tax system. This belief encourages compliance in areas that cannot be reached through audits or other programs. The Service’s approach to penalties is embodied in Penalty Policy Statement P-1-18 (see Exhibit 120.1.1-1.)"

Penalty Policy Statement P-1-18 reads as follows: "Penalties constitute one important tool of the Internal Revenue Service in pursuing its mission of collecting the proper amount of tax revenue at the least cost. Penalties support the Service’s mission only if penalties enhance voluntary compliance. Even though other results, such as raising of revenue, punishment, or reimbursement of the costs of enforcement, may also arise when penalties are asserted, the Service will design, administer, and evaluate penalty programs solely on the basis of whether they do the best possible job of encouraging compliant conduct.

"In the interest of an effective tax system, the Service uses penalties to encourage voluntary compliance by: (1) helping taxpayers understand that compliant conduct is appropriate and that non-compliant conduct is not; (2) deterring noncompliance by imposing costs on it; and (3) establishing the fairness of the tax system by justly penalizing the non-compliant taxpayer.

"To this end, the IRS administers a penalty system that is designed to:

"The Service maintains an ongoing effort to develop, monitor, and revise programs designed to assist taxpayers in complying with legal requirements and, thus, avoid penalties. "To ensure consistency, the Service prescribes and uses a single set of guidelines in a Penalty Handbook which will be followed by all operational and processing functions. Prior to implementation, changes to the Penalty Handbook must be reviewed for consistency with Service Policy and approved by the Office of Penalty Administration. The Service collects statistical and demographic information to evaluate penalties and penalty administration and how they relate to the goal of voluntary compliance. The Service continually evaluates the impact of the penalty program on compliance and recommends changes when the statutes or administration of penalties are not effectively promoting voluntary compliance."

The IRS’ Penalty Handbook provides much guidance in defending penalty assessments. This Special Report should be used in conjunction with my books How to Get Tax Amnesty and The IRS Problem Solver. Tax Amnesty gives details on the major changes made by the IRS to its penalty program. The IRS Problem Solver provides sample letters and step-by-step procedures for winning the abatement of penalties and interest.

The Philosophy of Penalties

I touched earlier on the philosophy of penalties by alluding to the Penalty Policy Statement. It is important to understand the philosophy of penalties in order to take full advantage of every opportunity to cancel improper assessments. At Penalty Handbook section 120.1.1.2.2, under the heading, "Fair and Consistent Approach to Penalty Administration," we find the following admonitions regarding penalties:

"(1) The Service’s approach to penalty administration must ensure:
"1. Consistency: The Service should apply penalties equally in similar situations. Taxpayers base their perceptions about the fairness of the system on their own experience and the information they receive from the media and others. lithe Service does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures) overall confidence in the tax system is jeopardized.
"2. Accuracy: The Service must arrive at the correct penalty decision. Accuracy is essential. Erroneous
penalty assessments and incorrect calculations confuse taxpayers and misrepresent the overall competency of the Service.
"3 Impartiality: Service employees are responsible for administering the penalty statutes in an even-handed manner that is fair and impartial to both government and the taxpayer. "4. Representation: Taxpayers must be given the opportunity to have their interests heard and considered. Employees need to take an active and objective role in case resolution so that all factors are considered."

The Cancellation of Penalties

Virtually every one of the 140-plus penalty provisions of the tax code contains a "good faith" or "reasonable cause" provision. What that means is when you act in good faith and based upon a reasonable cause for your actions, the penalty does not apply. As suggested earlier, penalties are designed to achieve voluntary compliance by penalizing deliberately non-compliance behavior. When the actions subject to the penalty were not taken out of a deliberate effort to cheat, deceive or mislead the IRS, any penalty assessment is improper.

In seeking cancellation of a penalty, the citizen must draft a letter setting forth facts sufficient to establish reasonable cause. The letter should detail your actions or lack thereof and the reasons for them. The letter should specifically explain that the acts being penalized were not taken for purposes of avoiding your legal responsibilities but rather, were due to no fault of your own. In 41 Ways, Chapter Six, I provide detailed examples of such a letter.

In the Penalty Handbook, under the heading, "Relief From Penalties," the IRS provides detailed discussion of numerous "reasonable cause" grounds. The agency not only describes reasonable cause considerations but also analyzes what type of evidence is to be considered in making the determination. Please note that those listed in the manual are not the only grounds that constitute reasonable cause. These are merely some "common reasons" given by taxpayers. That of course does not mean they are the only possible reasons. In fact, in section 120.1.1.3.1.1, "Standards," the handbook lists several IRS regulations that give examples of circumstances showing reasonable cause. You should consult those sources when circumstances dictate.

