Penalty

Penalty

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Penalty

20.1 Penalty Handbook
- 20.1.1 Introduction and Penalty Relief
- 20.1.2 Failure To File/Failure To Pay Penalties
- 20.1.3 Estimated Tax Penalties
- 20.1.3 Estimated Tax Penalties (Cont. 1)
- 20.1.4 Failure to Deposit Penalty
- 20.1.4 Failure to Deposit Penalty (Cont. 1)
- 20.1.4 Failure to Deposit Penalty (Cont. 2)
- 20.1.5 Return Related Penalties
- 20.1.5 Return Related Penalties (Cont. 1)
- 20.1.6 Preparer/Promoter Penalties
- 20.1.6 Preparer/Promoter Penalties (Cont. 1)
- 20.1.7 Information Return Penalties
- 20.1.7 Information Return Penalties (Cont. 1)
- 20.1.8 Employee Plans and Exempt Organizations Penalties
- 20.1.8 Employee Plans and Exempt Organizations Penalties (Cont. 1)
- 20.1.9 International Penalties
- 20.1.9 International Penalties (Cont. 1)
- 20.1.10 Miscellaneous Penalties
- 20.1.10 Miscellaneous Penalties (Cont. 1)

20.1.1.1 (08-20-1998)
Overview

This section discusses the new chapter format of the Penalty IRM 20.1. It also includes the purpose of penalties, criteria for penalty relief, methods of appealing penalties, master file indicators and administrative procedures.

20.1.1.1.1 (08-20-1998)
Background

In 1955 there were approximately 14 penalty provisions in the Internal Revenue Code. There are now more than ten times that number. With the increasing number of penalty provisions, the Service recognized the need to develop a fair, consistent, and comprehensive approach to penalty administration.
In November 1987 the Commissioner established a task force to study civil penalties; in February 1989 the Commissioner’s Executive Task Force issued a "Report on Civil Tax Penalties." The report established a philosophy concerning penalties, provided a statutory analysis of the three broad categories of penalties (filing of returns, payment of tax, accuracy of information), and made recommendations where warranted to resolve the inconsistencies. Those recommendations were, in part:
1. The Service should develop and adopt a single penalty policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance.
2. The Service should develop a single consolidated handbook on penalties for all employees. The handbook should be sufficiently detailed to serve as a practical everyday guide for most issues of penalty administration and provide clear guidance on computing penalties.
3. The Service should revise existing training programs to ensure consistent administration of penalties in all functions for the purpose of encouraging voluntary compliance.
4. The Service should examine its communications with taxpayers (including penalty notices and publications) to determine whether these communications do the best possible job of explaining why the penalty was imposed and how to avoid the penalty in the future.
5. The Service should finalize its review and analysis of the quality and clarity of machine-generated letters and notices used in the Adjustments and Correspondence Branches of the service centers.
6. The Service should consider ways to develop better information concerning the administration and effects of penalties. The Service should develop a master file database to provide statistical information regarding the administration of penalties. That information would be continuously reviewed for the purpose of suggesting changes in compliance programs, educational programs, penalty design and penalty administration.
In keeping with the Commissioner’s Executive Task Force Report and Congressional recommendations, the consolidated penalty IRM was developed.

20.1.1.1.2 (08-20-1998)
Purpose of IRM 20.1

The purpose of the consolidated penalty handbook is to provide guidance to all areas of the Service for all penalties imposed by the Internal Revenue Code. It sets forth procedures both for assessing and abating penalties and contains discussions on topics such as various types of relief from the penalties.
IRM 20.1 replaces all other internal management documents dealing with the administration of penalties, such as IRMs and handbooks developed by various functions. IRM 20.1 is the primary source of authority for the administration of penalties by the Service. Service functions may develop reference materials for their individual needs, such as desk guides. However, such reference material must receive approval from the Penalties and Interest Office prior to distribution and remain consistent with (a) the procedures set forth in this IRM, and (b) the philosophy of the penalty policy statement.
The penalty manual serves as the foundation for addressing inconsistent administration of penalties by various Service functions. By providing one source of authority for the administration of penalties, the Service greatly reduces inconsistencies regarding attitudes and
procedures.

20.1.1.1.3 (08-20-1998)
Organization of IRM 20.1

This manual is arranged in a user-friendly format. The chapters follow the logical sequence of events when working a penalty case. Appropriate headings are provided which describe the text that follows.
The manual is designed for use both as an everyday reference guide and as a training document. Figures and examples are included in the text where they are most useful. Figures which are referenced frequently throughout the text are included as chapter exhibits to conserve space.
The manual contains criteria, guidelines, and procedures for asserting, not asserting, and abating penalties. Chapters are included covering the penalty policy statement and philosophy, the application of reasonable cause, and the procedures for penalty appeals. The sections in IRM 20.1 are:
- 20.1, 20.1.1, Background; 20.1.2, Purpose of Penalties; 20.1.3, Relief from Penalties; 20.1.4, Methods of Appealing Penalties; 20.1.5, Master File Indicators; 20.1.6, Administrative Procedures and Exhibits.
- 20.1.2, Failure to File/Failure to Pay, IRC section 6651.
- 20.1.3, Estimated Tax Penalties (ES). IRC section 6654 (Individual) and IRC section 6655 (Corporate).
- 20.1.4, Failure to Deposit Penalties (FTD)
- 20.1.5, Return Related Penalties
- 20.1.6, Preparer/Promoter Penalties
- 20.1.7, Information Return Penalties
- 20.1.8, Employee Plans/Exempt Organizations
- 20.1.9, International Penalties
- 20.1.10, Miscellaneous Penalties
This section contains Exhibits to assist the user in researching penalty issues:
- 20.1.1–1, Penalty Policy Statement
- 20.1.1–2, Penalty Relief Application Chart
- 20.1.1–3, Penalty Reason Code Chart
- 20.1.1–4, Penalty Transaction Codes
- 20.1.1–5, Penalty Reference Numbers—500 Series
- 20.1.1–6, Penalty Reference Numbers—600 Series
- 20.1.1–7, Table of Abbreviations and Acronyms
- 20.1.1–8, Dictionary of Key Terms.

20.1.1.1.4 (08-20-1998)
Responsibility

Overall responsibility for penalty programs is assigned to the Penalties and Interest Office (OPIA). The OPIA is a matrix organization residing in Reporting Compliance (Small Business/Self Employed) Division. The OPIA is charged with coordinating policy and procedures concerning the administration of penalty programs, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching taxpayer attitudes and opinions, and determining appropriate action necessary to promote voluntary compliance.
Every function is the Service has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the penalty policy statement and philosophy. Attention should be directed to the coordination of penalty programs between offices and functions, to make sure that approaches are consistent and penalty information is used for identifying and responding to compliance problems.
Managers should continuously review information for trends which may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Managers should institute, on an ongoing basis, a quality review system that evaluates the timely and correct disposition of penalty cases and encourages consistent administration of penalties.
All employees should keep the following objectives in mind when handling each penalty case:
1. Similar cases and similarly situated taxpayers should be treated alike.
2. Each taxpayer should have the opportunity to have their interests heard and considered.
3. Strive to make a good decision in the first instance. A wrong decision, even though eventually corrected, has a negative impact on voluntary compliance.
4. Provide adequate opportunity for incorrect decisions to be
  corrected.
5. Treat each case in an impartial and honest way (i.e., approach the job, not from the government’s or the taxpayer’s perspective, but in the interest of fair and impartial enforcement of the tax laws).
6. Use each penalty case as an opportunity to educate the taxpayer, help the taxpayer understand their legal obligations and rights, and assist the taxpayer in understanding their appeal rights and, in all cases, observe the taxpayer’s procedural rights.
7. Endeavor to promptly process and resolve each taxpayer’s case.
8. Resolve each penalty case in a manner which promotes voluntary compliance.

20.1.1.1.5 (08-20-1998)
Administrative Information

This section provides information on requesting changes, updating, and submitting proposed changes to IRM 20.1. It also provides security standards for this IRM.

20.1.1.1.5.1 (08-20-1998)
Requesting Changes and Updating IRM 20.1

The Penalties and Interest Office (OPIA) has overall responsibility for coordinating and approving any update to IRM 20.1. OPIA’s role is to ensure consistency in penalty administration.
The offices of the Director, Compliance and Field Territory Managers in the functional areas are responsible for the initiation and content of Policy Statements, Manual Transmittals, and Manual Supplements necessary to maintain IRM 20.1 on a current basis. This responsibility includes:
1. Initially determining the need for an amendment of, or announcement calling attention to, provisions in IRM 20.1.
2. Deciding whether a revision will be in the form of a Manual Transmittal for a direct and immediate update to the Manual or a Manual Supplement prescribing procedures for a temporary implementation period before inclusion in the Manual (direct amendment by Manual Transmittal is preferable).
3. Ensuring accuracy and completeness of any revision and providing a statement regarding the effect on functional documents and other provisions of the Manual.
4. Ensuring revisions and announcements conform with the style and format of the IRM.
5. Coordinating proposed revisions and announcements with other units within a function, other functions as appropriate, and the OPIA.
6. Prior to implementing these changes, obtaining approval from the OPIA.
If special instructions are issued "in an emergency situation" , see text of Internal Management Document System Handbook. A copy of the document must also be furnished to the OPIA within 30 days of issuing the special instructions.

20.1.1.1.5.2 (08-20-1998)
Submitting Proposed Changes to IRM 20.1

Functions in the field (area or service center) should follow the instructions currently in the Internal Management Document System Handbook. This IRM will provide local instructions for submission of proposed changes to National Headquarters.
Headquarters personnel in the appropriate areas will forward the corrections as appropriate.
1. All areas must forward the requested change, in writing, to OPIA, and OPIA will coordinate the requested change through the document clearance process.
2. Corrections and updates will be verified, as appropriate, before they are incorporated into IRM 20.1.

20.1.1.1.5.3 (08-20-1998)
Security Standards

Service officials and managers must communicate security standards contained in the Manager’s Security Handbook to subordinate employees and establish methods to enforce them.
Employees are responsible for taking required precautions to provide security for the documents, information, and property which they handle in performing official duties.
Employees using IDRS should only access those accounts required to accomplish their official duties. Any unauthorized access or browsing of tax accounts by employees is prohibited by the Service.
1. Browsing is defined as looking at a tax account to satisfy a personal curiosity or for fraudulent reasons.
2. Unauthorized access to taxpayer information is subject to disciplinary action including dismissal from the Service.

20.1.1.1.6 (08-20-1998)
Taxpayer Advocate Service (TAS) Guidelines

While the Service is always striving to improve its systems and provide better service, some taxpayers still have difficulty obtaining a solution to a problem or an appropriate response to an inquiry. The purpose of TAS is to give taxpayers someone to speak for them within the Service—an advocate. TAS guarantees that taxpayers will have someone to make sure their rights are protected, someone to turn to when the system is not responsive to their needs. TAS steps in and takes action on behalf of taxpayers when their complaints or inquiries concerning problems related to Federal taxes meet TAS criteria. The purpose of the criteria is to ensure that problems and complaints which have not been handled properly through normal channels are included in TAS.
To make sure that all taxpayer problems receive equal consideration, employees should accept the taxpayer’s statement of the problem at face value when deciding if the complaint or inquiry meets TAS criteria. However, employees should be aware that TAS is not intended to be used to circumvent their responsibility for resolving overage or difficult cases.
In applying the criteria, it is necessary to use good judgement and to screen or probe the situation to determine if the complaint or inquiry should be included in the program.
A complaint or inquiry which meets any of the following conditions will be included in the TAS:
1. Any Service contact on the same case at least 30 days after an initial inquiry or complaint; or the second contact after 60 days from the filing of an original or amended return or claim.
2. Any contact that indicates the taxpayer has not received a response by the date promised (including commitment dates on IRS forms).
3. Any contact that indicates established systems have failed, or it is in the best interest of the taxpayer or the Service that the case be worked in TAS.
A complaint or inquiry does not need to be sent to TAS if the problem has been corrected or will be resolved by completing all required actions and responding to the taxpayer (by telephone, preparing written correspondence, or sending an IDRS letter) on the same date the case is identified as meeting TAS criteria.
Although the complaint or inquiry may appear to meet TAS criteria, e.g., second contact on the same issue, there will be instances when certain contacts should not be included in TAS:
1. When it can be determined that the taxpayer has not used, or refuses to use, established administrative or formal appeals procedures, or
2. When the complaint or inquiry only questions the constitutionality of the tax system.
Please keep in mind that a "nonfilers" can have a legitimate problem which should be handled by TAS.
Items meeting TAS criteria may be discovered at any point in the processing cycle. If the item or case meets TAS criteria, the case should be referred to the supervisor for referral to TAS.

20.1.1.1.7 (08-20-1998)
Form 911—ATAO

Form 911, Application for a Taxpayer Assistance Order to Relieve Hardship (ATAO) may be initiated by a Service employee on behalf of the taxpayer to request review of an account if:
1. The taxpayer is experiencing or about to experience a "significant hardship" ; and
2. The non-TAS employee dealing with the problem cannot or will not relieve that hardship immediately.
The Service may receive cases that qualify for an ATAO directly from the taxpayer or the taxpayer’s authorized representative (Form 911); or, through telephone contact or letter.
Use normal procedures and the appeal processes before resorting to an ATAO. However, if these procedures or processes are not appropriate because they will not be timely in resolving the hardship or were not followed and a "significant hardship" exists, consider requesting an ATAO. It is never wrong to consider whether an ATAO is appropriate.
"Significant hardship" is a highly subjective determination. A number of factors must be considered when making a determination of "significant hardship" . Enforcement action, in and of itself, is not a hardship without additional factors. For this reason, using good judgement after reviewing the pertinent facts and circumstances is the most important element in reaching the fair and reasonable decision.
Significant hardship consideration must be made on a case by case basis. The Taxpayer Advocate (PRO) will make the final decision. To properly evaluate a hardship situation, consider the following points:
- Will the taxpayer be able to retain housing?
- Will the taxpayer be able to obtain food?
- Will the taxpayer be able to retain utilities?
- Will the taxpayer be able to retain or obtain transportation to and from work?
- Will the taxpayer be able to remain employed?
- Will the taxpayer be able to obtain essential medical treatment and/or medication?
- Will the taxpayer be able to obtain reasonable clothing and/or shoes?
- Will the taxpayer sustain an avoidable loss of education?
- Will irreparable damage be caused to the taxpayer’s credit rating?
- Will the taxpayer be unable to meet payroll and/or be in imminent danger of bankruptcy?
- Is the hardship imminent?
Below are some examples of potential "significant hardship" cases.
1. A wage levy that impaired the taxpayer’s ability to purchase needed medication or medical care. The Service’s lack of awareness causes an unintentional negative impact and would qualify for an ATAO if the employee contacted cannot or will not relieve the hardship.
2. A payment is improperly applied to a taxpayer’s account, thus blocking the taxpayer’s receipt of a refund. After many contacts with the Service, substantiated with dates, the taxpayer is suffering emotional stress and files a Form 911 for relief. An ATAO is appropriate to request action to substantiate the credit and authorize the refund.
Below are some examples of cases which DO NOT show "significant hardship" .
1. A taxpayer is experiencing a significant hardship because of a bank levy on his sole source of funds. The employee contacted is able to release the levy and initiate a payment agreement with the taxpayer. Because the employee resolved the hardship, an ATAO would not be warranted.
2. The taxpayer complains that he will not be able to pay both the tax liability and the rent this month. The taxpayer has been current on previous rent payments, and the landlord has not contacted the taxpayer about the rent. The state where the taxpayer lives requires 60 days prior notice before eviction proceedings can begin. Because there is no imminent hardship, an ATAO would not be warranted.
Action required:
1. Immediately prepare Form 911 upon receipt of any telephone call, correspondence, or claim which shows need for an ATAO for which the non-TAS employee cannot or will not provide relief. Prepare Form 911 even if the taxpayer does not specifically ask for an ATAO. Attach the source document, if any, to Form 911. Functional management review is permissible, but should not delay the Form 911 in getting to the PRO. If functional management decides to provide the relief requested for internally identified Forms 911, they need not go to the PRO.
2. Route all Forms 911 (including statute cases) to the TAS office immediately.
3. Do not advise taxpayers that their case is being made an ATAO. The TAS office will respond to the taxpayer as necessary.
4. Refer to the Problem Resolution Program Handbook for additional information on "significant hardship" and ATAO processing
  instructions.
You may discover items meeting TAS criteria at any point in the processing cycle. If the issue or case meets any of the criteria, forward it to TAS.
Note:the ATAO procedure will not result in forgiveness of a valid tax liability. It only delays enforcement action, if appropriate.

20.1.1.2 (08-20-1998)
Purpose of Penalties

Penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Code.
For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Efforts made to fulfill these obligations constitute compliant behavior. Most penalties apply to behavior that fails to meet any or all of these obligations.
Penalties encourage voluntary compliance by:
- Defining standards of compliant behavior,
- Defining remedial consequences for noncompliance, and
- Providing monetary sanctions against taxpayers who do not meet the standard.
These three factors support the public conviction that the tax system is fair and the penalty is in proportion to the severity of the
noncompliance.

