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.

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

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

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.

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.

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

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)

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.

20.1.7.3  Failure to File Correct Information Returns IRC section 6721 20.1.7.3.4  Failure to Timely File Information Returns 20.1.7.3.4.5  (08-20-1998) Penalty for Failure to File on Magnetic Media The Payer Master File (PMF) generates a penalty proposal notice when a filer fails to comply with the magnetic media filing requirements for information returns. Failure to file in the required manner, i.e., on magnetic media or in other machine-readable form as provided under IRC Section 6011(e) and the regulations thereunder will result in a penalty. A penalty of $50 per return is proposed for each return filed on paper in excess of the magnetic media threshold. This criterion applies separately to each document type and separately for amended returns. The penalty should not be assessed if an undue hardship waiver was granted by MCC and posted to the PMF. See LEM 20.1.7.3.4.5. 20.1.7.3.4.6  (08-20-1998) Receiving Responses Filers may avoid a penalty by establishing reasonable cause for the failure. See IRM 20.1.7.9 for definitions of reasonable cause and IRM 20.1.7.9.2.9 for the special abatement conditions. See LEM 20.1.7.3.4.6. All current year magnetic media penalty cases are compared to the waivers of the magnetic media filing requirement that post to the PMF prior to the generation of penalty notices. However, if a filer responds with an approval letter from MCC granting a waiver of the magnetic media filing requirement, check to see if the filer's TIN appears on the waiver listing provided by MCC. If present, the penalty should be abated using the correct Penalty Reason Code (PRC). If the TIN is not on the waiver listing, see LEM 20.1.7.3.4.6.   If the taxpayer's response indicates that duplicate data was provided on paper and magnetic media: First attempt to verify using the PMF transcript or PMFOL and any supporting documentation sent by the filer. If no supporting documentation is found on the PMF transcript or PMFOL, contact MCC and provide the filer's name, TIN, EIN, Transmitter Control Code (TCC) if available, tax year, type of return and the number of returns filed. See LEM 20.1.7.3.4.6.   If the filer requests a copy of the Form(s) 1096 which resulted in the assessment on paper Forms 1098/1099, request a SCRIPS print (see IRM 20.1.7.1.8) of the Form(s) 1096 and send it to the filer. The DLN of the Form 1096 can be found on the PMF transcript and on PMFOLD. If the SCRIPS print of Form 1096 is not available after research, sanitize the page(s) of the PMF transcript containing the 1096 record(s) relevant to the penalty and send the filer a copy with an explanation. If the filer requests a copy of the Form(s) W-3 which resulted in the assessment on paper Forms W-2 send a photocopy to the filer. If the Form W-3 is not available, sanitize the page(s) of the PMF transcript containing the W-3 record(s) relevant to the penalty and send the filer a copy with an explanation. Do not submit a request to WIRS for copies of the Forms W-3.   If the filer requests a copy of the Forms W-2 which resulted in the assessment, request the document from WIRS using the microfilm sequence number(s) provided on the PMF transcript. Indicate W-3 and all W-2s in the remarks area. Inform the filer that it will take about 6 weeks to obtain microfilm copies of the Forms W-2. When the Forms W-2 are received from WIRS, count to verify that the penalty agrees with the number of documents processed (eliminate blanks, voids, and subtotal forms). If the volume is lower than the penalty assessed, send the documents to the filer with Letter 1948C explaining that the penalty will be adjusted accordingly. (See LEM 20.1.7.3.4.6)   The following information will be useful when working responses to Form W-2 magnetic media penalty cases. However, see LEM 20.1.7.3.4.6 for further information. If the filer questions why the number of Forms W-2 penalized does not agree with the volume entered on Form(s) W-3 by the filer, explain that the penalty is based on the actual number of return processed by SSA. Blanks, voids, and subtotal forms are not counted. In addition, the discrepancy may have occurred because the preparer entered an incorrect figure on Form W-3. If the response indicates that only magnetic media was filed or if the filer does not seem to understand why the penalty was assessed, send a copy of the Form W-3 along with Letter 1948C explaining that the W-3 is a records of the paper forms filed with SSA. If the filer used a prior year Form W-3, check the signature date to determine what year the returns were submitted.   