The point is that any reason establishing that you did not deliberately intend to cheat, mislead or deceive the IRS can qualify as reasonable cause. If the explanation is adequately linked by facts to the act that the IRS is penalizing, the explanation can constitute reasonable cause. Following this discussion, I reproduce in its entirety, the portion of the IRS Penalty Handbook, entitled "Relief From Penalties."

Appealing Adverse Decisions

I have stated many times that the decisions of tax examiners are not final. This is also true with the topic of penalty abatement. If the IRS refuses your initial request for abatement, you have the right to appeal that decision. I discuss the appeals process in chapter six of 41 Ways. The Penalty Handbook discusses the appeals process in detail begin-fling at section 120.1.1.4, "Methods of Appealing Penalties."

Some of the information in that section is ministerial in nature, applying only to the IRS. What is quite helpful, however, is the discussion addressing when, how and to whom one may appeal an adverse decision in a penalty abatement case. In the interests of completeness, I reproduced the entire penalty appeal section in this newsletter.

Recovering Penalties Already Paid

Those on lengthy installment agreements often wonder if they can recover penalties already paid. The answer is yes. Let us discuss two distinct situations in which penalty cancellation is helpful. The first involves those on a protracted installment agreement of an open tax year. The second involves those who already paid off a tax debt and the year is now closed.

In the case of an open tax year, that is, one in which there is a balance owed that the IRS is pursuing or you are paying through an installment agreement, you have the right to request a cancellation of penalties at any time. Even though you might have signed Form 433-D to acknowledge the tax debt and establish the installment agreement amount, you did not "agree" to pay the penalties if they do not apply. You always have the right to seek cancellation of those penalties through the abatement process.

Because installment amounts are applied to the tax first, then penalty and then interest in that order, penalty cancellation often has a profound effect on cutting an aged tax bill. By canceling the penalties, the IRS also cancels the interest on the penalties and that can cut a bill by 60 to 70 percent—sometimes more. In some cases, cutting the penalty can actually eliminate the entire bill and create a credit. The credit in turn leads to a refund.

For those who paid a bill in its entirety, the law provides a period of two years from the date of payment in which to make a claim for refund. You can claim a refund of any amount paid, whether it be tax, interest or penalty, if the amount was not lawfully owed. By establishing good faith and reasonable cause in the context of a claim for refund, you create the potential of recovering not only the penalty, but the interest on the penalty as well. The details of this process, as well as important legal limitations, are discussed in chapter five of my book, The Taxpayers Defense Manuel.

Summary and Conclusion

The Penalty Handbook provides much assistance in winning abatements. Historically, I have proven that when the average citizen is armed with good information, he can and will prevail in his penalty fight. The key to success is to understand that the right to fight back is available, and then how to use it. The information in this Special Report puts you in a unique position to fight back against the tidal wave penalty assessments.

The following chart lists some of the more common penalties, their code section reference and applicable abatement grounds.

 

PENALTY RELIEF: Application Chart

 

Type of Penalty

Reasonable
Cause
Relief

Other
Relief

6651(a)(1)

Failure to File

Yes

Yes

6651(a)(2)

Failure to Pay when Due

Yes

Yes

6651(a)(3)

Failure to Pay within 10 Days of Notice of Additional Tax Due

Yes

Yes

6651(d)

Failure to Pay within 10 days of Final Notice and Demand

Yes

Yes

6651 f)

Fraudulent Failure to File

Yes

Yes

6652(c)(1)

Failure to File Annual Return by Exempt Organization

Yes

Yes

6652(c)(2)

Failure to File Returns under Section 6034 or 6043(b)

Yes

Yes

6652(d)(2)

Notification of Change in Status of a Plan

Yes

Yes

6652(e)

Information Required in Connection with Certian Plans of Deferred Compensation Form 5500

Yes

Yes

6652(h)

Failure to Give Notice to Recipients of Certian Pension, etc, Distributions

Yes

Yes

6652(i)

Failure to Give Written Explaination to Recipients of Certian Qualifying Rollover Distributions

Yes

Yes

6654

Estimated Tax Penalty on Individuals Statutory Exceptions & Safe Harbor Rules

 

 

6655

Estimated Tax Penalty on Corporation Statutory Exceptions

 

 

6656(a)