20.1.1.2.1 (08-20-1998)
Encouraging Voluntary Compliance

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.
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.
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.
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.
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.
Compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.
Penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.
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.
Service personnel may educate taxpayers and encourage their future compliance by:
1. Discussing causes for the delinquency and listening to taxpayer’s reasons and concerns for noncompliance,
2. Ensuring that taxpayers understand their filing and paying responsibilities, and
3. Being alert to information received in discussions with taxpayers that indicate possible reasons for abatement of a penalty.
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 20.1.1–1.)

20.1.1.2.2 (08-20-1998)
Fair and Consistent Approach to Penalty Administration

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. If the Service does not administer penalties uniformly (guided by the applicable statutes, regulations, and procedures) overall confidence in the tax system is jeOPIArdized.
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 the 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.

20.1.1.3 (08-20-1998)
Relief From Penalties

Generally, relief from penalties falls into four separate categories. They are:
- Reasonable Cause
- Statutory Exceptions
- Administrative Waivers
- Correction of Service Error.
Appeals may recommend the abatement or nonassertion of a penalty based on these four criteria as well as "Hazards of Litigation."
This chapter discusses each of these categories and the related criteria. Also, see LEM 20.1.3.
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 LEM 20.1..3.
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.

20.1.1.3.1 (08-20-1998)
Reasonable Cause

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.
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 20.1.
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 which 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 20.1.1–2, 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 20.1 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 20.1. 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.
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.
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 20.1.1.3.
- 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?
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.

20.1.1.3.1.1 (08-20-1998)
Standards

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.
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.
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.

20.1.1.3.1.2 (08-20-1998)
Ordinary Business Care and Prudence

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.
In determining if the taxpayer exercised ordinary business care and prudence, review available information including the following:
1. 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 20.1.1.3.1).
2. 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.
3. Length of Time. Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance. See IRM 20.1.1.3.1. 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.
4. 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.
Abatement of a penalty because the taxpayer established ordinary business care and prudence is identified by the use of Penalty Reason Code (PRC) 22.

20.1.1.3.1.2.1 (08-20-1998)
Ignorance of the Law

In some instances taxpayers may not be aware of specific obligations to file and/or pay taxes. The ordinary business care and prudence standardrequires 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.
For example, consider:
1. The taxpayer’s education,
2. If the taxpayer has been subject to the tax,
3. If the taxpayer has been penalized, or
4. If there were recent changes in the tax forms or law which a taxpayer could not reasonably be expected to know.
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.
Reasonable cause should never be presumed, even in cases where ignorance of the law is claimed.
The taxpayer may have reasonable cause for noncompliance if:
1. A reasonable and good faith effort was made to comply with the law, or
2. The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement.

20.1.1.3.1.2.2 (08-20-1998)
Mistake was Made

The taxpayer may try to establish reasonable cause by claiming that a mistake was made.
1. Generally, this is not in keeping with the ordinary business care and prudence standardand does not provide a basis for reasonable cause.
2. 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.

20.1.1.3.1.2.3 (08-20-1998)
Forgetfulness

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.
1. Relying on another person to perform a required act is generally not sufficient for establishing reasonable cause.
2. 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.
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.

20.1.1.3.1.2.4 (08-20-1998)
Death, Serious Illness, or Unavoidable Absence

Death, serious illness or unavoidable absence of the taxpayer may establish reasonable cause for late filing, payment, or deposit for the following:
1. 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 24indicates the incident occurred to the individual or a member of that individual’s immediate family for filing, paying, or depositing.
2. 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 26indicates the incident occurred to the person responsible for filing, paying or depositing.
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.
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.

20.1.1.3.1.2.5 (08-20-1998)
Unable to Obtain Records

Explanations relating to the inability to obtain the necessary records may constitute reasonable cause in some instances, but may not in others.
Consider the facts and circumstances relevant to each case and evaluate the request for penalty relief.
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.
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.
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.

20.1.1.3.2 (08-20-1998)
Statutory Exceptions & Administrative Waivers

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.

20.1.1.3.2.1 (08-20-1998)
Statutory Exceptions

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:
1. IRC section 6654(e)(1), (2), or (3), Estimated Tax Penalties for Individuals (IRM 20.1.3).
2. IRC section 7502(a) and 7502(e), Timely Mailing Treated as Timely Filing and Paying (IRM 20.1.2).
3. IRC section 6724(a) or 6724(c), Waiver; Definitions and Special Rules, Information Return Penalties (IRM 20.1.7).
4. IRC section 6404(f), Abatement of Penalty or Addition to Tax Attributable to Written Advice of the Internal Revenue Service (see IRM 20.1.1).
5. 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."
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.
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.

20.1.1.3.2.2 (08-20-1998)
Administrative Waiver

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.
An administrative waiver may be necessary when there is a delay by the Service in:
1. Printing or mailing of forms
2. Publishing guidance, writing of regulations, or
3. Other conditions.
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.
An administrative waiver is identified by PRC 43.

20.1.1.3.2.3 (08-20-1998)
Undue Hardship

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 paya tax or deficiency on the due date.
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.
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.
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.
1. 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.
2. 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.
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).
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?
An abatement of a penalty because the taxpayer experienced a "undue hardship" is identified by the use of PRC 29.

20.1.1.3.2.4 (08-20-1998)
Advice

This section discusses three basic types of advice: written and/or oral advice provided by the Service, and advice provided by a tax
professional.
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:
1. Was the advice in response to a specific request and was the advice received related to the facts contained in that request?
2. Did the taxpayer reasonably rely on the advice?
The following examples address situations where a taxpayer relies on written advice from the Service regarding an item on a filed return.
1. The taxpayer did not reasonably rely on the advice regarding an item included on a returnif the advise was received after the date the return was filed;
2. 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;
3. A taxpayer may not be considered to have reasonably relied on written advice unrelatedto 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.
Did the taxpayer provide the Service or the tax professional with adequate and accurate information?
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 noticethat the advice is no longer correct or no longer represents the Service’s position.
The taxpayer is placed on noticeas the result of any of the following events that present a contrary position and occur after the issuance of the written advice:
1. Written correspondence from the Service that its advice is no longer correct or no longer represents the Service’s position;
2. Enactment of legislation or ratification of a tax treaty;
3. A U.S. Supreme Court decision;
4. The issuance of temporary or final regulations; or
5. the publication of a revenue ruling, revenue procedure, or other statement in the Internal Revenue Bulletin.
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.

20.1.1.3.2.4.1 (08-20-1998)
Written 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 erroneous written advice furnished by an officer or employee of the Service acting in their official capacity.
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.
Penalties abated as a result of reliance on erroneously written advice from the Service should be identified by PRC 44, Statutory Exception.

20.1.1.3.2.4.2 (08-20-1998)
Oral Advice from the Service

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.
In addition to considering the criteria provided in above, consider the following:
1. Did the taxpayer exercise ordinary business care and prudence in relying on that advice?
2. Was there a clear relationship between the taxpayer’s situation, the advice provided, and the penalty assessed?
3. What is the taxpayer’s prior tax history and prior experience with the tax requirements?
4. Did the Service provide correct information by other means (such as tax forms and publications)?
5. What type of supporting documentation is available?
The following are types of supporting documentation:
1. A notation of the taxpayer’s question to the Service;
2. Documentation regarding the advice provided by the Service;
3. Information regarding the office and method by which the advice was obtained;
4. The date the advice was provided, and
5. The name of the employee who provided the information.
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.

20.1.1.3.2.4.3 (08-20-1998)
Advice from a Tax Advisor

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 20.1.5, Preparer Promoter Penalty, and Treas. Reg. 1.6664–4(c).
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.
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" .
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.

20.1.1.3.2.5 (08-20-1998)
Fire, Casualty, Natural Disaster, or Other Disturbance

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.
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).
Fire, casualty, natural disaster, or other disturbance are factors to consider. One of these circumstances by itself does not necessarily provide penalty relief.
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.
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.
The determination to grant relief from each penalty must be based on the facts and circumstances surrounding each individual case.

20.1.1.3.2.6 (08-20-1998)
Official Disaster Area

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.
1. Because there are one-time instructions, they will not be incorporated in this IRM. Territories, service centers, and customer service sites will be kept informed of any special instructions affecting their areas.
2. Penalty Relief granted because the taxpayer was located in an Official Disaster Area is identified by the use of PRC 28.

20.1.1.3.3 (08-20-1998)
Service Error

A Service error can be any error made by the Service in computing or assessing tax, crediting accounts, etc. See Exhibit 20.1.1–3, Penalty Reason Code Chart, for the appropriate PRC to be used when abating either a computer-generated or manually-input penalty.
General Service Error (computer generated—PRC 15). This PRC should be used to identify penalties abated as the result of a Master File Recovery.
When an analyst, from any area of the Service, identifies a computer programming applicationthat caused a penalty to be assessed in error, that analyst should:
1. Contact Information Services (IS) to resolve the inadequate computer application, and
2. 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.
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:
1. A math error when manually computing a penalty,
2. An extension of time to file that did not post to the Master File, or
3. 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.

20.1.1.3.4 (08-20-1998)
Requesting Penalty Relief

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.
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.
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.
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.
Determine if the taxpayer’s explanation addresses the penalty imposed.
1. The dates and explanations should clearly correspond with events on which the penalties are based to show that the taxpayer is entitled to relief from the penalty.
2. Request additional information from the taxpayer to clarify the explanation if the dates and explanations do not correspond with the events on which the penalty are based.
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.
1. The same penalty, previously assessed, may indicate that the taxpayer is not exercising ordinary business care.
2. If this is the taxpayer’s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for relief, since a first time failure to comply does not by itself establish reasonable cause.
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.
The following are examples where penalty relief may not be appropriate.
1. The taxpayers claim that they were unable to comply with the filing requirement due to a death in the family. The death occurred several months prior to the due date of the return. The return was not filed until a year after the due date of the return.
2. Taxpayers claim that they were unable to comply with the filing requirement because the records necessary for filing were in the control of a third party, i.e., a bankruptcy trustee or an accountant. The records were returned to the taxpayer well in advance of time the return was required to be filed. The return was not filed until several months after the records were returned.
3. In both of the examples, the timing of the event may prevent the taxpayer from receiving penalty relief unless other factors justify the delay in filing.
Consider if the taxpayer could have anticipated the event that caused the non-compliance. See IRM 20.1.1.3.1.2.

20.1.1.3.4.1 (08-20-1998)
Subsequent Requests for Penalty Relief

A second or subsequent request for penalty relief may be received after the initial request for relief has been denied.
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.
1. 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.
2. 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.
3. If it is unclear what the taxpayer wants, contact the taxpayer to request clarifying information.
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.)

20.1.1.3.4.2 (08-20-1998)
Taxpayer Entitled to Relief

If the taxpayer provides an explanation that supports their request, waive or abate the applicable penalties. If the explanation applies to only a portion of the penalty, only that portion of the penalty should be waived or abated.
Document the decision and the basis for providing relief according to functional guidelines. Attach a copy of the information to the original return (if available) or other transaction (input) document.
Decisions made by compliance personnel, with respect to penalties, should not ordinarily be changed by personnel within another functional area. Before considering relief for a penalty asserted by compliance personnel, contact that office to determine if the case should be returned to the originating office.
If relief is granted prior to assertion of the penalty, use computer condition codes to suppress the automatic assertion of penalties. Functional areas that forward returns to be processed must request that the service center prevent the assessment of the penalty. This may be done by:
1. Writing "Reasonable Cause" or "Penalty Relief" (as appropriate) in the preprinted penalty block on the return or on Form 4364, Delinquency Computations;
2. Requesting the penalty assessment transaction code be input for zero amount;
3. Editing a computer condition code on the return; or
4. Preparing other forms appropriate for forwarding returns or penalty computations for processing.
5. In addition, annotate the appropriate PRC on the respective form or return.
If relief is granted after the assessment of a penalty, follow procedures for abating the penalty or the appropriate portion of the penalty. Adjustments to penalties that are due to reasonable cause should include Reason Code 62 and the appropriate PRC. See Exhibit 20.1.1–3.
If relief if warranted for only a portion of the penalty, manually compute and assess or abate the applicable penalty amount. This will prevent automatic assertion of the penalty for the full amount. Follow applicable penalty procedures in IRM 20.1.

20.1.1.3.4.3 (08-20-1998)
Taxpayer Not Entitled to Relief

If the criteria for penalty relief has not been met, determine if additional information would be helpful to evaluate the taxpayer’s request (see IRM 20.1.1.3.1).
If a final determination that the criteria for granting penalty relief was not established:
1. Document the decision and its basis according to functional guidelines, and
2. Attach a copy of the information to the original return (if available) or other transaction (input) document.
Employees denying a request for preassessment relief (prior to assessment) or abatement (after assessment), must provide written notification to the taxpayer of the denial and of the taxpayer’s appeal rights, regardless of whether the request was received,
1. In person,
2. Over the phone, or
3. In writing.
The notice should include:
1. A complete explanation of the Service’s decision and the basis for denial;
2. Information on the appeal procedures, including instructions on how to submit a written protest; and
3. Power of attorney information.
The Service has developed standardized letters that are used by various offices. They include:
- IDRS Correspondex Letter 854(C), which is generally used by service centers and area offices.
- ACS LT38, which is used by the Automated Collection System.
- Pattern letters 2413(P) and 2414(P), which are used by Collection Area Offices.
Functions that process returns through the service center will need to alert the service center of their decision to deny penalty relief. This can be done by writing "Penalty Relief Denied" in the appropriate preprinted penalty block on the return or on Form 4364, Delinquency
Computations.
If a request for penalty relief if denied after assessment, request or input TC 290 for zero amount, using blocking series 98/99 (Appeals uses blocking series 96X) with Reason Code 62 and Hold Code 3.

20.1.1.4 (08-20-1998)
Methods of Appealing Penalties

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.
Taxpayers have the right to challenge the assertion or assessment of a penalty, and generally may do so at any stage in the penalty process. Taxpayers may request:
1. A review of the penalty prior to assessment (e.g. deficiency
  procedures),
2. A penalty abatement after it is assessed and either before or after it is paid (postassessment review),
3. An abatement and refund after payment (claim for refund).
Taxpayers may indicate their disagreement with the Service verbally, in writing, or if paid, by filing a claim for refund or credit.
If agreement cannot be reached at the area 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.
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.

20.1.1.4.1 (08-20-1998)
The Appeals Function

The Appeals Office is an independent administrative body within the Service that is the only formal level of appeal within the Service.
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.
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 consid-ered in the appeals process, and should be considered before considering if reasonable cause or other relief criteria exist.
Appeals has the authority to settle penalties for less than the full amount based on the hazards of litigation.

20.1.1.4.1.1 (08-20-1998)
Preassessment Appeals

Generally, Appeals will consider the following type of penalties prior to assessment:
1. Penalties which are asserted by the Service in the course of an examination of a taxpayer’s income tax return;
2. 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
3. The intentional disregard penalty of IRC section 6721(e) when it is asserted for failures to comply with the cash reporting requirements of IRC section 6050I.
Generally, if Appeals considers a penalty before it is assessed, Appeals will not reconsider the penalty after it is assessed.
1. However, at its discretion, Appeals may reconsider its prior decision if evidence becomes available that indicates further consideration is warranted.
2. Taxpayers may also pay the penalty previously upheld by Appeals, and file a claim for refund. The claim for refund may be brought to Appeals if denied.
More detailed Appeals procedures are described in the Appeals Returns Processing and Control Handbook.

20.1.1.4.1.2 (08-20-1998)
Postassessment Appeals

To request abatement of a penalty after assessment, the taxpayer must submit a written request to the Service.
The employee must consider all the facts and circumstances to determine if the taxpayer’s explanation meets the penalty relief criteria. See IRM 20.1.1.3.
If a taxpayer orally request the abatement of a penalty, advise the taxpayer to submit the request in writing.
If a taxpayer orally requests an appeal of a decision, advise the taxpayer to submit the request in writing.
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.

20.1.1.4.2 (08-20-1998)
Deficiency Procedures

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:
1. Cannot assess an additional amount of income, estate, or gift tax, including related penalties unless it complies with deficiency
  procedures;
2. Can assess additional amounts of employment and certain excise tax and related penalties without providing a notice of deficiency;
3. Can assess penalties not related to a tax (e.g., IRC sections 6700, 6701, 6702) without providing a notice of deficiency;
4. Can assess estimated tax penalties (IRC sections 6654 and 6655) if a return was filed for the tax year without providing a notice of deficiency; and
5. Can assess the failure to file and failure to pay (IRC section 6651) applicable to the portion of the tax liability which is not a tax deficiency without providing a notice of deficiency.
6. 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.
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.
1. The taxes and related penalties subject to deficiency procedures include income, estate and gift tax, as well as certain excise taxes.
2. The taxes and related penalties not subject to deficiency procedures include employment taxes imposed by Subtitle C, and certain excise taxes.
The procedure called "notice of deficiency" provides the taxpayer a method of appealing tax and/or penalties prior to their assessment.