20.1.7.3.4.7  (08-20-1998) Penalty for Failure to File in the Proper Format (Unprocessable Returns) The penalty for failure to file in the proper format is assessed for unprocessable paper returns and magnetic media returns identified by the campus and MCC. This penalty is manually assessed by the campus (CP215 or CP 15). It is not preceded by Notice 972CG. For both paper and magnetic media, the documents are returned to the filer (during initial processing) along with a letter explaining the problem and requesting correction and resubmission by a specific date. Note: For paper returns, only a sample of the unprocessable returns are returned to the filer to identify the problem. However, the filer is asked to resubmit the entire submission.   Filers are also advised of the applicable penalties for not resubmitting the returns timely. If processable returns are submitted beyond the date requested, the filer is subject to a late filing penalty. Returns are referred to the penalty unit for the improper format penalty if they are still unprocessable at the processing cut off for the year. The penalty will be assessed at $50 per return and is computed by multiplying the number of unprocessable returns by $50. See LEM 20.1.7.3.4.8. The de minimis exception does not apply to the improper format penalty.   The penalty unit will receive copies of no response and unsatisfactory responses to Letters 1865C from Receipt and Control along with the Forms 1096 and the payee documents that cannot be processed. MCC will refer Forms 4804 to the campus for assessment of the penalty. The case is referred to the campus for the penalty only if the filer does not return the file to MCC or if the file was returned but was still unprocessable at the end of the processing year. MCC will refer to the campuses any unresolved, unreturned solicitations for corrected magnetic media (MCC will purge the case and upon nonreceipt will notify the campus of the DLN) . The campus will send CP215 to the submitter assessing the proposed penalty amounts. Any corrected tapes will be submitted to MCC from the campus asking for input as to the correctness of the assessment. If it appears that the filer only corrected the sample of unprocessable paper returns that were mailed with Letter 1865C, the campus may contact the filer to clarify that the entire submission must be resubmitted (per Letter 1865C). Allow the filer 30 days to respond before assessing the penalty. Prior to assessing the penalty for unprocessable magnetic media returns (Form 4804), check IDRS or MFTRA for the presence of a late filing or magnetic media penalty assessed for the same number of returns filed on paper. If an assessment is present, request a PMF transcript for manual assessments to determine if the penalty is for the same returns. If confirmed, notate the date and Penalty Considered on the 4804, associate with the closed case and refile. See LEM 20.1.7.3.4.8. If it is determined that the previous assessment is for different returns, assess the penalty based on the information on Forms 4804/4802.   Only the actual returns which cannot be processed will be subject to the failure to file in the proper format penalty. Receipt and Control will separate the submission into processable and unprocessable. Any processable returns will have been input with original Form 1096. The unprocessable returns will be forwarded by the Penalty Unit for assessment action with a photocopy of Form 1096. Note: The "Total number of documents" filed on Form 1096 should have been changed by Receipt and Control to reflect the number of unprocessable documents subject to penalty.   Verify the number of unprocessable documents subject to penalty by excluding voided and blank forms, and returns not required to be filed by law based on the dollar amount reported or exempt status. See Exhibit 20.1.7–4. MCC will count the entire submission as unprocessable and, if the number of documents cannot be discerned, will proposed the maximum penalty with affirmation from Headquarter Operations. Prior year submissions will also be considered. If returns are received from Receipt and Control which are processable, return the entire submission to the IRP Unit in Receipt and Control with an explanation. The penalty is to be assessed on the Civil Penalty Module. See IRM 20.1.7.1.6.2. If the unprocessable returns were also filed late the first time they were filed, check PMFOL to see if an extension was also granted, for the return type and tax year in question. If an extension was also granted, use reference number 503. If an extension was not granted, use reference number 506. If a sufficient number of returns were submitted to require magnetic media filing, check PMFOL to see if a waiver was granted for the return type and tax year in question. See LEM 20.1.7.3.4.8. If a magnetic media waiver was also granted, use reference number 503. If a waiver was not granted, use reference number 508. If the returns were filed late and the volume was large enough to require magnetic media filing, check for the extension and waiver. If both were granted, use reference number 503. If neither was granted, use reference number 511. If an extension was granted but no waiver, use reference number 508. If a waiver was granted but no extension, use reference number 506.   