Failure to Deposit

Yes

Yes

6657

Bad Check

Yes

Yes

6662

Accuracy-Related

Yes

Yes

6663

Fraud

Yes

Yes

6692

Failure to File Actuarial Report

Yes

Yes

6692

Failure to File Partnership Return

Yes

Yes

6721

Failure to File Correct Information Reporting Returns

Yes

Yes

6722

Failure to Furnish Correct Payee Statements

Yes

Yes

6723

Failure to Comply with othe Information Reporting Requirements

Yes

Yes

120.1.1.3 Relief From Penalties (08/20/98)
(1) Generally, relief from penalties falls into four separate categories. They are:
· Reasonable Cause
· Statutory Exceptions
· Administrative Waivers
· Correction of Service Error.
(2) Appeals may recommend the abatement or nonassertion of a penalty based on these four criteria as well as "Hazards of Litigation."
(3) This chapter discusses each of these categories and the related criteria. Also, see Section 1.3 of LEM 120.1.
(4) In the interest of fairness, the Service will consider requests for penalty relief received from third parties, including requests from representatives without an authorized power of attorney. While information may be accepted, NO taxpayer information may be discussed with a third party, unless a power of attorney or other acceptable authorization is secured in writing from the taxpayer. See 1.3 of LEM 120.1.
1. If additional information is needed, contact the taxpayer or the taxpayer’s authorized representative.
2. If the validity of the request is questionable, contact the taxpayer.
3. In all cases involving third party requests for penalty relief, advise the taxpayer of the request and the action taken.

120.1.1.3.1 Reasonable Cause (08/20/98)
(1) Reasonable cause is based on all the facts and circumstances in each situation and allows the Service to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.
(2) In the interest of equitable treatment of the taxpayer and effective tax administration, the nonassertion or abatement of civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the Internal Revenue Code (IRC), Regulations (Treas. Regs.), Policy Statements, and Part 120.1.
(3) Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
1. For those penalties where reasonable cause can be considered, any reason that establishes that the taxpayer exercised ordinary business care and prudence, but was unable to comply with a prescribed duty within the prescribed time, will be considered.
2. See IRM Exhibit 120.1.1-2, Penalty Relief-Application Chart. If a reasonable cause provision applies only to a specific Code section, that reasonable cause provision will be discussed in the IRM 120.1 chapter relating to that IRC section.
3. When considering the information provided in the following pages, remember that an acceptable explanation is not limited to those given in IRM 120.1. Penalty relief granted because the taxpayer provided an "other acceptable explanation" is identified by use of PRC 30 on either the closing or adjustment document.
(4) The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM sections for the rules that apply to a specific Code section.
(5) Taxpayers have reasonable cause when their conduct justifies the nonassertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of IRM 1.3.
· What happened and when did it happen?
· During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, or otherwise complying with the law?
· How did the facts and circumstances prevent the taxpayer from complying?
· How did the taxpayer handle the remainder of their affairs during this time?
· Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
(6) Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

120.1.1.3.1.1 Standards (08/20/98)
(1) Any reason that establishes a taxpayer exercised ordinary business care and prudence but was unable to comply with the tax law may be considered for penalty relief.
(2) The following regulations contain examples of circumstances that may be helpful in determining if a taxpayer has established reasonable cause:
· Accuracy-Related Penalty: 1.6664-4
· Failure to Pay Penalty: 301.6651-1(c)
· Failure to File: 301.6651-1(c)
· Failure to Deposit Penalty: 301.6656-1(b); 301.6656-2(c)
· Information Returns Penalty: 301.6723-1A(d); 301.6724-1
· Preparer/Promoter Penalties: 1.6694-2(d); 301.6707-1T.
(3) The following Internal Revenue Service Policy Statements contain specific criteria that may affect the imposition of penalties.
· P-2-4, Penalties and interest not asserted against Federal agencies.
· P-2-7, Reasonable cause for late filing of return or failure to deposit or pay tax when due.
· P-2-9, Timely mailed returns bearing foreign postmarks.
· P-2-11, Certain unsigned returns will be accepted for processing.

120.1.1.3.1.2 Ordinary Business Care and Prudence (08/20/98)
(1) Ordinary business care and prudence includes making provision for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing the taxpayer exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless was unable to comply with the law.
(2) In determining if the taxpayer exercised ordinary business care and prudence, review available information including the following:
(a) Taxpayer’s Reason. The taxpayer’s reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based. If the dates and explanations do not correspond to the events on which the penalties are based, request additional information from the taxpayer that may clarify the explanation (See IRM 120.1.1.3.1).
(b) Compliance History. Check the preceding tax years (at least 2) for payment patterns and the taxpayer’s overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer’s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause, since a first time failure to comply does not by itself establish reasonable cause.
(c) Length of Time. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance. See IRM 120.1.1.3.1. Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.
(d) Circumstances Beyond the Taxpayer’s Control. Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation. The taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late.
(3) Abatement of a penalty because the taxpayer established ordinary business care and prudence is identified by the use of Penalty Reason Code (PRC) 22.