20.1.1.4.2.1 (08-20-1998)
Non-Deficiency Procedures

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.
Generally, nondeficiency procedures are as follows:
1. If penalties are proposed and the taxpayer agrees, the penalties are assessed.
2. If penalties are proposed and the taxpayer disagrees a 30 day letter is issued andthe taxpayer may file a protest with Appeals.
3. If Appeals sustains the penalty proposal, the penalties are assessed.
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.
If a 30 day letter was not issued, or if a claim for refund was denied, the taxpayer should be given the opportunity for an appeal.

20.1.1.5 (08-20-1998)
Master File Indicators

Master file indicators are listed below.

20.1.1.5.1 (08-20-1998)
Master File Reason Codes

Penalty reason codes were adopted to enable the Service to track penalties. Accurate reporting of these reason codes is vital. Penalty reason codes provide the basis for determining a taxpayer’s compliance history and the foundation of the Penalty Management Information System. Penalty reason codes are used with both BMF and IMF document code 54 and 47 transactions.
Penalty reason codes are divided into two categories, systemically generated and manually input. When manually abating a penalty, use only those reason codes identified as available for manual input on Exhibit 20.1.1–3.
If an abatement or partial abatement of a penalty is appropriate, either input the abatement transaction or complete the appropriate form to request that the support area abate the penalty using the specified penalty reason code.
1. Taxpayer Service—IDRS (ADJ54)—The Penalty Reason Code MUST be used only in the fourth reason code position.
2. Compliance—The penalty reason code must be used to identify the reason for the abatement or nonassertion of a penalty when completing any of the following forms: Form 5344, Examination Closing Record (ADJ47); Form 5599, EO Examined Closing Record (ADJ47); and Form 8278, Computation and Assessment of Miscellaneous Penalties (ADJ54).
3. Appeals—The penalty reason code must be used when abatement or non-assertion of a penalty when completing any of the following forms: Form 5403, Appeals Closing Record (ADJ47), Form 9120, Appeals Transmittal Memorandum and Supporting Statement—Penalty (ADJ54), and Form 8278, Computation and Assessment of Miscellaneous Penalties (ADJ54).
There are four main categories of Penalty Reason Codes available for manual input.
1. Penalty Relief, to be used in conjunction with IRM 20.1.1.3 or other specific penalty provisions provided throughout IRM 20.1 (see Exhibit 20.1.1–3).
2. Appeals, the following three reason codes are to be used only by Appeals and only when the other criteria referenced in Exhibit 20.1.1–3 are inappropriate. For example: RC 40—hazards of litigation or other Appeals Settlement when all of the penalty is abated; RC 41—penalties are sustained by Appeals; RC 42—partial abatement (Settlements where part of the penalty is abated).
3. Statutory Exception or Administrative Waivers(to be used when written procedures have been established).
4. Service Error(to be used when it is determined that the Service computed the penalty incorrectly or inappropriately).
If more than one penalty is abated for more than one reason, each abatement action must reference its own penalty reason code. This will require a separate adjustment for each penalty reason code. For example:
- 16X Reasonable Cause—PRC 25
- 27X Partially abated—PRC 42
- 18X Hazards—PRC 40
If all penalties are abated for the same reason, only one PRC must be referenced. For example:
- 16X Reasonable Cause—PRC 25
- 27X Reasonable Cause
- 18X Reasonable Cause

20.1.1.5.2 (08-20-1998)
Penalty Transaction Codes

Penalty transaction codes (see Exhibit 20.1.1–4) indicate assessment or abatement actions. Generally, return related penalties are based on an underpayment of tax.
1. When the penalty is assessed on the Tax Module, generally, each penalty is assigned a Transaction Code (TC) which identifies the type of penalty, however, some penalties assessed on a Tax Module will use a TC 240 with a reference number (RN) which identifies the type of penalty. These reference numbers are between 680 and 699.
2. There are usually four potential transaction codes for each penalty, one each for manual and computer assessments with the related abatement codes. For example, Failure to File (FTF):
  (1) 160— Manually assessed FTF (2) 161— Manually abatedFTF (3) 166— Computer generated assessment of the FTF (4) 167— Computer generated abatement of the FTF.
3. Related penalty Transaction Codes in a series are shown in Exhibit 20.1.1–4, with the first two digits plus an X. For example, in the FTF example series above the TC will be shown as 16X.
Exhibit 20.1.1–4 provides (a) Penalty Transaction Codes (TC) (b) their related IRC section, and (c) a description of the penalty.

20.1.1.5.3 (08-20-1998)
Penalty Reference Numbers

Penalty Reference Numbers are used to identify penalties that are not based on information from a tax return. These penalties are based on a failure to perform an act required by the Internal Revenue Code (IRC). The penalty is assessed on MFT 13 (Individual) or 55 (Business), and identified by a Reference Number.
At times several reference numbers will be used to identify one Code section, though the failure may be the same or similar. This is done to identify the area or program responsible for assessing or abating the penalty. For example, both reference numbers 500 and 600 are used to identify a penalty assessed as the result of IRC section 6721.
1. Reference number 500 is used if the failure was identified on the Payer Master File.
2. Reference number 600 is used if the failure was identified during an examination, audit, or other compliance determination based on the taxpayer’s books and records.
3. Reference numbers between 680 and 699 are used to identify return related penalties. These reference numbers will appear on tax related MFT’s (not MFT 13 or 55).
See Exhibits 20.1.1–5 and 20.1.1–6 for Penalty Reference Numbers, their related IRC section, a description of the penalty, or the computer paragraph inserted in the balance due notice.
The following are examples of reference numbers assigned for various failures relating to IRC section 6721.
1. Reference numbers 500 through 514 are used to assess/abate penalties based on Payer Master File information. See IRM 20.1.7, Information Return Penalties.
2. Reference number 549 is used to assess/abate penalties based on the CAWR Program. See IRM 20.1.7, Information Return
  Penalties.
3. The 600 series reference numbers are used to assess or abate a penalty as the result of an examination or a determination made by a compliance employee: (a) 600—failure to timely and correctly file an information return; (b) 609—failure to timely and correctly file a Form 8300—responses to Detroit Computing Center; (c) 651—Failure to File—Form 8300; (d) 652—Intentional Disregard—Form 8300.

20.1.1.6 (08-20-1998)
Administrative Procedures

See Exhibit 20.1.1–7 for the Table of Abbreviations and Acronyms and Exhibit 20.1.1–8 for the Dictionary of Key Terms.

20.1.1.6.1 (08-20-1998)
Corporate Files on Line (CFOL)

CFOL provides on-line research of master file account and return data. The use of command codes such as IMFOL, BMFOL, and RTVUE is an alternative to MFTRA/ACTRA/ESTAB requests.
However, since master file does not carry all information available on the IDRS screen displays (IDRS notice status, case control information, pending transaction, etc.), it is imperative that IDRS research be initiated before accessing master file information via CFOL command codes. Also IDRS input command codes that will cause a change to master file data cannot be preceded by BRTVUE or RTVUE.
CFOL command codes should be used to research entity and/or tax data which may not be available on IDRS. In most cases, the response will appear on the screen in five seconds or less.
1. It is recommended that CFOL command codes be used in lieu of MFTRA/ACTRA/ESTAB when the case can be resolved from information provided by the CFOL command codes.
2. This will reduce the need to order MFTRA transcripts on some cases.
IMFOL accesses the IMF and allows several screen displays based on an input definer code. These include:
1. An index screen which shows whether a specific tax period is available on-line or not. The index screen also includes a balance due field showing if the account is in debit, credit, or zero balance.
2. A screen which shows entity type information (similar to INOLE).
3. A screen which has specific data from the tax account (similar to TXMOD and MFTRA).
4. A screen titled IMF Adjustment Transaction Screen which includes detailed information about adjustment transactions input.
5. A screen which includes retention register account information.
6. A posted TC 150 return screen which displays return data that is transcribed along with computer generated fields.
7. A status history screen which includes extension to file data.
8. A help screen which displays information to assist in using IMFOL/BMFOL.
RTVUE accesses the Return Transaction File (RTF). It contains all edited, transcribed, and error corrected data from data entry lines of returns and related forms and schedules filed in the current processing year (including returns for prior tax years). At a later date, this file will contain information for the current year and two prior year returns. This command code requires a definer to access a particular screen and has an index type screen.
For further explanation of the screen displays and applicable definer codes, refer to the Aims Handbook for IDRS Terminals Inquiries.

Exhibit 20.1.1.6-1 (08-20-1998)
Penalty Policy Statement (P–1–18)

PENALTY POLICY STATEMENT

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:

—	ensure consistency;

—	ensure accuracy of results in light of the facts and the law;

—	provide methods for the taxpayer to have his or her interests heard and considered;

—	require impartiality and a commitment to achieve the correct decision;

—	allow for prompt reversal of initial determinations when sufficient information has been presented to indicate that the penalty is not appropriate;

—	ensure that penalties are used for their proper purpose and not as bargaining points in the development or processing of cases.

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 Penalties and Interest Office.

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.

Exhibit 20.1.1.6-2 (08-20-1998)
Penalty Relief—Application Chart

PENALTY RELIEF—APPLICATION CHART
IRC Section	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(a)(1)**	Failure to File Information Returns	Yes	Yes
6652(c)(1)	Failure to File Annual Return by Exempt Organization	Yes	Yes
6652(c)(2)	Failure to File Returns under IRC 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 Certain Plans of Deferred Compensation—Form 5500	Yes	Yes
6652(h)	Failure to Give Notice to Recipients of Certain Pension, etc, Distributions	Yes	Yes
6652(i)	Failure to Give Written Explanation to Recipients of Certain Qualifying Rollover Distributions	Yes	Yes
6653(a)*	Negligence	No	Yes*
6653(b)*	Fraud	No	Yes*
6654	Estimated Tax Penalty on Individuals	No	Statutory Exception
6655	Estimated Tax Penalty on Corporations	No	No
6656(a)	Failure to Deposit	Yes	Yes
6657	Bad Check	Yes	Yes
6659*	Valuation Overstatement	No	Yes
6659A*	Overstatement of Pension Liabilities	No	Yes
6661*	Substantial Understatement	No	Yes
6662	Accuracy-Related	Yes	Yes
6663	Fraud	Yes	Yes
6692	Failure to File Actuarial Report	Yes	Yes
6698	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 other Information Reporting Requirements	Yes	Yes
* Repealed for tax returns filed after December 31, 1989 ** Repealed for tax returns filed after December 31, 1986

Exhibit 20.1.1.6-3 (08-20-1998)
Penalty Reason Code Chart

PENALTY REASON CODE (PRC) CHART COMPUTER GENERATED
ORIGIN	PENALTY REASON CODE	DEFINITION

Systemic
	01	Suppressed/Abated—LEM criteria
	02	Penalty adjusted due to computational error
	03	Master File Recovery

Taxpayer
	10	Corrected/Amended return, Original return taxpayer prepared
	13	Corrected/Amended return, Original return prepared by the Service (SFR/6020B)
	14	Misapplied/misdated payment (TP/Bank)

Service
	15	General Service Error (134)
	*21	LEM Criteria

PENALTY REASON CODE CHART (PRC) MANUAL INPUT

ORIGIN	PENALTY REASON CODE	DEFINITION

Reasonable Cause (RC62)
	22	Taxpayer exercised ordinary business care and prudence. 20.1.1.3.1.2
	24	Death, Serious illness or Unavoidable absence of taxpayer or immediate family member of the party responsible. (IMF) 20.1.1.3.1.2.4
	25	Records inaccessible. 20.1.1.3.1.2.5
	26	Death, Serious illness or Unavoidable absence of party responsible (or member of immediate family). (BMF) 20.1.1.3.1.2.4
	*30	Other 20.1.1.3

General Penalty Relief
	*43	Administrative Waiver 20.1.1.3.2
	*31	Erroneous oral advice from the Service 20.1.1.3.2.4.2
	*44	Statutory Exception 20.1.1.3.2
	23	Taxpayer relied on practitioner or third party 20.1.1.3.2.4.3
	27	Timely mailed/timely filed 20.1.1.3.2.3
	28	Disaster Area 20.1.1.3.2.6
	29	Undue economic hardship/inability to pay 20.1.1.3.2.3
	*45	Service Error 20.1.1.3.3

Appeals
	* 40	Appeals abatement (Hazards of Litigation)
	*41	Appeals sustains penalty
	*42	Appeals partially sustains penalty

Exhibit 20.1.1.6-4 (08-20-1998)
Penalty Transaction Codes

Penalty Transaction Codes

TC	IRC section	Description
16X	6651(a)(1)	Failure to File a Tax Return (FTF). The FTF penalty is equal to the appropriate percentage of the net tax due multiplied by each month or part of a month (not to exceed 5 months) the return is not filed:
		4 ¹/₂% if the FTP also applies, or 5% if only the FTF applies.
17X	6654	Failure by an Individual to pay Estimated Income Tax, and
	6655	Failure by a Corporation to pay Estimated Income Tax.
		The excess of the required installment (either individual or corporate) minus the amount paid or credited on or before the due date of the installment is the underpayment.
		To determine the penalty for each installment, multiply:
			—the penalty rate (the underpayment interest rate for the applicable quarter)
			—by the amount of the underpayment,
			—for the period of the underpayment (the earlier of the date the payment is received or the return due date.
18X	6656	Failure to Deposit. The penalty is based on the:
			—underpayment of the under deposited amount, and
			—the number of days between the deposit liability due date and the date the deposit is received.
			2%—	1 to 5 days late,
			5%—	6 to 15 days late,
			10%—	more than 15 days but before 10 days after notice and demand, or
			15%—	payments received more than 10 days after notice and demand.
			10%—	FTD Avoidance Penalty
				Payments, made directly to the IRS, or deposits made to a bank when the employer is required to deposit electronically.
20X	6723	Failure to provide a Taxpayer Identification Number (TIN). The penalty is $50 per failure, not to exceed $100,000.
23X	6652(c)	Daily Delinquency Penalty—$10 times the number of days the return was filed after the due date or extended due date, not to exceed $5,000.
240**		Assesses a Miscellaneous Penalty generally associated with a Reference Number.
241**		Abates a Miscellaneous Penalty generally associated with a Reference Number.
246	6698	Assesses the Failure to File a Partnership return or missing information associated with a partnership return. The penalty is $50 per partner, per month, for not more than 5 months.
247		Abates the Failure to File a Partnership return or missing information penalty associated with a partnership return.
27X	6651(a)2	Failure to Pay (FTP) is ¹/₂ of 1% (.005) per month, for each month or part of a month, from the due date of the return to the date the tax is paid or the maximum of 25% of the unpaid tax is reached, or
	6651(a)3	Failure to Pay is ¹/₂ of 1% (.005) for each month or part of a month, from 10 days after notice and demand until the tax is paid or the maximum of 25% of the unpaid tax is reached, or
	6651(d)	Increases the penalty from ¹/₂ of 1% (.005) to 1% (.01) per month, the earlier of the day on which notice and demand for immediate payment is given or 10 days after the service has issued the notice of intent to levy.
28X	6657	Bad Check Penalty—
		If the check—
			is $750 or more, the penalty is 2 percent of the amount of the check,
			is less than $750, the penalty is the penalty is the lesser of:
				$15, or
				the amount of the check.
31X*	6652(b)	Failure to Report Tips Penalty—imposes a penalty on the employee (who received the tips) equal to 50 percent of the employee’s portion of the FICA tax or Railroad Retirement tax applicable to the tip amount that was not reported at the time and in the manner required.
32X*	6653(b)R	Fraud Penalties assessed for returns with a due date prior to January 1, 1990.
	6663	Fraud Penalties assessed on returns due after December 31, 1989.
35X*	6662(c)	Negligence penalties assessed for returns with a due date after December 31, 1989, are 20% of the underpayment of tax due to negligence.

R	This IRC section was repealed , the law may or may not have been incorporated into another Code section.

*	The penalty was assessed as the result on an examination or other compliance employee determination. These penalties should be abated only by the area responsible for assessing the penalty or by Appeals.

**	See Reference Numbers in Exhibits 20.1.1–5 and 20.1.1–6.

Exhibit 20.1.1.6-5 (08-20-1998)
Penalty Reference Numbers (500 Series)

Penalties assessed using the reference numbers 500 through 514 are assessed using the following computational formula. Only one penalty, per return, can be assessed regardless of the number of failures associated with that return. Therefore, the computer paragraph associated with the respective reference number relates to the type of failure, not the way the penalty was computed.

RN	IRC section	Description
	6721	Imposition of the Failure to Comply with Certain Information Reporting Requirements.
		♦	These reference numbers should only be used for returns and statements due after December 31, 1989.
		♦	$50 per failure/maximum $250,000.
		♦	$15 per failure/maximum $75,000, If a failure is corrected within 30 days, after the due date of the return of the information return, i.e., the penalty will be decreased to $15 per failure.
		♦	$30 per failure/maximum $150,000, If the failure is corrected more than 30 days after the due date of the return, but on or before August 1 of the filing year, i.e., the penalty will be decreased to $30 per failure.
500	6721	Late Filing Penalty
		♦	A penalty is charged for each Form 1098, 1099( ¹), W–2G, or W–2 that was not correctly and timely filed.
501	6721	Magnetic Media Penalty
		♦	A penalty is charged for each Form 1098, 1099, W–2G, or W–2 (after the first 250 forms of each type) required by IRC section 6011(e)(2)(a) not filed either electronically or by magnetic media.
502	6721	Missing or Incorrect TIN Penalty
		♦	A penalty is charged for each Form 1098, 1099, W–2G, or W–2 submitted with missing or incorrect TINs.
503	6721	Improper Format Penalty
		♦	A penalty is charged for each Form 1098, 1099, W–2G, or W–2 submitted in an improper format as provided for in either the IRC, Treas. Regs, or SSA procedures.