If the assessment is input on or before July 1 of filing year, the campus should include a quick note with the notice. The quick note should contain the following statement: The penalty was assessed at $50 per return but it will be reduced if the corrected forms are submitted on or before August 1, 20XX. Processable returns (paper) resubmitted after the date requested in Letter 1865C may be referred to the penalty unit for assessment of the late filing penalty. MCC may also refer these cases to the campus with Form 4804 for assessment. MCC will separate cases subject to late filing penalty from the subject to unprocessable penalty. See LEM 20.1.7.3.4.3. In this situation, the penalty unit should assess a late filing penalty (reference number 500). If the filer filed more than 250 returns (paper), use PMFOL to determine whether a waiver was granted. If the waiver was granted, assess the late filing penalty only. If no waiver was granted, assess the combination late/magnetic media penalty using reference number 504.   20.1.7.3.4.8  (08-20-1998) Receiving Responses (Unprocessable Returns) Generally filers must establish reasonable cause for the penalty to be abated. See IRM 20.1.7.9.1 for definitions of reasonable cause and IRM 20.1.7.9.2.9 for the special abatement conditions. See LEM 20.1.7.3.4.8 for further instructions. If the filer submits corrected returns in response to the penalty notice, Receipt and Control will notate the CP15/215 Processable returns submitted and also notate the received date and the number of returns submitted. Review the filer's response to determine if the explanation establishes reasonable cause. If the filer's explanation does not establish reasonable cause, and the received date indicates that the $50 penalty should be reduced (see LEM 20.1.7.3.4.8), recalculate the penalty at $15 or $30 per return as appropriate. The penalty should only be adjusted for the number of processable returns received as noted on the CP15/215. Also include the following explanation: We received your corrected information returns on   . The penalty you were previously assessed for filing unprocessable Forms    has been reduced to $XX.XX per return. You will receive an adjusted balance due notice.   If the filer submits processable returns in response to the notice but the explanation provided does not meet reasonable cause, disallow the claim. 20.1.7.3.4.9  (08-20-1998) Penalty for Missing and Incorrect TINs Filers who file an information return with a missing TIN, or a TIN determined to be incorrect or not currently issued by the Service, are subject to a penalty of $50 per return. After the TIN validation process is performed to identify payee records with missing and incorrect TINs/names, this data is transmitted to the Payer Master File for inclusion in the penalty proposal notice. See Exhibit 20.1.7–5 for details on how the Service performs TIN validation to determine which TINs are incorrect or not currently issued. Note: When a TIN is identified as incorrect, either the TIN or name may be incorrect.   A paper or tape listing of payee records with missing or incorrect TINs is sent to the filer along with the proposal notice. Publication 1586, Reasonable Cause Regulations and Requirements as They Apply to Missing and Incorrect TINs, is also included in this mailing. It provides a detailed explanation of the action the filer is required to take upon receiving the listing. A payer making a reportable payment to a payee, the payee must make an initial solicitation for the payee's TIN at the time the account is opened. If the payer does not receive a TIN as a result of the initial solicitation, he/she must complete a first annual solicitation by December 31 of the year in which the account was opened, or ny January 31 of the following year if the account was opened in December. If the payee does not receive a TIN as a result of the first annual solicitation, he/she must complete a second annual solicitation by December 31 of the year immediately following the calendar year in which the account was opened. Filers are required to review payee accounts to verify whether or not they have completed the required solicitations (request TINs from payees) to show reasonable cause to have the penalty waived or abated. 