120.1.1.3.1.2.1 Ignorance of the Law (08/20/98)
(1) In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standard requires that taxpayers make reasonable efforts to determine their tax obligations. Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances.
(2) For example, consider:
(a) The taxpayer’s education,
(b) If the taxpayer has been subject to the tax,
(c) If the taxpayer has been penalized, or
(d) If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know.
(3) The level of complexity of a tax or compliance issue is another factor that should be considered in evaluating reasonable cause because of ignorance of the law.
(4) Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed.
(5) The taxpayer may have reasonable cause for noncompliance if:
(a) A reasonable and good faith effort was made to comply with the law, or
(b) The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.

120.1.1.3.1.2.2 Mistake was Made (08/20/98)
(1) The taxpayer may try to establish reasonable cause by claiming that a mistake was made.
(a) Generally, this is not in keeping with the ordinary business care and prudence standard and does not provide a basis for reasonable cause.
(b) However, the reason for the mistake may be a supporting factor if additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence.

120.1.1.3.1.2.3 Forgetfulness (08/20/98)
(1) The taxpayer may try to establish reasonable cause by claiming forgetfulness or an oversight by the taxpayer or another party caused the noncompliance. Generally, this is not in keeping with ordinary business care and prudence standard and does not provide a basis for reasonable cause.
(a) Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause.
(b) It is the taxpayer’s responsibility to file a timely and accurate return and to make timely deposits or payments. This responsibility cannot be delegated.
(2) Information to consider when evaluating a request for an abatement or nonassertion of a penalty based on a mistake or a claim of ignorance of the law includes, but is not limited to:
· When and how the taxpayer became aware of the mistake.
· The extent to which the taxpayer corrected the mistake.
· The relationship between the taxpayer and the subordinate.
· If the taxpayer took timely steps to correct the failure after it was discovered.
· The supporting documentation.


120.1.1.3.1.2.4 Death, Serious Illness, or Unavoidable Absence
(1) Death, serious illness or unavoidable absence of the taxpayer may establish reasonable cause for late filing, payment, or deposit for the following:
(a) An individual: If there was a death, serious illness, or unavoidable absence of the taxpayer or a death or serious illness in the taxpayer’s immediate family (i.e. spouse, sibling, parents, grandparents, children). PRC 24 indicates the incident occurred to the individual or a member of that individual’s immediate family for filing, paying, or depositing.
(b) A corporation, estate, trust, etc.: If there was a death, serious illness, or other unavoidable absence of the taxpayer (or a member of such taxpayer’s immediate family), and that taxpayer had sole authority to execute the return, make the deposit, or pay the tax (person responsible). PRC 26 indicates the incident occurred to the person responsible for filing, paying or depositing.
(2) If someone, other than the taxpayer or the person responsible, is authorized to meet the obligation, consider the reasons why that person did not meet the obligation when evaluating the request for relief. In the case of a business, if only one person was authorized, determine whether this was in keeping with ordinary business care and prudence.
(3) Information to consider when evaluating a request for penalty relief based on reasonable cause due to death, serious illness, or unavoidable absence includes, but is not limited to, the following:
1. The relationship of the taxpayer to the other parties involved.
2. The date of death.
3. The dates, duration, and severity of illness.
4. The dates and reasons for absence.
5. How the event prevented compliance.
6. If other business obligations were impaired, and
7. If tax duties were attended to promptly when the illness passed, or within a reasonable period of time after a death or absence.

120.1.1.3.1.2.5 Unable to Obtain Records (08/20/98)
(1) Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others.
(2) Consider the facts and circumstances relevant to each case and evaluate the request for penalty relief.
(3) If the taxpayer was unable to obtain records necessary to comply with a tax obligation, the taxpayer may or may not be able to establish reasonable cause. Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control they were unable to comply.
(4) Information to consider when evaluating such a request includes, but is not limited to an explanation as to:
· Why the records were needed to comply.
· Why the records were unavailable and what steps were taken to secure the records.
· When and how the taxpayer became aware that they did not have the necessary records.
· If other means were explored to secure needed information.
· Why the taxpayer did not estimate the information.
· If the taxpayer contacted the Service for instructions on what to do about missing information.
· If the taxpayer promptly complied once the missing information was received; and
· Supporting documentation such as copies of letters written and responses received in an effort to get the needed information.
(5) Use PRC 25 if the taxpayer establishes reasonable cause because of an inability to obtain the records necessary to comply with a tax or information filing requirement.

120.1.1.3.2 Statutory Exceptions & Administrative Waivers
(1) These two very separate categories are placed together because in many instances an Administrative Waiver is an extension of rules that were provided for by statute.