¹ Any applicable suffix
504	6721	Late and Magnetic Media Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was not filed:
			♦	correctly and timely, and
			♦	either electronically or using magnetic media. (over 250 forms)
505	6721	Late and Missing or Incorrect TIN Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was not:
		♦	correctly and timely filed, and
		♦	submitted with a missing or incorrect TIN.
506	6721	Late and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was not:
		♦	correctly and timely filed, and
507	6721	Magnetic Media and Missing or Incorrect TIN Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was:
		♦	not filed either electronically or using magnetic media, (over 250 forms) and
		♦	filed with missing or incorrect TINs.
508	6721	Magnetic Media and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was not:
		♦	filed either electronically or using magnetic media, and
		♦	submitted in the proper format as provided for in either the IRC, Treas. Regs. or SSA procedures.
509	6721	Missing or Incorrect TIN and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was filed:
		♦	with a missing or incorrect TIN, and
		♦	in an improper format as provided for in either the IRC, Treas. Regs. or SSA procedures.
510	6721	Late, Magnetic Media, and Missing or Incorrect TIN Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was:
		♦	not correctly and timely filed,
		♦	not filed either electronically or by magnetic media (after the first 250 forms of each type) required by IRC section 6011(e)(2)(a), and
		♦	filed with missing or incorrect TINs.
511	6721	Late, Magnetic Media, and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was not:
		♦	correctly and timely filed,
		♦	filed either electronically or by magnetic media (after the first 250 forms of each type) required by IRC section 6011(e)(2)(a), and
		♦	submitted in the proper format as provided for in either the IRC, Treas. Regs. or SSA procedures.
512	6721	Late, Missing or Incorrect TIN, and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was:
		♦	not correctly and timely filed,
		♦	filed with missing or incorrect TINs, and
		♦	not submitted in the proper format as provided for in either the IRC, Treas. Regs. or SSA procedures.
513	6721	Magnetic Media, Missing or Incorrect TIN, and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was:
		♦	not filed either electronically or using magnetic media,
		♦	filed with missing or incorrect TINs, and
		♦	not submitted in the proper format as provided for in either the IRC, Treas. Regs. or SSA procedures.
514	6721	Late, Magnetic Media, Missing or Incorrect TIN, and Improper Format Penalty
		A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was:
		♦	not correctly and timely filed,
		♦	either electronically or using magnetic media,
		♦	filed with missing or incorrect TINs, and
		♦	not submitted in the proper format as provided for in either the IRC, Treas. Regs. or SSA procedures.
549	6721(e)	Penalty in the Case of Intentional Disregard. (CAWR Penalty Program)
		♦	The penalty is assessed at $100 per failure to file Form W–2.
		♦	A penalty is charged for each form W–2 that was not filed as required by IRC section 6051.

Exhibit 20.1.1.6-6 (08-20-1998)
Penalty Reference Numbers (600 Series)

RN	IRC section	Description
600	6721	Failure to File Correct Information Returns.
		♦	This reference number should only be used for returns and statements due after December 31, 1989.
		♦	$50 per failure/maximum $250,000.
		♦	$15 per failure/maximum $75,000. If a failure is corrected within 30 days, after the due date of the information return, the penalty will be decreased to $15 per failure. The maximum annual penalty per filer shall not exceed $75,000.
		♦	$30 per failure/maximum $150,000. If the failure is corrected more than 30 days after the due date of the return, but on or before August 1st of the filing year, the penalty will be decreased to $30 per failure. The maximum annual penalty per filer shall not exceed $150,000.
		♦	For other circumstances that may apply, see IRM 20.1.10.
601	6723	Failure to Include Correct Information.
		♦	This reference number should only be used for return periods beginning after December 31, 1985 and ending prior to January 1, 1990.
		♦	$5 per failure, with a maximum not to exceed $20,000.
602	6676	Failure to Supply Identifying Numbers.
		♦	This reference number should only be used for returns and statements due prior to January 1, 1990.
		♦	The penalty was incorporated into IRC section 6723.
603	6676	Failure to Supply Identifying Numbers.
		♦	This reference number should only be used for returns and statements due prior to January 1, 1990.
		♦	The TIN penalty was incorporated into IRC 6721 for information returns and IRC section 6723 for other documents.
604	6676	Failure to Supply Identifying Numbers.
		♦	This reference number should only be used for returns and statements due prior to January 1, 1990.
		♦	The TIN penalty was incorporated into IRC 6721 for information returns and IRC section 6723 for other documents.
605	6676	Failure to Supply Identifying Numbers.
		♦	This reference number should only be used for returns and statements due prior to January 1, 1990.
		♦	The TIN penalty was incorporated into IRC 6721 for information returns and IRC section 6723 for other documents.
606	6676	Failure to Supply Identifying Numbers.
		♦	This reference number should only be used for returns and statements due prior to January 1, 1990.
		♦	The TIN penalty was incorporated into IRC 6721 for information returns and IRC section 6723 for other documents.
607	6721	Failure to File a Correct Information Returns.
		♦	This reference number should only be used for returns due after December 31, 1986 and before January 1, 1990.
608	6721	Failure to File a Correct Information Returns.
		♦	This reference number should only be used for Forms 1099 INT, DIV, and PATR returns due after December 31, 1985 and before January 1, 1990.
609	6721	Failure to File a Complete Form 8300, Report of Cash Payments Over $10,000. (Detroit Computing Center)
610	6722	Failure to Furnish Correct Payee Statement.
		♦	This reference number should only be used for returns due after December 31, 1986 and before January 1, 1990.
611	6722	Failure to Furnish Correct Payee Statement.
		♦	This reference number should only be used for Forms 1099 INT, DIV, OID, and PATR returns due after December 31, 1986 and before January 1, 1990.
612	6722	Failure to Furnish Correct Payee Statement.
		♦	For returns required to be filed after December 31, 1989, a penalty will be imposed for each failure to:
			♦	furnish a payee statement on or before the due date to the person to whom the statement must be furnished,
			♦	furnish all information required, and
			♦	furnish correct information.
		♦	The $50 penalty for failure to furnish payee statements is not reduced if returns are corrected or filed after the due date.
		♦	Only one penalty per statement, regardless of the number of failures per statement.
		♦	The total penalty for all such failures during any calendar year shall not exceed $100,000.
613	6679	Failure to File Returns, Etc, With Respect to Foreign Corporations or Foreign Partnerships.
		♦	Failure to File Form 5471 and Schedule O.
		♦	The penalty is assessed at $1,000 per failure.
614	6679	Failure to File Returns, Etc, With Respect to Foreign Corporations or Foreign Partnerships.
		♦	Failure to File Form 5471 and Schedule N.
		♦	The penalty is assessed at $1,000 per failure.
615	6682	False Information with Respect to Withholding.
		♦	False information on Form W–9.
		♦	$500 for each false statement (W–9).
616	6682	False Information with Respect to Withholding.
		♦	False information on Form W–4.
		♦	$500 for each false statement (W–4).
617	6723	Failure to Include Correct Information. This reference number should only be used for returns due after December 31, 1986, and before January 1, 1990.
		♦	See reference number 647 and 648 for 6723 penalty computation.
618	6672	Failure to Collect and Pay Over Tax, or an Attempt to Evade or Defeat Tax.
		♦	Trust Fund Recovery Program. The penalty is assessed against responsible corporate officers.
		♦	100% of the tax required to be collected, accounted for, and paid over.
619	6679	Failure to File Returns with Respect to Foreign Corporations or Foreign Partnerships.
		♦	Failure to File such form as Treas. Reg. provides
		♦	The penalty is assessed at $1,000 per failure.
620	6693	Failure to Provide Reports on Individual Retirement Accounts or Annuities.
	6693(b)(1)	Overstatement of Designated Non-deductible Contributions—$100 per overstatement,
	6693(b)(2)	Failure to File an IRA Form—$50 per failure,
621	6723	Failure to Comply with Other Reporting Requirements.
		♦	For returns and statements required to be filed after December 31, 1989,
		♦	A penalty of $50 per failure
			♦	to comply timely with specified information reporting requirements, or
			♦	to include correct information.
			♦	The maximum penalty is $100,000 per year.
622	6694(a)	Understatement of Taxpayer’s Liability by Income Tax Return Preparer.
		♦	This reference number should only be used for documents prepared prior to January 1, 1990.
		♦	Prior to January 1, 1990, this penalty was assessed at $100 per return or claim for refund.
623	6038(b)	Failure to Furnish Information with Respect to Certain Foreign Corporations.
		♦	Failure to File Form 5471 and Schedule M.
		♦	$1,000 per accounting period. If the failure continues for more than 90 days after notice of failure mailed an additional $1,000 for each subsequent 30-day period not to exceed $24,000.
624	6695	Other Assessable Penalties with Respect to the Preparation of Income Tax Returns for Other Persons.
		♦	Any failure by the preparer to:
	6695(a)		furnish a copy of the return to the taxpayer,
	6695(b)		sign the return,
	6695(c)		furnish the preparer’s identifying number,
	6695(d)		retain a copy, return or list, as required by IRC 6107(b),
	6695(e)		file a correct information return or other requirement of IRC 6060.
		♦	these penalties are assessed at $50 per failure, not to exceed $25,000 per year.
625	6038A(d)	Information with Respect to Certain Foreign owned Corporations.
		♦	failure to furnish information or maintain records as required by IRC 6038A(a) and 6038A(b)
		♦	$10,000 for each taxable year with respect to which the failure occurs. If the failure continues for more than 90 days after notice of failure mailed, an additional $10,000 is imposed for each 30-day period during which the failure continues after the expiration of the original 90 day period.
626	6695(d)	Other Assessable Penalties with Respect to the Preparation of Income Tax Returns for Other Persons.
		♦	endorses or otherwise negotiates a refund check (made with respect to income tax) issued to a taxpayer.
		♦	$500 per check.
627		Reserved
628	6700	Promoting Abusive Tax Shelters
		♦	the lessor of $1,000 or 100% of the gross income for each such activity.
629		Reserved
630	6701	Penalties for Aiding and Abetting Understatement of Tax Liability.
		♦	Aiding and abetting— Promoter
			♦	The penalty is assessed for each document that relates to the tax liability of:
				♦ noncorporate—at $1,000, or ♦ corporate—at $10,000
631	6701	Penalties for Aiding and Abetting Understatement of Tax Liability.
		♦	Aiding and abetting— Preparer
		♦	The penalty is assessed for each document that relates to the tax liability of:
			♦	non-corporate—at $1,000, or
			♦	corporate—at $10,000.
632	6705	Failure by a Broker to Provide Notice to a Payor.
		♦	$500 for each failure.
633	6713	Disclosure or Use of Information by Preparer of Returns
		♦	$250 per disclosure or use with a maximum of $10,000 per calendar year.
634	6707	Failure to Furnish Information Regarding Tax Shelters
		♦	the greater of 1 percent of the amount invested, or
		♦	$500.
635	7216	Disclosure or Use of Information by Preparers of Returns.
		♦	when convicted of knowingly or recklessly disclosing information (misdemeanor), the person shall be:
		♦	fined no more than $1,000, or
		♦	imprisoned not more than 1 year, or
		♦	both, plus
		♦	the cost of the prosecution.
636	6708	Failure to Maintain Lists of Investors in Potentially Abusive Tax Shelters.
		♦	$50 per failure,
		♦	not to exceed $100,000 per calendar year.
637	6676	Failure to Supply Identifying Numbers. This reference number should only be used for returns due prior to January 1, 1990.
		♦	The penalty was incorporated into IRC section 6723.
638	6652	Failure to Supply Identifying Numbers. This reference number should only be used for returns due prior to January 1, 1990.
		♦	The penalty was incorporated into IRC section 6721.
639	6652	Failure to Supply Identifying Numbers. This reference number should only be used for returns due prior to January 1, 1990.
		♦	The penalty was incorporated into IRC section 6721.
640	6652	Failure to Supply Identifying Numbers. This reference number should only be used for returns due prior to January 1, 1990.
		♦	The penalty was incorporated into IRC section 6721.
641	6652	Failure to Supply Identifying Numbers. This reference number should only be used for returns due prior to January 1, 1990.
		♦	The penalty was incorporated into IRC section 6721.
642	6673(a)	Sanctions and costs awarded by Courts
		♦	A Tax Court determined that the taxpayer filed frivolous suit for damages against the United States.
		♦	Court awarded sanctions, penalties, or costs not to exceed $25,000.
643	6673(b)	Sanctions and costs awarded by Courts (IRC section 7433).
		♦	A Court (other than the Tax Court) determination that the taxpayer filed frivolous suit for damages against the United States.
		♦	Court awarded sanctions, penalties, or costs not to exceed $10,000.
678	6706(b)	Failure to furnish information required under Section 1275(c)(2) on debt instrument.
		♦	Penalty of 1% of the aggregate issue price of such issue, not to exceed $50,000, unless failure is due to reasonable cause and not willful neglect.
645	6694(a)	Understatement of Taxpayer’s Liability by Income Tax Return Preparer.
		♦	This reference number is to be used for documents prepared after December 31, 1989.
		♦	The penalty is assessed against an income tax preparer.
			♦	The penalty is based on an understatement or return for which the preparer took a position that did not have a realistic possibility of being sustained on its merits, and
			♦	which was not disclosed or was frivolous.
		♦	The penalty is assessed at $250 per return or claim.
646	6694(b)	Understatement of Taxpayer’s Liability by Income Tax Return Preparer.
		♦	This reference number should only be used for documents prepared prior to January 1, 1990.
		♦	The penalty is assessed:
			if any part of the understatement is due to willful attempt to understate the tax liability or reckless conduct in preparing the return or claim.
			at $500 per return or claim reduced by any amount assessed under 6694(a).
647	6723	Failure to Include Correct Information.
		♦	This reference number should only be used for returns prepared prior to January 1, 1990.
		♦	The penalty was self-assessed at $5 for each return or statement that was reported incorrectly.
648	6723	Failure to Include Correct Information.
		♦	This reference number should only be used for returns due prior to January 1, 1990.
		♦	The penalty was at $5 for each return or statement that was reported incorrectly.
649	6652(c)(2)	Failure by Exempt Organization or Certain Trusts to file returns required by IRC 6034 or 6043(b).
		♦	For any one return, the penalty is assessed at $10 per day, not to exceed $5,000 for all persons for the failure to file any one return.
650	6694(b)	Understatement of Taxpayer’s Liability by Income Tax Return Preparer.
		♦	This reference number should only be used for documents prepared after December 31, 1989.
		♦	The penalty is assessed if any part of the understatement is due to willful or reckless conduct or intentional disregard of the rules or regulations in preparing the return or claim for refund.
		♦	After December 31, 1989 this penalty was assessed at $1,000 per return or claim reduced by any amount of penalty paid under 6694(a).
651	6721	Failure to Comply with Certain Information Reporting Requirements—Form 8300.
		♦	This penalty applies to returns required to be filed after December 31, 1989.
		♦	The penalty is assessed at $50 per Form 8300 not timely and correctly filed.
652	6721(e)	Intentional Disregard of the Failure to comply with Certain Information Reporting Requirements.
		♦	This reference number is used to assess the intentional disregard penalty when the Form 8300 is not timely or correctly filed.
		♦	This penalty applies to returns pertaining to amounts received after November 5, 1990.
		♦	The penalty is assessed at the greater of:
			♦	$25,000, or
			♦	the amount of cash received in such transaction, to the extent the cash does not exceed $100,000.
			♦	The $250,000 yearly limitation under IRC 6721 shall not apply.
653	6722	Failure to Furnish Correct Payee Statements
		♦	This penalty applies to payee statements required to be filed after December 31, 1989.
		♦	The penalty is assessed at $50 per payee statement not timely furnished or containing incorrect or incomplete information.
		♦	The maximum penalty shall not exceed $100,000 per year.
654	6722(c)	Intentional Disregard of the Requirement to Furnish a Correct Payee Statement—Form 8300.
		♦	This penalty applies to payee statements required to be filed after December 31, 1989.
		♦	The intentional disregard penalty for failing to provide a payor of cash with a statement as required by IRC sections 6050I(e) after December 31, 1989, is the greater of $100 or 10 percent of the amount required to be reported correctly on the statement.
		♦	The $100,000 yearly limitation does not apply.
655	7342(c)	Penalty for Refusal to Permit Entry or Examination.
		♦	A penalty of $500 for each refusal to admit entry or to permit examination.
		♦	A penalty of $1,000 for each refusal to admit entry or to permit examination if the refusal is related to 4083(c), place where taxable fuel is stored or produced.
656	6715	Dyed Fuel Sold For Use or Used in Taxable Use, Etc.
		♦	This penalty is effective beginning after December 31, 1993.
		♦	The penalty is assessed on any dyed diesel fuel (nontaxable use), sold or held for sale as taxable use of such fuel.
		♦	1st offense:
			♦	The penalty is the greater of $10 per gallon of dyed fuel involved, or $1,000,
		♦	subsequent violations:
			♦	multiply the number of prior violations times the greater of $10 per gallon per prior violation or $1,000 per prior violation.
657	6715	Failure to Post or Provide Notice with Respect to any Dyed Diesel Fuel as required by IRC section 4082(c).
		♦	This penalty is effective beginning after December 31, 1993.
		♦	The penalty is assessed on any dyed diesel fuel (non-taxable use), sold or held for sale as taxable use of such fuel.
		♦	The penalty is the greater of:
			♦	1st offense, $10 per gallon, or $1,000,
			♦	subsequent violations, multiply the number of violations times the greater of $10 per gallon or $1,000.
658		Reserved
659		Reserved
660		Reserved
661		Reserved
662		Reserved
663		Reserved
664		Reserved
665	6702	Frivolous Income Tax Return.
		♦	If any individual files what purports to be an income tax return, which either:
			♦	contains insufficient information, or
			♦	contains on its face substantially incorrect information, and
		♦	where the conduct will delay or impede the administration of Federal income tax laws or is a frivolous position.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
		Each of the following eight reference numbers relate to a specific type of frivolous return.
666	6702	Frivolous arguments (General) to reduce taxes or delay the collection of taxes.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
667	6702	The "penalty of perjury" statement was altered or deleted
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
668	6702	The return did not contain enough information to be processed.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
669	6702	The claim that wages not paid in gold or silver is frivolous.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
670	6702	The war credit or deduction claimed is not provided for in the Internal Revenue Code.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
671	6702	The credit claimed for the decrease or discounted value of Federal Reserve Notes represents a frivolous position.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
672	6702	The claim that wages and payments for services are not income or profits because there was a fair exchange is a frivolous position.
		♦	The penalty is assessed at $500 per return deemed to be frivolous.
673	6702	The refusal to furnish information needed to determine income tax liability on constitutional grounds.
		♦	The penalty is assessed at $500 per return.
674	6723	Failure to Comply with Other Reporting Requirements. Failure to Provide Notice of Partnership Exchange.
		♦	a penalty of $50 is imposed for each failure to comply timely with specified information reporting requirements.
		♦	The maximum penalty for failure to comply with all specified information reporting requirements is $100,000 per year.
675	6722(b)	Failure to Notify Partnership of Exchanged of Partnership Interest.
		♦	This penalty applies to statements required to be furnished before January 1, 1990.
		♦	The penalty is assessed at $50 per payee statement not timely or correctly furnished.
676	6038B	Notice of Certain Transfers to Foreign Persons (Failure to File Form 926)
		♦	The penalty is assessed at 25 percent of the amount of the gain realized on the exchange.
677	6677	Failure to File Information Returns with Respect to Certain Foreign Trusts.
		♦	5 percent of the amount transferred to a trust, or
		♦	5 percent of the value of the corpus of the trust at the close of the taxable year, but
		♦	not more than $1,000.
678	6039E	Failure to provide Information concerning Residence Status.
		♦	$500 for each failure to provide the required information.
679	6039E	Failure to provide Information concerning Residence Status. (Taxpayer Identification Number).
		♦	$500 for each failure to provide the required information.
	6662	Imposition of Accuracy-Related Penalty
680	6662(f)	Substantial Overstatement of Pension Liabilities
681	6662(d)	Substantial Understatement of Income Tax.
682	6662(g)	Substantial Estate or Gift Tax Valuation Understatement
683		Reserved
684	7519	Required Payments for Entities Electing Not to Have Required Taxable Year.
		♦	The penalty is assessed for failing to make an election payment.
		♦	The penalty is assessed at 10 percent of the under paid amount and is assessed on MFT 15.
685	6712	Failure to Disclose Treaty-Based Return Position.
		♦	The penalty is assessed at:
			♦	$1,000, individual,
			♦	$10,000, corporation.
686	6651(f)	Increase in Penalty for Fraudulent Failure to File
		♦	15 percent per month,
		♦	for a maximum of 5 months,
		♦	not to exceed 75 percent of the total tax.
687		Reserved
688		Reserved
689		Reserved
690		Reserved
691		Reserved
692		Reserved
693		Reserved
694		Reserved
695		Reserved
696		Reserved
697		Reserved
698		Reserved
699		Reserved

Exhibit 20.1.1.6-7 (08-20-1998)
Table of Abbreviations and Acronyms

ABBR.	DEFINITION
23C	Assessment Date
ACH	Automated Clearing House
ACR	Audit Change Report
ADEPT	Automated Deposit of Electronic Payments for Taxes
ADP	Automatic Data Processing
AGI	Adjusted Gross Income
AICPA	American Institute of Certified Public Accountants
AIMS	Audit Information Management System
AO	Appeals Officer
AOC	Advice of Credit
ASED	Assessment Statute Expiration Date
ASFR	Automated Substitute for Return
ATAO	Application Taxpayer Assistance Order to Relieve Hardship
AT&F	Bureau of Alcohol, Tobacco and Firearms
BMF	Business Master File
BWH	Backup Withholding
CPS	Case Processing Support
CAF	Centralized Authorization File
CAWR	Combined Annual Wage Reporting
CBAF	Commercial Bank Address File
CC	Command Code
CCD	Chief Compliance Division
CFR	Code of Federal Regulations
CI	Criminal Investigation
CP	Computer Paragraph
CPA	Certified Public Accountant
CPM	Civil Penalty Module
CRS	Communication Replacement System
CSED	Collection Statute Expiration Date
CY	Calendar Year
CVPN	Civil Penalty Name Line
DCC	Detroit Computing Center
DLN	Document Locator Number
DP	Data Processing
EFC	Electronic Filing Coordinators
EFP	Electronic Filing Program
EIN	Employer Identification Number
EMIS	Enforcement Management Information System
EPMF	Employee Plans Master File
EQTRAS	Examination Quality Trends Analysis System
ERTA	Economic Recovery Tax Act of 1981
ES	Estimated Tax
CPS	Case Processing Support
ETE	Employment Tax Examiner
FFA	Fiduciary FTD Avoidance
FICA	Federal Insurance Contribution Act
FIFO	First-In-First-Out Inventory Method
FFF	Fraudulent Failure to File
FMS	Financial Management Service
FRB	Federal Reserve Bank
FRCS	Federal Reserve Communication System
FTD	Federal Tax Deposit
FTF	Failure to File
FTP	Failure to Pay
FUTA	Federal Unemployment Tax Act
FY	Fiscal Year
GBP	Good Block Proof
IC	Interagency Coordinator
IAC	Interest Abatement Coordinator
IDRS	Integrated Data Retrieval System
IDTCA	Interest and Dividend Tax Compliance Act of 1983
IEP	International Enforcement Program
IMF	Individual Master File
IMPACT	Improved Penalty Administration & Compliance Tax Act of 1989
IRA	Individual Retirement Account
IRAF	Individual Retirement Account File
IRC	Internal Revenue Code
IRM	Internal Revenue Manual
IR Regs	Internal Revenue Regulations
IRS	Internal Revenue Service
IRS NO.	Abstract Number
LEM	Law Enforcement Manual
LIFO	Last-In-First-Out Inventory Method
LMQAS	Line Management Quality Assurance System
MARS	Manual Accounting Replacement System
MCC	Martinsburg Computing Center
MCR	Master Control Records
MF	Master File
MFT	Master File Tax
MICRORAR	Revenue Agent Report-Computer Generated
MSN	Microfilm Serial Number
NASACT	National Association of State Auditors, Comptrollers, and Treasurers
NMF	Non-Master File
OBRA	Omnibus Budget Reconciliation Act
OCR	Optical Character Recognition
ODC	Ozone Depleting Chemicals
OPIA	Penalties and Interest Office
PAS	Program Analysis System
PCC	Penalty Computation Code
PFN	Partnership Prefiling Notification
PIC	Penalty Indicator Code
PIL	Preparer’s Inventory Listing
PINEX	Penalty and Interest Notice Explanations
PMF	Payer Master File
PNL	Prefiling Notification Letter
PNP	Presumptive Negligence Penalty
POA	Power of Attorney

PSC	Penalty Screening Committee
PVL	Preparer’s Volume Listing
QAS	Quality Assurance Staff
OBRA	Omnibus Reconciliation Act
QR	Quality Review
RAR	Revenue Agent Report
RC	Reason Code
RDD	Return Due Date
RFC	Regulated Futures Contract
REMIC	Real Estate Mortgage Investment Conduit
ROFT	Record of Federal Tax (deposit Liability schedule)
RONT	Record of Net Tax Liability—Form 720
RRTA	Railroad Retirement Tax Act
RSED	Refund Statute Expiration Date
RURT	Railroad Unemployment Repayment Tax
SCCF	Service Center Control File
SIC	Schedule Indicator Code
SFR	Substitute for Return
SRTP	Statement on Responsibilities in Tax Practice
SSA	Social Security Administration
SSN	Social Security Number
STAUP	Command code which stops collection activity
TAMRA	Technical & Miscellaneous Revenue Act
TC	Transaction Code
TDA	Taxpayer Delinquent Account
TDD	Telecommunications Device for the Deaf
TECS	Treasury Enforcement Communication System
TEFRA	Tax Equity Fiscal Responsibility Act (1982)
TE/GE	Tax Exempt/Government Entities
TIF	Taxpayer Information File
TIN	Taxpayer Identification Number
TLN	Transmittal Locator Number
TP	Taxpayer
TRA’86	Tax Reform Act of 1986
TSR	Taxpayer Service Representative
TT&L	Treasury Tax and Loan Account
TY	Tax Year
UNISTAR	Unified System for Time and Appeals Records
UPC	Unpostable Code
URB	Underreporter Branch (Service Centers)

Exhibit 20.1.1.6-8 (08-20-1998)
Dictionary of Key Terms

23C DATE	The date an assessment is made. Assessment is accomplished when the assessment officer schedules the liability and signs the assessment register (Form 23C, Assessment Certificate, Summary Record of Assessments).
ABATEMENT	A reduction in the assessment of tax, penalty, or interest when it is determined the assessment is incorrect, or when the taxpayer should be relieved of a liability, e.g., penalty abatement for reasonable cause.
ABSTRACT NUMBER	A three-digit number that references a specific type of excise tax. The abstract number will correspond exactly with the IRS number shown on the excise tax form, Form 720. See IRM 20.1.4.
ABSTRACTS	Reports that identify the specific type of tax collected, corresponding to the proper appropriation account set by Congressional Act or Public Law.
ACCOUNT	A record of a taxpayer’s assessments, abatements and credits.
ACCRUALS	The increase of interest and penalty amounts amassed from the date a penalty or interest assessment is posted to an account (23C Date) to the date the amounts are paid.
ADVANCE PAYMENT	The payment made for an anticipated deficiency prior to the actual assessment.
ADVICE OF CREDIT (AOC)	The transmittal, on Treasury Form 2284, of federal taxes paid to a depositary bank. See IRM 20.1.4.
ANNUAL ACCOUNTING PERIOD	A 12-consecutive month period (calendar or fiscal year) adopted by the taxpayer for maintaining books and records.
ASSERT	Determine that tax, penalty, or interest applies to a taxpayer account. See IRM 20.1.4.
ASSESS	Formal entry of tax debt including penalty, and/or interest that has been determined to be due and collectable by IRS. See IRM 20.1.4.
ASSESSMENT	A bookkeeping entry, recording the amount of tax, penalties, and/or interest charged to a taxpayer’s account.
ASSESSMENT DATE	The date Form 23C is executed by the assessment officer.
AUDIT TRAIL	Data used to track case activity to follow the development of an issue from the time it is raised to the time it is resolved.
AUTOMATIC ADJUSTMENT	A subsequent adjustment to an account which follows automatically from the previous adjustment.
BALANCE DUE	The amount of tax, penalty, interest or other receivables that remain unpaid on a taxpayer’s account.
BLOCK	Returns or documents that have been grouped together for processing and filing purposes. Blocks consist of one hundred or fewer documents.
BUSINESS MASTER FILE (BMF)	The files maintained by the IRS which include business transactions and accounts. These include employment taxes, income taxes on businesses, use taxes, wagering taxes, and excise taxes.
BURDEN OF PROOF	The necessity of affirmatively proving a fact or facts in dispute on an issue.
CALENDAR YEAR	A 12-consecutive month period beginning with January 1.
CHARITABLE DEDUCTION PROPERTY	A taxpayer’s contribution of real or personal property to a charity for which a deduction can be claimed under IRC Section 170.
CLAIM—FORMAL	A request from the taxpayer on the proper form, such as Form 843, 1040X or 1120X, asking that a liability previously assessed be reduced.
CLAIM—INFORMAL	A written request, other than on the proper form, signed by the taxpayer, requesting changes to obtain a correct and accurate reflection of his/her tax liability.
COMMAND CODE (CC)	A five or six character code used to access IDRS.
COMMERCIAL BANK ADDRESS FILE (CBAF)	A computer listing of all authorized depositories within each service center’s processing area.
COMPUTER PARAGRAPH NOTICE (CP)	A computer generated message relating to a taxpayer’s account.
CONTACT PERSONNEL	Any IRS employee who has direct contact with the taxpayer either on the telephone, in person, or by mail.
CYCLE	One week’s processing at the service center and Martinsburg Computing Center.
DEBIT BALANCE	The amount by which the balance due exceeds the total amount of credits.
DELINQUENT RETURN	A return which is filed after the prescribed due date (determined with regard to any valid extension of time).
DISCLOSURE	See IRC section 6103 and IRC section 6664(c).
DISHONORED CHECK	A taxpayer’s check that a financial institution does not accept for payment. See IRM 20.1.10.
DOCUMENT CODE (Doc Code)	The Code which identifies the specific type of return or document that was filed or processed. See document 6209, ADP and IDRS Information 1992, Section 2.
DOCUMENT LOCATOR NUMBER (DLN)	A 14-digit identification number assigned to every return/document and entered into the ADP system that affects a taxpayer account.
DOCUMENT REGISTER	A numerical listing of each item in a block of returns or documents. The document register serves as a transmittal for each block of remittance returns.
DUE DATE	Date by which a return must be filed or a payment or deposit made.
DUMMY MODULE	A tax module created on IDRS in order to record information when the true tax module is not present.
EIGHTH-MONTHLY PERIODS	See IRM 20.1.4.
EMPLOYEE PLANS MASTER FILE (EPMF)	The files maintained by the IRS which include transactions on Employee Plan accounts.
EMPLOYER IDENTIFICATION NUMBER (EIN)	A unique nine-digit number used to identify a taxpayer’s business account in a NN–NNNNNNN format.
ENTITY AREA	The portion of an input document or tax return that contains the name, address, account number, tax period and other entity data.
FEDERAL RESERVE BANK (FRB)	One of 12 banks of the Federal Reserve system which verifies and classifies federal tax deposits (FTD) monies collected within its geographic jurisdiction.
FIDUCIARY FTD AVOIDANCE (FFA)	The penalty chargeable to third party fiduciaries who do not submit their trusts’ estimated tax payments on magnetic tape through the FTD system.
FILE LOCATION CODE (FLC)	The first two digits of the DLN used to identify the service center or district office that initiated a transaction. See Document 6209, Section 4 for a complete list of FLCs.
FINANCIAL MANAGEMENT SERVICE (FMS)	The Federal agency responsible for the government’s cash management program. FMS, rather than IRS, has jurisdiction over authorized financial institutions and asserts sanctions against banks and agents for misdating and mishandling FTDs.
FISCAL YEAR	An accounting period of 12 consecutive months other than a calendar year.
FOREIGN-CONTROLLED CORPORATION	A domestic corporation engaged in U.S. business and controlled by a foreign person.
FRAUD	The intentional commission of an act or acts for the specific purpose of evading a tax believed to be owing.
FREEZE CODE	A condition on an account which prohibits any further action being taken.
FRIVOLOUS	Clearly lacking in substance, or clearly insufficient as a matter of law.
GENERATED DATA	Information produced as a result of input to, or update of, IDRS or Master File.
HARDSHIP	In general, an economic condition that is so severe that the taxpayer is, or would be financially debilitated if they satisfy their obligation. See IRM 20.1.1, reasonable cause.
INDIVIDUAL MASTER FILE (IMF)	The files maintained by the IRS which include transactions on individual tax accounts.
INDIVIDUAL RETIREMENT ACCOUNT FILE (IRAF)	The files maintained by the IRS which include transactions on Individual Retirement Accounts.
INTEGRATED DATA RETRIEVAL SYSTEM (IDRS)	A computer system capable of retrieving or updating stored information which works in conjunction with the Master File records of a taxpayer’s account.
INTERAGENCY COORDINATOR (IAC)	The designated employee in the FTD unit of the SC Accounting Branch who is a liaison between IRS, FRB, commercial banks and reporting agents.
INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN)	A taxpayer identifying number issued by the IRS to an alien individual who is ineligible to receive an SSN for the purpose of reporting tax related information.
JULIAN DATE	The numeric day of the year starting with 001 on January 1 and continuing sequentially to 365 (or 366).
LEVY	An administrative means of collecting taxes by seizure of the taxpayer’s property and rights to property to satisfy delinquent taxes.
MASTER FILE TAX (MFT) CODE	A two-digit code that identifies the type of return filed and the tax class. See Document 6209, Section 2 for a complete listing of MFTs.
MICROFILM SERIAL NUMBER (MSN)	A ten-digit locator number printed across each FTD and AOC processed through the Optical Character Recognition (OCR) equipment as each service center. The MSN is used to identify and/or locate individual FTD coupons.
NON-MASTER FILE	The files maintained by the IRS which include transactions on tax accounts not included on the Master File.
NORMAL (LEGAL) DUE DATE	The date the statute requires the filing of the return. If the normal or extended due date falls on a Saturday, Sunday or legal holiday, the return is considered timely if it is filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday.
OFFER-IN-COMPROMISE	An agreement resolving a taxpayer’s account where it has been determined that there is either doubt as to collectibility, doubt as to liability, or both.
ORAL EVIDENCE	Non-written information received from the taxpayer, authorized representative or other third party, providing additional facts for requesting penalty relief. See IRM 20.1.1 for additional information on acceptable oral evidence.
PENALTY	A sanction primarily used to promote voluntary compliance of the tax laws.
PENALTY COMPUTATION CODE (PCC)	A two-digit code which is used to denote the reasons why, or methods by which, a FTD penalty was charged.
PENALTY PERIOD	The time for which a penalty is applicable.
PENDING TRANSACTION	A transaction entered into IDRS which has not yet posted to the Master File. Pending transactions will affect the IDRS account balance, but will not change the Master File account balance.
PERIOD ENDING	The ending year and month of the period covered by a tax return.
PINEX	An IDRS computer program used to produce penalty and interest explanations for taxpayers.
POSTASSESSMENT APPEAL	An appeal of tax, penalty and/or interest made by the taxpayer after the tax and/or penalty has been assessed.
PREPAID CREDITS	Payments of tax, such as withholding, estimated payments, etc., made prior to the due date of the return.
PRESCRIBED DUE DATE	The due date designated for filing a return, including any extension of time for filing.
PRESUMPTIVE DUE DATE	The due date designated for filing a return, not taking into account any extensions.
PROBLEM RESOLUTION PROGRAM (TAS)	A program within the IRS to which taxpayers’ problems can be referred if they cannot be resolved by normal procedures. The program cannot change the tax law or technical decisions.
REASON CODE	A two-digit code used when adjusting an account to denote which item on the tax return is affected by the adjustment.
REBATE	A credit, refund or other repayment where too much tax was paid.
RECEIVED DATE:
a. Timely filed return	The original or extended due date of the return.
b. Late filed return	The IRS received date stamped on the face of the return.
REFILE DLN	A new DLN assigned to a return or other document after an audit or tax adjustment has been completed. The tax return and related documents are filed under this refile DLN.
REFUND	Money returned to the taxpayer as a result of overpayment of a tax liability.
REMITTANCE AMOUNT	The amount of money received in payment of a liability. This remittance may be by check, money order, cashier’s check, or cash.
SECURED DELINQUENT RETURN	A return secured after a taxpayer has been contacted by the Service but prior to an assessment made under Substitute for Return procedures.
SEIZED PROPERTY	Property of the taxpayer over which the Service has exercised actual or constructive dominion and control for purposed of satisfying outstanding tax liabilities.
SERVICE CENTER CONTROL FILE (SCCF)	A magnetic tape control system record the receipt of returns/documents, to trace their progress through the processing system and finally to verify that all items have been completed. The SCCF systems maintain separate totals for revenue receipts and other items.
SOCIAL SECURITY NUMBER	A unique nine-digit number used to identify an individual taxpayer account, in NNN-NN-NNNN format issued by the Social Security Administration.
SOURCE DOCUMENT	Backup documentation used by Service personnel to explain an adjustment to a taxpayer’s account; for example, taxpayer correspondence.
STATUS CODE	A two-digit numeric code indicating the Master File and/or IDRS status of a tax module.
STATUTE OF LIMITATIONS	A set of rules specifying the period in which actions may occur, or within which rights may be enforced.
SUBSEQUENT PAYMENT	A payment received for an account that has been assessed and for which the taxpayer has been billed.
SUBSTANTIAL AUTHORITY	The objective determination that a position taken by a taxpayer is supportable.
SUBSTITUTE FOR RETURN (SFR)	A return prepared on behalf of a taxpayer by the Service pursuant to IRC section 6020(b). The return is prepared when it has been determined that a taxpayer is liable for filing the tax return but has failed to do so upon due notice from the Service.
SUPERSEDING RETURN	An amended return filed on or before the return due date. It is filed on an original return form, not an amended return form.
TAX CLASS	A one-digit code which identifies the type of tax involved in a transaction.
TAX MODULE	A record of one account for one taxpayer covering one type of tax for one tax period.
TAX PERIOD	The period of time for which a return is filed.
TAXPAYER DELINQUENT ACCOUNT (TDA)	An internal computer notice indicating the taxpayer has not responded to prior balance due notices or paid a balance due.
TAXPAYER IDENTIFICATION NUMBER (TIN)	A nine-digit number assigned to taxpayers for identification purposes. Depending on the nature of the taxpayer, the TIN is either an Employer Identification Number (EIN), a Social Security Number (SSN), or an Individual TIN.
TAXPAYER INFORMATION FILE (TIF)	The IDRS file which contains entity and module information.
TIMELY FILED	A return or document which was filed by the taxpayer and received by the Service within specified time frames. A return is timely filed if postmarked by the original or extended due date (Rev. Rul. 73-133).
TOLERANCE	The allowable deviation from standard in order to facilitate administration of a program. A tolerance can take the form of a dollar amount or a time volumetric allowance.
TRANSACTION CODE (TC)	Three-digit code that identifies a specific action on a taxpayer’s account. Document 6209, ADP and IDRS Information, Section 20.1.1.8 contains a complete listing of TCs.
UNDERPAYMENT	In general, the amount by which any tax imposed exceeds the tax shown by the taxpayer on the return, plus amounts previously assessed (or collected without assessment) before the return was filed in excess of any rebate.
VOLUNTARY COMPLIANCE	Taxpayers who freely obey the tax laws. Compliance is defined in the IRC as:
	(a) filing accurate and complete returns on time, (b) paying amounts due, and (c) reporting information required.
WAIVER	A waiver is a limited form of penalty relief.
WILLFUL NEGLECT	Conscious, intentional failure to comply with the provisions of the IRC, or reckless indifference to such provisions.