120.1.1.3.2.1 Statutory Exceptions (08/20/98)
(1) Tax legislation (Internal Revenue Code (IRC)) may provide an exception to a penalty. Specific statutory exceptions can be found in either the penalty-related IRC section or the accompanying regulations. For example:
(a) IRC Section 6654(e)(1), (2), or (3), Estimated Tax Penalties for Individuals (IRM 120.1.3).
(b) IRC Section 7502(a) and 7502(e), Timely Mailing Treated as Timely Filing and Paying (IRM 120.1.2).
(c) IRC Section 6724(a) or 6724(c), Waiver; Definitions and Special Rules, Information Return Penalties (IRM 120.1.7).
(d) IRC Section 6404(f), Abatement of Penalty or Addition to Tax Attributable to Written Advice of the Internal Revenue Service (see IRM 120.1.1).
(e) IRC Section 7508, Time for performing certain Acts Postponed by Reason of Service in Combat Zone. This provision applies only in a presidentially declared "Combat Zone."
(2) Legislation with retroactive provisions may provide guidance on associated penalties. As a result of that retroactive provision, the Service may issue a News Release or other guidance with instructions for the disposition of the related penalties.
(3) Some Statutory Exceptions are assigned their own Penalty Reason Code (see the specific topic). However, many are not. Statutory Exceptions in general are identified by the use of PRC 44.

120.1.1.3.2.2 Administrative Waiver (08/20/98)
(1) The Service may formally interpret or clarify a provision to provide administrative relief from a penalty that would otherwise be assessed. An administrative waiver may be addressed in either a Policy Statement, News Release, or other formal communication stating that the policy of the Service is to provide relief from a penalty under specific conditions.
(2) An administrative waiver may be necessary when there is a delay by the Service in:
(a) Printing or mailing of forms
(b) Publishing guidance, writing of regulations, or
(c) Other conditions.
(3) An example of an administrative waiver is Notice 93-22, 1993-1 C.B. 305. This allowed individuals who requested an automatic 4-month extension of time to file an income tax return, an extension of time without remitting the unpaid amount of any tax properly estimated to be due.
(4) An administrative waiver is identified by PRC 43.

120.1.1.3.2.3 Undue Hardship (08/20/98)
(1) An undue hardship may support the granting of an extension of time for paying a tax or deficiency.Treas. Reg. 1.6161-1(b), provides that an undue hardship must be more than an inconvenience to the taxpayer. The taxpayer must show that they would sustain a substantial financial loss if forced to pay a tax or deficiency on the due date.
(2) The extension of time to pay does not provide the taxpayer with an extension of time to file. Nor does the extension of time to pay relieve the taxpayer of any appropriate penalties.
(3) Undue hardship generally does not affect a person’s ability to file and therefore would not provide a basis for penalty relief in a failure to file situation. However, each request must be considered on a case-by-case basis. Undue hardship may establish reasonable cause for failure to file on magnetic media, under Treas. Reg. 301.6724-1.
(4) Undue hardship may also support relief from the addition to tax for failure to pay tax if, the explanation for the noncompliance supports such a determination. However, the mere inability to pay does not ordinarily provide the basis for granting penalty relief. Under Treas. Reg. 301.6651-1(e), the taxpayer must also show that they exercised ordinary business care and prudence in providing for the payment of the tax liability.
(a) The taxpayer may claim that enough funds were on hand but, as a result of unanticipated events, the taxpayer was unable to pay the taxes.
(b) Consider an individual taxpayer’s inability to pay a factor when considering penalty relief if the taxpayer shows that, had the payment been made on the payment due date, undue hardship (as defined in Treas. Reg. 1.6161-1(b)) would have resulted. In the case where a taxpayer files bankruptcy, consider inability to pay a factor if the insolvency occurred before the tax payment date.
(5) If a payroll was met, taxes were withheld and should be available for deposit. Employers must reserve money withheld from employees’ wages in trust until deposited. The employer should not use the money for any other purpose. Undue hardship does not support relief from the IRC Section 6672, Failure to Collect and Pay Over Tax, or attempt to Evade or Defeat Tax (Trust Fund Recovery Program).
(6) Information to consider when evaluating a request for penalty relief includes, but is not limited to, the following:
· When did the taxpayer know they could not pay?
· Why was the taxpayer unable to pay?
· Did the taxpayer explore other means to secure the necessary funds?
· What did the taxpayer supply in the way of supporting documentation, such as copies of bank statements?
· Did the taxpayer pay when the funds became available?
(7) An abatement of a penalty because the taxpayer experienced a "undue hardship" is identified by the use of PRC 29.