20.1.2.1 (07-31-2001)
Overview

This section of the consolidated penalty IRM discusses the Failure to File and Failure to Pay penalties.

20.1.2.1.1 (07-31-2001)
Failure to File Tax Return or Pay Tax

The Failure to File and Failure to Pay Penalties covered in this chapter are:
- IRC Section 6651(a)(1)
  Failure to File Tax Return
- IRC Section 6651(a)(2)
  Failure to Pay Tax as shown on return
- IRC Section 6651(a)(3)
  Failure to Pay Tax after Notice and Demand for tax not shown on return
- IRC Section 6651(d)
  Increase in the Penalty for Failure to Pay in Certain Cases
- IRC Section 6651(f)
  Increase in the Penalty for Fraudulent Failure to File
- IRC Section 6651(h)
  Failure to Pay Penalty Reduced During Installment Agreement .
- IRC Section 6698
  Failure to File a Partnership Return

20.1.2.1.2 (07-31-2001)
General Information

General applications:
1. IRC section 6651(a)(1): The FTF penalty applies on the amount due from the return due date (or extended due date) until paid or until the 25% maximum penalty is applied. The FTF penalty rate is 5% a month. (See exception (2)a below.)
2. IRC section 6651(a)(2): The FTP penalty for failure to pay amounts shown on the return as filed, applies on the amount due from the return due date to the date paid at one-half of one percent (.005), not to exceed 25%.
3. IRC section 6651(a)(3): The penalty for failure to pay amounts not shown on the return (e.g., audit deficiencies or other subsequent adjustments) applies on the amount due beginning after 21 calendar days from the notice and demand for payment (23C date) to the date paid at one-half of one percent (.005), not to exceed 25%. (Note: if the amount due equals or exceeds $100,000, the FTP penalty under IRC section 6651(a)(3) starts 10 business days from the 23C date.)
Coordination between FTF and FTP penalties:
1. When the FTF penalty under IRC section 6651(a)(1) and the FTP penalty for failure to pay tax shown on the return under IRC section 6651(a)(2)) both apply for the same months, the FTF penalty under IRC section6651(a)(1) is reduced by the amount of the FTP penalty under IRC section 6651(a)(2).
2. When the FTF penalty and the FTP penalty for failure to pay tax not showing on the return under IRC section 6652(a)(3) both apply for the same months, FTF is assessed at 5% per month not to exceed 25%. FTP applies at 1/2% per month not to exceed 25%. (Note: FTP under IRC section 6651(a)(3) applies to subsequent assessments, e.g., audit deficiencies.) There is no offset/reduction between FTF and FTP under IRC section 6651(a)(3).
Transactions affecting the FTF/FTP penalty calculation:
1. Amended returns: Accepted amended returns (TC 977) that decrease the tax on return, modify the net amount due and require a recalculation of the penalty from the same start date used for the original calculation. Additional tax on an amended return requires an increase to the FTF penalty from the start date used for the original calculation. No adjustment to FTP under IRC section 6651(a)(2) is required.
2. Refund offsets: A refund offset (TC 706/826) is treated as a payment by the taxpayer from another module and reduces the net amount due for subsequent penalty calculations
3. Carrybacks/carryovers: The FTF/FTP penalty calculation is based on the amount due before the tax liability is decreased by carryback or carryover losses or credits, e.g., net operating losses, investment credits, foreign tax credits. Carryback or carryover losses or credits to the module on which the FTF/FTP penalty is running do not reduce the net amount due for penalty calculation purposes.

20.1.2.1.2.1 (07-31-2001)
Extension of Time to File

IRC section 6081 and the related regulations provide for a reasonable extension of time to file a return. The "reasonable extension " is not to exceed 6 months (unless the taxpayer is abroad). If the taxpayer has a valid extension of time for filing a return, the taxpayer is not liable for the FTF penalty for the duration of the extension period. The computation of the FTF penalty begins immediately after the extended due date.
An extension of time to file is not an extension of time to pay. However, if the taxpayer --
1. has a valid extension of time to file,
2. has paid 90% of the tax due by the return due date,
3. files the return by the extended due date, and
4. pays remaining amounts due in full with the return
the Service will assume the taxpayer satisfies the reasonable cause exception to the FTP penalty and it will not be assessed. Absent any one of the above four factors, the FTP penalty is assessed from the original return due date. This provision does not apply to the additional two month extension requested on Form 2688. (See Notice 93-22.)
If a timely-filed request for an extension of time to file is denied and the taxpayer files the return within 10 days from the date of the Service’s denial, no FTF penalty will be assessed.
The Service may void a previously granted automatic extension where the taxpayer’s Form 4868 or 7004 is invalid.
Individuals are granted the automatic four month extension of time to file if the following conditions are satisfied (Treas. Regs. 1.6081–1 and 1.6081–4):
1. The individual must have completed Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return,
2. filed the application on or before the due date of the return, and
3. properly estimated the tax due.
4. An additional two month extension may be requested by completing Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return.
5. The automatic extension can be requested by telephone (taxpayers should retain the confirmation number.) The extension request can also be e-filed from tax preparation software or through a tax return preparer.
Individuals outside the United States are granted an automatic two-month extension (until June 15, for calendar year taxpayers) to file a return and pay any federal income tax due if the individuals are U.S. citizens or residents and on the regular due date of the return:
1. Live outside the United States and Puerto Rico, and their main place of business or post of duty is outside the United States and Puerto Rico, or
2. Are in the military or naval service on duty outside the United States and Puerto Rico.
3. To use this automatic two-month extension, the individual must attach a statement to their return explaining which situation (1 or 2 above) qualifies them for the extension.
4. If a joint return is filed, only one spouse has to qualify for this automatic extension. If separate returns are filed, the automatic extension applies only to the spouse who qualifies.
Service in a Combat Zone IRC Section 7508): The time for filing a return or paying a tax should be automatically extended for 180 days after the period an individual:
1. Serves (or supports) the Armed Forces of the United States in an area designated as a "combat zone" by the president of the United States, or
2. Is hospitalized as a result of an injury received in an area designated as a combat zone.
Partnership (Treas. Regs. 1.6081–2):
1. A partnership, required to file Form 1065, is granted an automatic three month extension of time to file when properly completing a Form 8736, Application for Automatic Extension of Time to File U.S. Return for a Partnership, REMIC, or for Certain Trusts.
2. The request must be filed with the Service on or before the original due date of the return. The request must be signed by a general partner or other person authorized to file the application.
3. The extension of time to file the Form 1065 does not extend the time to make the required payment under IRC Section 7519, Required Payments for Entities Electing Not to Have Required Taxable Year, or file a partner’s income tax return, or pay a partner’s income tax.
Corporations are granted an automatic six month extension of time to file when they :
1. properly complete Form 7004, Application for Automatic Extension of Time to File U.S. Corporation Income Tax Return and file it before the original return due date,
2. properly estimate and pay the tax before the return due date, and
3. have the properly authorized person sign the form (see Treas. Regs. 1-6062-1. )
The FTP penalty will be administratively waived under reasonable cause criteria if the above requirements are satisfied, 90% of the tax has been paid by the return due date and the remaining amount is paid by the extended due date.
TE/GE Blanket extensions or filing exceptions have been granted to certain exempt organizations under Rev. Rul. 71–236, 1971–1 C.B. 398, Rev. Proc. 83–23, 1983–1 C.B. 687, as supplemented by Rev. Proc. 94–17, 1994–1 C.B. 579 and Rev. Proc. 86–23, 1986–1 C.B. 564. See IRM 20.1.8 for TE/GE penalties.

20.1.2.1.2.2 (07-31-2001)
Unsigned Returns

See current procedures in Commissioner's Directives and Chief Counsel's Directives.

20.1.2.1.2.3 (07-31-2001)
Received Date

A return is considered timely if received prior to, or on, the due date or extended due date of the return. If the due date falls on a Saturday, Sunday, or legal holiday, and the return is filed by the next business day, consider it filed on the due date.
U.S. Postal Service: Consider a return timely-filed if postmarked by the U.S. Postal Service (or designated delivery service) by the original or extended due date. See LEM 20.1.2.4.
1. A return is late if the postmark date is after the prescribed due date.
2. When more than one United States Postal Service postmark date appears on an envelope, consider the earlier postmark date as the date the return was mailed.
Registered and Certified Mail: The date of registration for registered mail is treated as the postmark date. The postmark date on certified mail is treated as the postmark date.
Privately Metered Mail: In general, consider a return timely filed if it contains a postal meter stamp that:
1. bears the date on or before the last date (or last day of the period) prescribed for filing the return, and
2. the return is received not later than the time the return would normally have been received if it had been mailed on the last date (or last day of the period) prescribed for filing the return.
If the return is received after the normal time, and the postmark is not made by the U.S. postal service, the taxpayer must prove the factors in Treas. Reg. 301.7502–1(c)(1)(iii)(B).
1. The document must show a postmarked date that is on or before the last day of the period prescribed for filing the document.
2. The document must be received by the Service not later than the time the document would have been received if it were postmarked at the same point of origin by the United States Post Office.
3. In addition, the person who is required to file the document must show: the document was deposited before the last collection of the mail (from the place of deposit) on or before the last day prescribed for filing the document, any delay in receiving the document was due to a delay in the transmission of the mail.
Date Stamp: The Service date stamps the received date on returns filed after the original due date. Returns filed by the original due date carry the due date as the received date and are not date stamped when received. The received date for a late-filed return is the date a return reaches any IRS office or service center.
A TC 610 may show the received date on the transcript. IDRS shows the received date under the posted return information section as RET–RECD–DT.

20.1.2.1.2.4 (07-31-2001)
Definition of Month

For FTF/FTP penalty purposes, a month is calculated from the date the penalty period begins to the same date in each following month, or part of a month. Both penalties continue to apply monthly until the maximum period is reached or (for FTF) the return is filed or (for FTP) the tax is paid. For example:
1. The return due date is April 15, 1997. The return is received July 17, 1999 with tax due of $1,700 paid in full. FTF and FTP both apply for four months.
2. The return extended due date is August 15, 1998. The return is received December 21, 1998 showing tax on return of $2,000, withholding of $800, and amount due of $1,200 paid in full with return. FTF applies for five months from August 15, 1998. FTP (under IRC section 6651(a)(2)) applies for nine months from April 15, 1998.
For any return or payment due date that begins on the last date of a month, the following examples apply:
1. Return or payment due date January 31; first month ends February 28; second month ends March 31; third month ends April 30.
2. Return or payment due date falling on the 30th of any month; all subsequent months end on the 30th except February which ends on the 28th or the 29th.
If a return is not timely filed or the tax is not timely paid, the fact that the date prescribed for filing the return or paying the tax, or the corresponding date in any succeeding calendar month, falls on a Saturday, Sunday, or a legal holiday is immaterial in determining the number of months for the FTF/FTP penalty. Treas. Reg. 301.6651–1(b)(3).