120.1.1.3.2.4 Advice (08/20/98)
(1) This section discusses three basic types of advice: written and/or oral advice provided by the Service, and advice provided by a tax professional.
(2) Information to consider when evaluating a request for abatement or nonassertion of a penalty due to reliance or advice, includes, but is not limited to, the following:
(a) Was the advice in response to a specific request and was the advice received related to the facts contained in that request?
(b) Did the taxpayer reasonably rely on the advice?
(3) The following examples address situations where a taxpayer relies on written advice from the Service regarding an item on a filed return.
(a) The taxpayer did not reasonably rely on the advice regarding an item included on a return if the advise was received after the date the return was filed;
(b) A taxpayer may be considered to have reasonably relied on advice received after the return was filed if they then filed an amended return that conformed with such written advice;
(c) A taxpayer may not be considered to have reasonably relied on written advice unrelated to an item included on a return, such as advice on the payment of estimated taxes, if the advice is received after the estimated tax payment was due.
(4) Did the taxpayer provide the Service or the tax professional with adequate and accurate information?
(5) The taxpayer is entitled to penalty relief for the period during which they relied on the advice. The period continues until the taxpayer is placed on notice that the advice is no longer correct or no longer represents the Service’s position.
(6) The taxpayer is placed on notice as the result of any of the following events that present a contrary position and occur after the issuance of the written advice:
(a) Written correspondence from the Service that its advice is no longer correct or no longer represents the Service’s position;
(b) Enactment of legislation or ratification of a tax treaty;
(c) A U.S. Supreme Court decision;
(d) The issuance of temporary or final regulations; or
(e) the publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin.
(7) Taxpayers should submit the necessary supporting information and documentation with Form 843, Claim. However, if the information provided demonstrates that abatement of the penalty is warranted, the penalty should be abated, whether or not a Form 843 is provided.


120.1.1.3.2.4.1 Written Advice from the Service (08/20/98)
(1) The Service is required by IRC Section 6404(f) and Treas. Reg. 301.6404-3 to abate any portion of any penalty attributable to erroneous written advice furnished by an officer or employee of the Service acting in their official capacity.
(2) If the taxpayer does not meet the criteria for penalty relief under IRC Section 6404, the taxpayer may qualify for other penalty relief. For instance, taxpayers who fail to meet all of the above criteria may still qualify for relief under reasonable cause if the Service determines that the taxpayer exercised ordinary business care and prudence in relying on the Service’s written advice.
(3) Penalties abated as a result of reliance on erroneously written advice from the Service should be identified by PRC 44, Statutory Exception.

120.1.1.3.2.4.2 Oral Advice from the Service (08/20/98)
(1) The Service may provide penalty relief based on a taxpayer’s reliance on erroneous oral advice from the Service. The Service is required by IRC Section 6404(f) and Treas. Reg. 301.6404-3 to abate any portion of any penalty attributable to erroneously written advice furnished by an employee acting in their official capacity. Administratively, the Service has extended this relief to include erroneous oral advice when appropriate.
(2) In addition to considering the criteria provided in above, consider the following:
(a) Did the taxpayer exercise ordinary business care and prudence in relying on that advice?
(b) Was there a clear relationship between the taxpayer’s situation, the advice provided, and the penalty assessed?
(c) What is the taxpayer’s prior tax history and prior experience with the tax requirements?
(d) Did the Service provide correct information by other means (such as tax forms and publications)?
(e) What type of supporting documentation is available?
(3) The following are types of supporting documentation:
(a) A notation of the taxpayer’s question to the Service;
(b) Documentation regarding the advice provided by the Service;
(c) Information regarding the office and method by which the advice was obtained;
(d) The date the advice was provided, and
(e) The name of the employee who provided the information.
(4) Penalties abated as the result of reliance on erroneous oral advice provided by the Service should be identified by using PRC 31 in the fourth reason code position.

120.1.1.3.2.4.3 Advice from a Tax Advisor (08/20/98)
(1) Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC Section 6664© for the accuracy-related penalty under IRC Section 6662. See IRM 120.1.5, Preparer Promoter Penalty, and Treas. Reg. 1.6664-4(c).
(2) However, in very limited instances, reliance on the advice of a tax advisor may apply to other penalties when the tax advisor provides advice on a substantive tax issue.
(3) Example: The employer researched all available Service publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were "contract labor" or employees. As a result, the tax advisor advised the employer that the workers were "contract labor". However, the Service later determined that the workers were "employees" and not "contract labor".
(4) Reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay or deposit taxes cannot be excused by reliance on the advice of a tax advisor.

120.1.1.3.2.5 Fire, Casualty, Natural Disaster, or Other Disturbance
(1) Relief from a penalty may be requested if there was a failure to timely comply with a requirement to file a return or pay a tax as the result of a fire, casualty, natural disaster, or other disturbance.
(2) Relief from a penalty because the taxpayer suffered from a fire, casualty, natural disaster, or other disturbance should be identified by the use of the appropriate PRC. It could be that as a result of the fire the taxpayer was unable to access their records (PRC 25) or as the result of an accident, the responsible party was hospitalized and unable to file the return or pay the tax (PRC 24 or 26).
(3) Fire, casualty, natural disaster, or other disturbance are factors to consider. One of these circumstances by itself does not necessarily provide penalty relief.
(4) Penalty relief may be appropriate if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond the taxpayer’s control they were unable to comply with the law.
(5) Factors to consider include:
· Timing.
· Effect on the taxpayer’s business.
· Steps taken to attempt to comply.
· If the taxpayer complied when it became possible.
(6) The determination to grant relief from each penalty must be based on the facts and circumstances surrounding each individual case.

120.1.1.3.2.6 Official Disaster Area (08/20/98)
(1) When a significant disaster occurs affecting a wide area of taxpayers, the Service often issues special instructions to facilitate evaluating the request for penalty relief.
(a) Because there are one-time instructions, they will not be incorporated in this IRM. Districts, service centers, and customer service sites will be kept informed of any special instructions affecting their areas.
(b) Penalty Relief granted because the taxpayer was located in an Official Disaster Area is identified by the use of PRC 28.

120.1.1.3.3 Service Error (08/20/98)
(1) A Service error can be any error made by the Service in computing or assessing tax, crediting accounts, etc. See Exhibit 120.1.1-3, Penalty Reason Code Chart, for the appropriate PRC to be used when abating either a computer-generated or manually-input penalty.
(2) General Service Error (computer generated—PRC 15). This PRC should be used to identify penalties abated as the result of a Master File Recovery.
(3) When an analyst, from any area of the Service, identifies a computer programming application that caused a penalty to be assessed in error, that analyst should:
(a) Contact Information Services (IS) to resolve the inadequate computer application , and
(b) Include on the Request for Information Services (RIS) a statement indicating that PRC 15 must be used to identify any abatement of a penalty resulting from reversal of the computer application.
(4) Other Service Error (manual input—PRC 45). This PRC should be used to identify penalties abated as the result of service errors that occur individually. Some examples are:
(a) A math error when manually computing a penalty,
(b) An extension of time to file that did not post to the Master File, or
(c) Any other error, when it can be shown that (a) the taxpayer did in fact comply with the law, and (b) the Service did not initially recognize that fact.


120.1.1.3.4 Requesting Penalty Relief (08/20/98)
(1) The initial request for relief may occur either after an examination, but before a penalty is actually assessed, or with a return that is either filed or paid late.
(2) When the request is received carefully analyze the taxpayer’s reasons to determine if penalty relief if warranted. The burden of proof 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 if other penalty relief criteria apply.
(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.
(a) 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.
(b) Request additional information from the taxpayer to clarify the explanation if the dates and explanations do not correspond with the events on which the penalty are based.
(6) Review available Service information (see IRM 1.3.1.2) in determining whether or not the taxpayer exercised ordinary business care and prudence. Check the preceding tax years (at least two) for payment patterns and the taxpayer’s overall compliance history.
(a) The same penalty, previously assessed, may indicate that the taxpayer is not exercising ordinary business care.
(b) 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.
(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 fails to timely correct noncompliant behavior.
(8) The following are examples where penalty relief may not be appropriate.
(a) 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.
(b) 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.
(c) 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 120.1.1.3.1.2.

120.1.1.3.4.1 Subsequent Requests for Penalty Relief (08/20/98)
(1) A second or subsequent request for penalty relief may be received after the initial request for relief has been denied.
(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.
(a) Is the taxpayer submitting new information? If yes, consider the facts and circumstances discussed in the new information. Abate the penalty, disallow the request, or send a letter informing the taxpayer that you are unable to consider (not consider) the request for penalty relief based on the new information provided and the information contained in the original disallowance.
(b) If the taxpayer is not submitting new information then is the taxpayer requesting an appeal of the previous determination? If yes, forward the request to Appeals. If no, send the taxpayer a letter stating that you are unable to consider (not consider) the case on the grounds of the previous determination.
(c) If it is unclear what the taxpayer wants, contact the taxpayer to request clarifying information.
(3) If the penalty was previously sustained in Appeals, forward the request to the appropriate Appeals office. (This may be identified by the presence of a TC 290 for $0.00 with a blocking series 96X on the account.)