20.1.2.1.2.5 (07-31-2001)
Net Amount Due

For the FTF penalty under IRC section 6651(a)(1), the net tax amount is the amount of tax required to be shown on the return less allowable credits. This amount is reduced by payments made on or before the prescribed due date of the return (excluding extensions), such as withholding credits, tax deposits, estimated tax payments, overpayments from prior periods, or other payments.
The failure to file penalty applies not only to tax shown on a taxpayer’s original return, but also to any additional tax later found due on the return.
The net tax amount required to be shown on the return includes all income taxes as well as employment taxes. For example, the uncollected employee FICA tax on tips is a tax required to be shown on Form 1040, Individual Tax Return; thus, this uncollected FICA tax on tips should be included in the net tax amount.
Certain taxes may be paid in installments, e.g., heavy vehicle use tax (Form 2290) and estate taxes (Form 706).
1. If the taxpayer elects to pay this type tax in installments, the FTP penalty does not apply.
When computing the net tax amount from the return due date for the FTF penalty, do not consider amounts which were paid after the due date of the return, but before the date of filing. For example:
1. Taxpayer sends in payment of $700 for TY 1998 Form 1040 on May 27, 1999 before he files the return
2. Taxpayer files return August 27, 1999 and pays remaining amount due of $200.
3. Tax on return, $1,200; withholding, $300; balance due as of return due date, $900.
4. FTP is calculated on $900 for two months at 1/2% a month = $9. Plus, FTP is calculated on $200 for three months at 1/2% a month = $3. Total FTP penalty = $12
5. FTF penalty is calculated on $900 for five months at 4.5% a month = $202.50.

20.1.2.1.3 (07-31-2001)
Penalty Relief

IRM 20.1.1.3, provides guidance for determining if the taxpayer meets the criteria that will allow relief from a penalty. See Exhibit 20.1.1–3 of IRM 20.1.1 for a complete list of penalty reason codes.
The Service will abate the FTF/FTP penalty when the taxpayer shows reasonable cause and not willful neglect for the failure to file a return or pay a tax as required. In some instances the abatement will only apply to the portion of the penalty for the period the taxpayer meets relief criteria.
1. Reasonable cause determinations MUST be made on the individual facts and circumstances of each case.
2. Generally, the taxpayer must pay the tax due before the Service will abate a FTP penalty for reasonable cause. The penalty continues to accrue until the tax is paid. The taxpayer may have reasonable cause for some months, but not for others. A correct determination cannot be made until after the tax is paid. An exception to this rule is allowed for accounts in which the FTP penalty has reached the 25% maximum before the taxpayer's request for abatement.
Contacted personnel should address the reason for the failure to file or pay penalty when securing or examining returns on which the penalty applies. Making this initial determination will prevent the need for subsequent abatements. Enter Reason Code (RC) 62 in any of the first three reason code fields for adjustments involving requests for reasonable cause consideration, and the applicable penalty reason code (PRC) in the fourth reason code field.
When the FTF/FTP penalties are abated for reasonable cause using TC 271 with RC 62, Master File will not restrict future computer computations of FTP penalty (provided it was not previously restricted). The computer continues to compute the FTP penalty but will waive the amount associated with RC 62.
1. A TC 271 input without RC 62 restricts subsequent computation of the penalty.
2. Input TC 272 with a zero amount to remove the manual restriction on failure to pay penalty, when you determine that a module was restricted in error.
3. See LEM 20.1.2.

20.1.2.1.4 (07-31-2001)
Substitute for Return IRC section 6651(g)

Pursuant to IRC section 6020(b) a substitute for return (SFR) is prepared by the Service when it is determined that a taxpayer is liable for filing the tax return but failed to do so after receiving notification from the Service.
If a taxpayer fails to file a delinquent return when requested under the SFR program and the statutory notice of deficiency defaults, or the taxpayer executes an agreement to waive the restrictions on assessment of a deficiency (by signing a Form 870, 4549E or 4549), the Service will assess the FTF/FTP penalty.

Note:

Excise and employment tax returns do not follow statutory notice of deficiency procedures.
The FTP penalty on amounts shown on SFRs for returns due after July 30, 1996 (determined without regard to extensions) is calculated from the return due date under IRC section 6651(a)(2). For returns due before July 31, 1996, FTP begins 21 calender days (10 business days if the amount on the notice is $100,000 or more) after the 23C date (TC 290 or 300) under IRC section 6651(a)(3).
When the FTP and the FTF penalties apply for the same months, the FTF penalty is calculated from the return due date at four and one half percent (.045) a month for each month it is late, not to exceed five months. For any month in which the FTP and the FTF penalties do not both apply, the FTF penalty rate is 5%.
If the taxpayer has an extension of time to file (TC 460), the FTF penalty begins on the extended due date whether or not the taxpayer filed by the extended due date.
Note: under IRC section 6651(d) the FTP penalty on an SFR increases from one-half of one percent (.005) to 1% after notice of intent to levy (CP 504) is issued. TC 971 with AC 69 or 35 also indicates that the 1% rate has been triggered.
If the taxpayer files his own return (the due date for which, without regard to extensions, is after July 30, 1996) after the 1% FTP penalty rate has taken effect on the SFR assessment, the FTP penalty under IRC section 6651(a)(2) is recalculated on the amount showing due on the taxpayer's return by using the .5% rate for the same period the .5% rate was in effect on the SFR and the 1% rate for the same period the 1% rate was in effect on the SFR, not to exceed 25% in the aggregate.
The FTP penalty is automatically calculated and assessed from the due date of the return until the date the tax is paid. To allow automatic generation of the FTP by master file, input an adjustment to tax (or 290/300 for a zero amount) with a (1) Priority code 2 (ADJ54/TC290), or (2) Priority code 9 (ADJ47/TC300).

20.1.2.1.5 (07-31-2001)
Excise Tax

The filing and paying of an excise tax covering the tax on one of the categories (Abstract Numbers/IRS No.s) listed on Form 720, Quarterly Federal Excise Tax Return, does not constitute the filing of a return or paying a tax for any of the other categories (Abstract Numbers).
Example: A manufacturer of bows and arrows and fishing rods files a timely return for the tax on bows and arrows only. Do not consider this return as being a timely-filed return for the tax on fishing rods.

20.1.2.1.6 (07-31-2001)
Restrictions on Assertions

According to Policy Statement P–2–4, the Service does not assert penalties against federal agencies.
The general statute of limitations for assessing the penalty on a filed return is three years from either the due date or the date filed, whichever is later. There is no statute of limitations for assessing the penalty where no return has been filed.

20.1.2.1.6.1 (07-31-2001)
Taxpayer in Bankruptcy

IRC section 6658 prohibits the assertion of the FTP penalty while a taxpayer is involved in a title 11 bankruptcy proceeding if:
1. The tax was incurred by an estate and the failure to pay occurred pursuant to an order of the court finding probable insufficiency of funds of the estate to pay administrative expenses, or
2. The tax was incurred by the debtor before the order of relief or the appointment of a trustee in an involuntary case, whichever is earlier and
  1. the petition was filed before the return due date, including extensions, or
  2. the date for making the addition to the tax occurs on or after the day on which the petition was filed.
In the case of a tax assessed before the start of a proceeding:
1. no FTP penalty will be asserted for the period during which the bankruptcy case is pending,
2. the FTP penalty will stop accruing at the start of the bankruptcy proceeding and
3. it will resume after the bankruptcy is resolved and continue until the tax is paid or the 25 percent maximum penalty is reached.

20.1.2.1.7 (07-31-2001)
Assessment/Abatement Procedures

Delinquent returns. Examiners securing delinquent returns will solicit any explanation the taxpayer may provide on the FTF/FTP penalty determination. When adjusting the tax on a return that was filed late, determine if the FTF/FTP penalty was previously assessed or abated, and consider any factors that would apply to these penalties on a proposed tax adjustment. When the audit of a delinquent return results in an overpayment (refund), the FTF penalty and the FTP penalty under IRC section 6651(a)(2) initially assessed by the service center are recalculated and reduced.
1. Example 1: Taxpayer filed 1997 Form 1040 on 7-18-98 (four months late) showing a refund of $500. The return is audited 6-20-99, and a tax deficiency of $1,200 is agreed. FTF penalty applies at 5% a month for four months from the return due date on $1,200. The FTP penalty would first apply at one-half of one percent a month under IRC section 6651(a)(3) on any amounts unpaid after 21 days from assessment (the 23C date)
2. Example 2: Taxpayer filed 1997 Form 1040 on 7-18-98 (four months late) paying $1,400 amount due in full with return. FTF and FTP were assessed. The return is audited in June, 1999 and results in an overpayment (refund) of $900. FTF penalty is recalculated on $500 ($1,400 original underpayment less $900 overpayment from audit) at 4.5% a month for four months from the return due date. The FTP penalty is also recalculated based on $500 for four months at .5% a month.
3. After 1/1/02 AC 262 for TC 971 will generate when the maximum FTP penalty has been assessed. When the account drops from IDRS AC 262 will be visible on CFOL for both IMF and BMF. When figuring FTP manually, AC 262 can be input manually.
Carrybacks and carryovers:
1. The examiner will not adjust the penalty for that part of the tax liability which is decreased because of a carryback or carry over, such as a net operating loss, an investment credit, a foreign tax credit or a capital loss (for corporations).
2. In the case of a carryback or carryover, the FTF penalty is adjusted by reference to the potential tax liability (either a deficiency or an overassessment) which is computed prior to application of the carryback or carryover.
3. For example: The 1998 F-1120 was due March 15, 1999 but was filed four months late with amount due of $7,000 paid in full on June 27, 1999. FTF and FTP were assessed. An NOL of $12,000 from TY 1999 was carried back to TY 1998. No adjustments to the FTF/FTP penalty apply even though the carryback reduces the tax per return to zero.
4. For example: The 1998 F-1120 was due March 15, 1999 but filed four months late and was subject to an NOL carryback of $20,000 from TY 1999. Tax per return of $50,000 less the carryback of $20,000 leaves adjusted taxable income of $30,000. The taxpayer subsequently agrees to an audit deficiency of $27,000. FTP begins on $27,000 21 days after notice and demand for payment.

20.1.2.1.7.1 (07-31-2001)
Service Center/Customer Service

Manual Computation of the Penalty:
1. In many instances, Master File calculates the FTP penalty (TC 276).
2. When manual adjustments of the penalty are required, Service personnel are responsible for determining the correct penalty amount.
3. IDRS Command Code (CC) INTST is available for determining the amount of assessed and accrued FTP penalty on accounts not previously restricted (TC 270/271).
4. IDRS CC COMPAF is available for computing the FTP penalty which should be assessed or abated. The COMPAF print may be used to document a manual adjustment.
5. When there is a difference between computer generated and manual computations, manual computations take precedence.
The following transaction codes identify assessment or abatement of the FTF and FTP penalties:
- TC 166/167—computer generated assessment/abatement of the FTF penalty.
- TC 160/161—manual assessment/manual abatement of the FTF penalty.
- TC 162—manual removal of computation restriction of the FTF penalty.
- TC 276/277—computer generated assessment/abatement of the FTP penalty.
- TC 270/271—manually assessment/abatement of the FTP penalty.
Blocking Series. When making a FTF and/or FTP adjustment:
1. with the original return, use a refile blocking series;
2. without the original return, use any nonrefile blocking series as appropriate.
Priority Codes. To remove a prior restriction and allow automatic generation of the FTP penalty by master file, input an adjustment to tax (or 290/300 for a zero amount) with a priority code 2 (ADJ54/TC290), or priority code 9 (ADJ47/TC300).
Manual assessments /abatements: Since the FTP penalty accrues until the earlier of the date the tax is paid or the maximum penalty is assessed, it is important that employees do not unnecessarily restrict the module.
System errors: Prompt action is needed to correct FTF/FTP penalties erroneously assessed or accrued due to system errors. When a system error is discovered, the Service issues special instructions identifying the problem and the steps needed to correct the situation. Usually, these system errors are quickly resolved. When a system error on an individual case is identified, such as a tax account suspended in notice status longer than it should have been, an adjustment to assessed and accrued FTP penalty may be needed.
Before adjusting restricted FTF/FTP assessments, the original assessment documents may be obtained to check the penalty computation and rationale for restricting the penalty.
1. Assessed and accrued FTP penalties should be manually computed (CC COMPAF may be used) and abated from the cycle of the last status update through the 23C date of the posting TC 271.
2. Notify the taxpayer of the action taken and the balance due, if any.

20.1.2.1.7.2 (07-31-2001)
PINEX

The IRS provides explanations of all penalty and interest charges to the taxpayer when a balance due notice or a refund is issued. Using the Penalty and Interest Notice Explanation (PINEX) system.
Upon request, command code PINEX generates a notice of explanation to the taxpayer. The specific tax module requested must be on the TIF data base and at least one unreversed penalty or interest transaction posted.
This notice includes a computation and explanation of selected computer generated penalties, interest charged and interest paid except for computations and explanations of failure to deposit penalty.
PINEX notices must be reviewed by the tax examiner requesting the notice, and, if correct, mailed to the taxpayer.
PINEX also provides screen displays of penalty and interest computations for an immediate response to telephone inquiries or walk-in requests made to Area Offices. IRS personnel may find the screen displays helpful in analyzing penalty and interest transactions in general.

20.1.2.1.8 (07-31-2001)
FTF/FTP on Withholding and EIC

When an adjustment is made to a taxpayer's withholding credit or estimated payments, the FTP penalty applies only when the allowable amount is less than the original tax due. For example:
1. A taxpayer's return has tax of $1,000, withholding of $1,800, and was refunded $800.
2. If the withholding of $1,800 is reduced to $1,100 (TC 807 for $700), the FTP penalty is not asserted because the remaining allowable withholding ($1,100) still exceeds (or, is enough to cover) the tax of $1,000.
3. If the withholding of $1,800 is reduced to $600, the FTP penalty is asserted on $400, because the allowable withholding ($600) does not exceed (or, is not enough to cover) the original tax due of $1,000.
Note:

Note: any FTP penalty on adjustments to withholding and estimated tax payments is always calculated from return due date under IRC section 6651(a)(2) even when the adjustment is part of a subsequent assessment, e.g., an audit determination.
When a pre-refund adjustment is made to a taxpayer's Earned Income Credit (EIC), the FTP penalty applies when the allowable EIC is less than the original tax due. For example:
1. A taxpayer's return has tax of $2,000, withholding of $1,800 and EIC of $800.
2. The refund of $600 is frozen pending EIC verification
3. If the EIC of $800 is fully disallowed, the taxpayer has an amount due of $200. The FTP penalty applies under IRC section 6651(a)(3) on $200 from 21 days after the notice and demand for payment until full paid or until the maximum 25% is reached.
4. If $500 of the $800 EIC is disallowed, the taxpayer's $600 refund is reduced to $100, and no FTP penalty applies
5. Note: the same factors apply to the FTP penalty on EIC pre-refund or in-process adjustments due to the recertification requirement (or the two or ten year prohibition) on EIC under IRC section 32(k).
When an adjustment is made to a taxpayer's EIC after return processing, the amount of the EIC reduction (TC 765) is subject to the FTP penalty under IRC section 6651(a)(3) from 21 days after the notice and demand for payment until full paid or until the maximum 25% is reached. In the following example FTF also applies:
1. The taxpayer's return, due April 15, 1998, was filed on August 2, 1998 with tax of $2,000, EIC of $800, and withholding of $1,800. The $600 refund is issued.
2. The return is subsequently audited, the EIC of $800 is disallowed and a deficiency assessed on June 22, 1999. The amount is full paid on November 27, 1999.
3. The taxpayer is assessed FTF from return due date at 5% a month times four months times $800 = $160.
4. The taxpayer is assessed FTP under IRC section 6651(a)(3) beginning on July 14, 1999 at 1/2% a month times five months times $800 = $20.

20.1.2.2 (07-31-2001)
Minimum Failure to File

The minimum failure to file (MFTF) penalty applies to delinquent individual, corporate, trust and estate tax returns when
1. the tax return is more than 60 days past due, and
2. the regular FTF penalty is less than the lesser of $100 or 100% of the tax on the return.
Example one: Taxpayer files 1997 F-1040 three months late on June 20, 1998 and pays the full amount due of $600 with the return. The FTF penalty is calculated at four and one-half percent a month, times three months, times $600 = $81. The MFTF penalty applies because the FTF penalty of $81 is less than the lesser of $100 or the amount showing due on the return ($600). The MFTF penalty is therefore $100.
Example two: Same as above only the taxpayer files five months late on August 20, 1998. The FTF penalty is calculated at four and one-half percent a month, times five months, times $600 = $135. The MFTF penalty does not apply because $135 is not less than the lesser of $100 or the amount showing due on the return ($600).