120.1.1.4 Methods of Appealing Penalties (08/20/98)
(1) Various administrative and legislative remedies are provided for taxpayers who disagree with the Service’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:
(a) A review of the penalty prior to assessment (e.g. deficiency procedures),
(b) A penalty abatement after it is assessed and either before or after it is paid (post assessment review),
(c) An abatement and refund after payment (claim for refund).
(3) Taxpayers may indicate their disagreement with the Service verbally, in writing, or if paid, by filing a claim for refund or credit.
(4) If agreement cannot be reached at the district or service center, 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 Appeals Processing & Control Handbook.

120.1.1.4.1 The Appeals Function (08/20/98)
(1) The Appeals Office is an independent administrative body within the Service that is the only formal level of appeal within the Service.
(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 a Service 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 exist.
(4) Appeals has the authority to settle penalties for less than the full amount based on the hazards of litigation.

120.1.1.4.1.1 Preassessment Appeals (08/20/98)
(1) Generally, Appeals will consider the following type of penalties prior to assessment:
(a) Penalties which are asserted by the Service in the course of an examination of a taxpayer’s income tax return;
(b) Penalties which are granted a specific preassessment appeal right such as the Trust Fund Recovery penalty under IRC 6672 (see Employment Tax Handbook for Trust Fund Recovery penalty guidelines) or the Preparer penalties under IRC 6694, and
(c) 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 penalty after it is assessed.
(a) However, at its discretion, Appeals may reconsider its prior decision if evidence becomes available that indicates further consideration is warranted.
(b) Taxpayers may also pay the penalty previously upheld by Appeals, and file a claim for refund. The claim for refund may be brought to Appeals if denied.
(3) More detailed Appeals procedures are described in the Appeals Returns Processing and Control Handbook.


120.1.1.4.1.2 Postassessment Appeals (08/20/98)
(1) To request abatement of a penalty after assessment, the taxpayer must submit a written request to the Service.
(2) The employee must consider all the facts and circumstances to determine if the taxpayer’s explanation meets the penalty relief criteria. See IRM 1.3.
(3) If a taxpayer orally request the abatement of a penalty, advise the taxpayer to submit the request in writing.
(4) If a taxpayer orally requests an appeal of a decision, advise the taxpayer to submit the request in writing.
(5) Certain penalties such as failure to file, failure to pay, and failure to deposit are routinely assessed at the time a return is filed or the tax is paid. When one of these penalties is assessed, the taxpayer may submit a statement requesting an abatement of the penalty.

120.1.1.4.2 Deficiency Procedures (08/20/98)
(1) IRC Section 6211 generally defines a deficiency as the excess of the correct amount of income, estate or gift taxes owed less the sum of the amount shown on the return and the amounts previously assessed (or collected without assessment) less rebates. In general, deficiency procedures are used when additional income, estate, or gift taxes and/or related penalties are proposed. The Service generally:
(a) Cannot assess an additional amount of income, estate, or gift tax, including related penalties unless it complies with deficiency procedures;
(b) Can assess additional amounts of employment and certain excise tax and related penalties without providing a notice of deficiency;
(c) Can assess penalties not related to a tax (e.g., IRC sections 6700, 6701, 6702) without providing a notice of deficiency;
(d) 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
(e) Can assess the failure to file and failure to pay (IRC Section 6651) applicable to the portion of the tax liability which is not a tax deficiency without providing a notice of deficiency.
(f) Example: Taxpayer files the return one month late and reports and pays a tax of $4,000. On audit, the Service determines a tax deficiency of $1,000. The late filing penalty is 5 percent, per month, (for up to 5 months) of the amount of tax. The total failure to file 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 failure to file 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 income tax deficiency. However, if the penalty was the result of an underpayment of employment tax, deficiency procedures would not apply to the penalty.
(a) The taxes and related penalties subject to deficiency procedures include income, estate and gift tax, as well as certain excise taxes.
(b) The taxes and related penalties not subject to deficiency procedures include employment taxes imposed by Subtitle C, and certain excise taxes.
(3) The procedure called "notice of deficiency" provides the taxpayer a method of appealing tax and/or penalties prior to their assessment.

120.1.1.4.2.1 Non-Deficiency Procedures (08/20/98)
(1) Most employment 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, nondeficiency procedures are as follows:
(a) If penalties are proposed and the taxpayer agrees, the penalties are assessed.
(b) If penalties are proposed and the taxpayer disagrees a 30 day letter is issued and the taxpayer may file a protest with Appeals.
(c) If 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 they may 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.

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