20.1.2.3 (07-31-2001)
Failure to File a Tax Return IRC section 6651(a)(1)

IRC section 6651(a)(1) imposes a penalty for failure to file a tax return by the date prescribed (including extensions), unless it is shown that the failure is due to reasonable cause and not due to willful neglect. See IRM 20.1.1.3 for a discussion of penalty relief.
Penalties for failure to file information returns, such as Forms 1099 or 5500, are discussed in Chapters 20.1.7, Information Return Penalties and 20.1.8, TE/GE Penalties.

20.1.2.3.1 (07-31-2001)
Penalty Computation

Determine the FTF penalty period.
1. The penalty period extends from the return due date (or extended due date) for each month or part of a month the return is late, not to exceed five months.
2. The FTF penalty does not apply during the period covered by a valid extension of time to file (Forms 4868, 2688, 7004, 2758, and 8736). TCs 460 and 620 identify extensions.
Determine the FTF penalty rate.
1. Generally, the FTF penalty is 5% of the net amount due per month (or part of a month) not to exceed five months.
2. When the FTF penalty and the FTP penalty under IRC section 6651(a)(2) apply at the same time, the FTF penalty is reduced by the amount of the FTP penalty under IRC section 6651(a)(2). In other words, FTF is then assessed at a rate of 4.5% a month and FTP at .5% a month. When both FTF and FTP apply for 5 months, the maximum FTF penalty rate is 22.5%.
3. The FTF penalty is only reduced by the 1/2% FTP penalty under IRC section 6651(a)(2)--regarding unpaid amounts shown due on the return. The 1/2% FTP penalty under IRC section 6651(a)(3)--regarding unpaid amounts subsequently assessed, e.g., TCs 290 and 300--does not reduce the FTF penalty.
4. When a delinquent return is later assessed an additional tax (e.g., TC 290/300), the FTF penalty is calculated from the RDD (or extended due date) on the additional amount at 5% a month for each month the return was originally past due. This includes underpayment amended returns.
5. When a delinquent return has the original tax reduced (e.g., TC 291/301), the FTF penalty is re-calculated from the RDD (or extended due date) on the reduced amount of tax using the rate originally applied.
Multiply the net amount due (see IRM 20.1.2.1.2.5) times the number of months the return is past due times the applicable monthly rate. This figure is not to exceed 25% of the net amount due.
Example FTF penalty calculations:
1. An individual taxpayer files the 1997 return on June 19, 1998 with a tax liability of $700 paid in full with the return. Since the FTF and the 1/2% FTP penalty under IRC 6651(a)(2) apply at the same time, the 5% FTF penalty is reduced to four and one half percent (.045). The FTF penalty rate of .045 a month, times three months, times $700 = $94.50.
2. The same taxpayer is subsequently audited and a deficiency of $1,200 is assessed on February 19, 1999. The FTF penalty applies at a rate of 5% a month, times three months, times $1,200 = $180. This amount is in addition to any prior FTF penalty that was previously imposed. (Note: The FTF penalty is not reduced by the FTP penalty under IRC section 6651(a)(3), which is applicable to deficiencies.)
3. A 1998 return is filed four months late on July 21, 1999 claiming a $400 refund. The return is subsequently audited and a deficiency of $700 is assessed. Since the $700 is, per IRC section 6651(a)(1), "an amount required to be shown as tax" on the return, the FTF penalty is calculated by multiplying 5% per month, times four months, times $700 = $140. (Note: for FTF purposes, the amount subject to the penalty, i.e., $700, is not offset by the $400 refund on the return as filed.)

20.1.2.4 (07-31-2001)
Failure to Pay Tax IRC section 6651(a)(2)

IRC section 6651(a)(2) imposes a FTP penalty if the tax shown on any return is not paid by the due date of that return. This penalty applies to the following returns:
- Income tax returns;
- Employment tax returns;
- Excise tax returns;
- Gift tax returns;
- Estate tax returns;
It does not apply to:
- Information returns required under Chapter 61, Subchapter A, Part III;
- Payments of estimated tax;
- Partnership returns.
The Service does not assert this penalty when the failure to pay is due to reasonable cause and not willful neglect or the taxpayer qualifies under other penalty relief criteria. See IRM 20.1.1.3 for a complete discussion of penalty relief.

20.1.2.4.1 (07-31-2001)
Penalty Computation

Determine the penalty period. The penalty period for the FTP penalty under IRC section 6651(a)(2) is the number of months (including a part of a month) from the return due date--not including extensions--until the tax is paid. (See IRM 20.1.2.1.2.4 for the definition of a month.)
The penalty rate is one-half of one percent per month (or part of a month) on the net amount due until the tax is paid in full or the maximum 25% is reached. (See IRM 20.1.2.6 for FTP rate increase to 1%. See IRM 20.1.2.8 for FTP rate decrease to one quarter of one percent.)
Determine the net amount due. (See IRM 20.1.2.1.2.5.)
Multiply the number of months (including a part of a month) the tax remains unpaid, times the penalty rate, times the net amount due.
Examples:
1. The 1999 return is filed on June 17, 2000 with the amount due of $5,200 paid in full with the return. The FTP penalty under IRC section 6651(a)(2) applies from RDD (April 15, 2000) for three months at one-half of one percent per month on $5,200. One-half of one percent (.005) per month, times three months, times $5,200 equals the FTP penalty of $78.
2. The 1998 return (due April 15, 1999) is filed October 28, 1999 with $7,000 due. Two thousand ($2,000) is paid with the return. The remaining $5,000 is paid on May 3, 2000. FTP penalty applies to $7,000 from RDD at .005 a month for seven months = $245. Plus: FTP penalty on $5,000 from November 15, 1999 at .005 a month for six months = $150.

20.1.2.5 (07-31-2001)
Failure to Pay Tax IRC section 6651(a)(3)

IRC section 6651(a)(3) imposes a FTP penalty on any tax required to be reported on a return, other than information returns, that was not reported on the return. The FTP penalty under IRC 6651(a)(3) relates to amounts subsequently assessed (usually TCs 290 and 300), unlike the FTP penalty under IRC section 6651(a)(2) that relates to unpaid amounts showing due on the return as originally filed.
The FTF penalty is not reduced by the FTP penalty imposed under IRC section 6651(a)(3). See IRC section 6651(c)(1).
1. The FTF penalty is computed from the original due date of the return for up to five months.
2. The FTP penalty imposed under IRC section 6651(a)(3) begins 21 calendar days from the date of notice and demand (10 business days if the amount owed equals or exceeds $100,000) and continues until the additional tax is paid, not to exceed 25 percent of the tax.
3. Therefore, the FTF and FTP penalties may be assessed on the same amount of unpaid tax, but for different periods of time.

20.1.2.5.1 (07-31-2001)
Penalty Computation

Determine the penalty period:
1. Determine the number of months (including a part of a month) from the date that is 21 calendar days after notice and demand for payment (10 business days if the balance due equals or exceeds $100,000).
2. The penalty applies until the tax is paid in full or the maximum 25% is reached.
3. For first balance due notices (CP 501s) issued after December 31, 1996, the FTP penalty under IRC section 6651(a)(3) begins 21 calendar days (or 10 business days if the balance due equals or exceeds $100,000) after assessment (23C date). For notices first issued before January 1, 1997, the FTP penalty began 10 days after assessment.
The penalty rate is one-half of one percent (.005) per month for each month or part of a month the tax is unpaid, not to exceed 25%.
Determine the net amount due. For any month in which a partial payment is made, the net amount due is proportionately reduced for the FTP calculation on the following month. See IRM 20.1.2.1.2.5.
Multiply the number of months (including a part of a month) the tax remains unpaid, times the penalty rate, times the net amount due.
The following examples illustrate the FTP penalty under IRC section 6651(a)(3):
1. Example 1: Taxpayer timely filed 1999 return with a refund. Taxpayer was audited and assessed a deficiency (TC 300) of $2,500 on February 5, 2001. Full payment is received April 30, 2001. FTP penalty is calculated at ¹/₂% (.005) a month beginning after 21 days from assessment, i.e., from the start date of February 27, 2001: $2,500 x .005 x 3 months = $37.50.
2. Example 2: Taxpayer filed 1999 return four months late on July 19, 2000 with $3,000 balance due paid in full. (FTF at .045 a month x 4 months x $3,000 = $540 plus FTP at .005 a month x 4 months x $3,000 = $60. Both penalties are assessed and paid.) Taxpayer is later audited and a deficiency (TC 300) of $4,500 is assessed on January 4, 2001. Taxpayer pays in full five months later on June 7, 2001. FTF applies from RDD at 5% (.05) a month x 4 months x $4,500 = $900. FTP applies from January 26, 2001 at ¹/₂% a month x 5 months x $4,500 = $112.50.
3. Example 3: Taxpayer filed 1999 return five months late on August 19, 2000 with unpaid balance due of $6,000. The maximum FTF of $1,350 applies: 4¹/₂% a month x 5 months x $6,000 = $1,350. FTP under IRC section 6651(a)(2) continues running at ¹/₂% a month from RDD on $6,000. The 1% rate under IRC section 6651(d) is triggered on December 4, 2000. Taxpayer receives a CP 2000 notice showing additional tax due of $1,200 on unreported interest income. Taxpayer does not respond and $1,200 is assessed (TC 290) on March 6, 2001. FTP under IRC section 6651(a)(3) first applies on March 28, 2001 at 1% a month on $1,200. The March 28, 2001 start date is determined by IRC section 6651(a)(3). The 1% rate is decided by IRC section 6651(d) because the 1% FTP penalty rate was already running on the unpaid balance originally due from the RDD.

20.1.2.6 (07-31-2001)
Increase in the FTP IRC Section 6651(d)

IRC section 6651(d) increases the FTP penalty rate under IRC section 6651(a)(2) or (3) from one-half of one percent (.005) to one percent (.01) of the tax at the start of the month beginning after:
- 10 days after the date of notice of intent to levy (IRC section 6331(d)), or
- The day on which notice and demand for immediate payment is given in the case of jeopardy (IRC section 6631(a)).
- These are the only two conditions—trigger dates—that allow for the FTP penalty rate increase to one percent.
See IRM 20.1.2.6.1 for information on how to identify the notice of intent to levy.
The 1% penalty rate applies to all subsequent assessments on that module. However, once a module is fully paid, a later assessment will begin to accrue at the one-half of one percent rate. This later assessment will also be subject to the above trigger dates for the 1% rate.
The increased rate does not change the monthly period for accruing the penalty.

20.1.2.6.1 (07-31-2001)
Penalty Computation

Determine the penalty period under IRC section 6651(d):
1. The 1% FTP rate begins on the month beginning after (1) the 10th day after the notice of intent to levy, or (2) the day notice and demand for immediate payment is given on a jeopardy assessment.
2. The CP 504 is a notice of intent to levy for IRC section 6651(d) purposes. Master File Notice Status 58 provides the same indication. If a Collection employee requested the issuance of either ACS Letter 11 or DO Letter 1058, the Master File indication would be provided by TC 971 with Action Code 35 or 69.
Determine the penalty rate. The penalty is assessed at 1% (.01) per month or part of a month on the amount due until the tax is paid or the maximum 25% penalty amount is reached.
The net amount due under IRC section 6651(d) that is subject to the 1% penalty rate is the net amount showing on the notice of intent to levy unless that amount was reduced by a payment received after the notice

20.1.1.1 (08-20-1998) Overview

20.1.1.1.1 (08-20-1998) Background

20.1.1.1.2 (08-20-1998) Purpose of IRM 20.1

20.1.1.1.3 (08-20-1998) Organization of IRM 20.1

20.1.1.1.4 (08-20-1998) Responsibility

20.1.1.1.5 (08-20-1998) Administrative Information

20.1.1.1.5.1 (08-20-1998) Requesting Changes and Updating IRM 20.1

20.1.1.1.5.2 (08-20-1998) Submitting Proposed Changes to IRM 20.1

20.1.1.1.5.3 (08-20-1998) Security Standards

20.1.1.1.6 (08-20-1998) Taxpayer Advocate Service (TAS) Guidelines

20.1.1.1.7 (08-20-1998) Form 911—ATAO

20.1.1.2 (08-20-1998) Purpose of Penalties

20.1.1.2.1 (08-20-1998) Encouraging Voluntary Compliance

20.1.1.2.2 (08-20-1998) Fair and Consistent Approach to Penalty Administration

20.1.1.3 (08-20-1998) Relief From Penalties

20.1.1.3.1 (08-20-1998) Reasonable Cause

20.1.1.3.1.1 (08-20-1998) Standards

20.1.1.3.1.2 (08-20-1998) Ordinary Business Care and Prudence

20.1.1.3.1.2.1 (08-20-1998) Ignorance of the Law

20.1.1.3.1.2.2 (08-20-1998) Mistake was Made

20.1.1.3.1.2.3 (08-20-1998) Forgetfulness

20.1.1.3.1.2.4 (08-20-1998) Death, Serious Illness, or Unavoidable Absence

20.1.1.3.1.2.5 (08-20-1998) Unable to Obtain Records

20.1.1.3.2 (08-20-1998) Statutory Exceptions & Administrative Waivers

20.1.1.3.2.1 (08-20-1998) Statutory Exceptions

20.1.1.3.2.2 (08-20-1998) Administrative Waiver

20.1.1.3.2.3 (08-20-1998) Undue Hardship

20.1.1.3.2.4 (08-20-1998) Advice

20.1.1.3.2.4.1 (08-20-1998) Written Advice from the Service

20.1.1.3.2.4.2 (08-20-1998) Oral Advice from the Service

20.1.1.3.2.4.3 (08-20-1998) Advice from a Tax Advisor

20.1.1.3.2.5 (08-20-1998) Fire, Casualty, Natural Disaster, or Other Disturbance

20.1.1.3.2.6 (08-20-1998) Official Disaster Area

20.1.1.3.3 (08-20-1998) Service Error

20.1.1.3.4 (08-20-1998) Requesting Penalty Relief

20.1.1.3.4.1 (08-20-1998) Subsequent Requests for Penalty Relief

20.1.1.3.4.2 (08-20-1998) Taxpayer Entitled to Relief

20.1.1.3.4.3 (08-20-1998) Taxpayer Not Entitled to Relief

20.1.1.4 (08-20-1998) Methods of Appealing Penalties

20.1.1.4.1 (08-20-1998) The Appeals Function

20.1.1.4.1.1 (08-20-1998) Preassessment Appeals

20.1.1.4.1.2 (08-20-1998) Postassessment Appeals

20.1.1.4.2 (08-20-1998) Deficiency Procedures

20.1.1.4.2.1 (08-20-1998) Non-Deficiency Procedures

20.1.1.5 (08-20-1998) Master File Indicators

20.1.1.5.1 (08-20-1998) Master File Reason Codes

20.1.1.5.2 (08-20-1998) Penalty Transaction Codes

20.1.1.5.3 (08-20-1998) Penalty Reference Numbers

20.1.1.6 (08-20-1998) Administrative Procedures

20.1.1.6.1 (08-20-1998) Corporate Files on Line (CFOL)

Exhibit 20.1.1.6-1 (08-20-1998) Penalty Policy Statement (P–1–18)

Exhibit 20.1.1.6-2 (08-20-1998) Penalty Relief—Application Chart

Exhibit 20.1.1.6-3 (08-20-1998) Penalty Reason Code Chart

Exhibit 20.1.1.6-4 (08-20-1998) Penalty Transaction Codes

Exhibit 20.1.1.6-5 (08-20-1998) Penalty Reference Numbers (500 Series)

Exhibit 20.1.1.6-6 (08-20-1998) Penalty Reference Numbers (600 Series)

Exhibit 20.1.1.6-7 (08-20-1998) Table of Abbreviations and Acronyms

Exhibit 20.1.1.6-8 (08-20-1998) Dictionary of Key Terms

20.1.2.1 (07-31-2001) Overview

20.1.2.1.1 (07-31-2001) Failure to File Tax Return or Pay Tax

20.1.2.1.2 (07-31-2001) General Information

20.1.2.1.2.1 (07-31-2001) Extension of Time to File

20.1.2.1.2.2 (07-31-2001) Unsigned Returns

20.1.2.1.2.3 (07-31-2001) Received Date

20.1.2.1.2.4 (07-31-2001) Definition of Month

20.1.2.1.2.5 (07-31-2001) Net Amount Due

20.1.2.1.3 (07-31-2001) Penalty Relief

20.1.2.1.4 (07-31-2001) Substitute for Return IRC section 6651(g)

Note:

20.1.2.1.5 (07-31-2001) Excise Tax

20.1.2.1.6 (07-31-2001) Restrictions on Assertions

20.1.2.1.6.1 (07-31-2001) Taxpayer in Bankruptcy

20.1.2.1.7 (07-31-2001) Assessment/Abatement Procedures

20.1.2.1.7.1 (07-31-2001) Service Center/Customer Service

20.1.2.1.7.2 (07-31-2001) PINEX

20.1.2.1.8 (07-31-2001) FTF/FTP on Withholding and EIC