20.1.7.3.4.10  (08-20-1998) Receiving Responses (Missing and Incorrect TINs) See IRM 20.1.7.9.2.2 for the general solicitation requirements for TINs and the general reasonable cause criteria in IRM 20.1.7.9.2.3 to determine if the penalty should be waived or abated. Also see LEM 20.1.7.9.1 for the special abatement criteria. If the filer's response indicates they do not understand why they received the notice and/or what actions they are required to take, provide a brief explanation in Letter 1948C and refer them to the Publication 1586. If the filer has included corrected returns for prior years in response to the notice, advise the filer that corrections for name/TINs are not required for prior years. Filers should be advised to update their records and reflect the correct data on any returns filed in the future. If corrected returns are provided for current year returns, route them to the Receipt and Control Function for processing if they are received prior to the campus Program Completion Date (PCD). Note: Filers are required to submit other corrections for information returns (e.g., money amounts) for current year returns.   If the filer submits examples of garbled information on the TIN listing apologize for the inconvenience and advise that no action is necessary. Filers must compare the listings of incorrect and/or not currently issued TINs received from the Service with their records to determine if the name/TIN combination included on the listings agrees or disagrees with their records. In general, if an account number is provided on the listing, the filer need only identify any account or accounts with that corresponding number or designation that has the same name/TIN combination. If no account number is provided, the filer must use reasonable care to identify all accounts that relate to the same incorrect name/TIN combination. If the name/TIN combination on the listing agrees with their records, the filer must perform the required annual solicitation (see IRM 20.7.9.2.4) if not completed previously. If the name/TIN combination on the listing disagrees with its records, the filer must determine whether: An error was made when filing the information return. If so, the filer must include the correct information on any future information returns, The information in their records has changed since filing the information return. If so, the filer must include that information on any future information returns, The Service changed the information during processing. If so, the filer should notate their records and take no further action. In all the instances outlined above, the filer should notate their records and provide this information in their reply to the 972CG Notice.   20.1.7.3.4.11  (08-20-1998) Notice 972CG, Notice of Proposed Civil Penalty Notice 972CG, Notice of Proposed Civil Penalty, is mailed to give filers an opportunity to establish reasonable cause for waiver of penalties prior to assessment. The notice includes proposed penalties for failure to file timely, failure to file on magnetic media and missing and incorrect TINs. Notice 972CG is assigned the reference number which corresponds to the penalty proposed, e.g. reference number 500 for the failure to file timely penalty. Filers are allowed 45 days to respond to the notice and to submit an explanation as to why the penalty should be waived. Filers may also submit a payment if they fully or partially agree or sign a consent to allow the Service to send a bill for the balance due. *NOTE-The decision to assess or not assess the penalty should not be made based on the amount of payment received. Reasonable Cause Criteria must be applied in all instances. The penalty will be assessed against filers who do not submit a satisfactory explanation or who fail to respond to the notice. All penalties will be manually assessed following the procedures in IRM 20.1.7.1.6.2. Notice 972CG is not posted to the master file or shown on any IDRS or CFOL Command Codes. Campuses may open an IDRS control base on MFT 13 or 55 after mailing the notices immediately upon receipt of a reply. This will prevent a delay in taking necessary interim or closing actions after the response is reviewed. When the control base is opened enter Notice 972CG or "972CGREPLY in the ACTIVITY and OTHE as the category code. (Special Category Code CVPN should be established for these cases). See IRM 20.1.7.6.3 for procedures that may be required to create entities if there is no IMF or BMF account to penalize or to create a Civil Penalty Name Line (IMF accounts only) if it has not already been established on the Master File. These procedures are necessary to prevent unpostable conditions. Campuses should maintain a suspense file for Notice 972CG which contains the: Notice, TIN listing (if applicable) The PMF transcripts, and CP215/15A, Summary of Your 1999 Information Return Penalties. These file should be maintained in TIN order. Files should be maintained for 180 days.   20.1.7.3.4.11.1  (08-20-1998) Receiving Responses (Notice 972CG) Review responses to Notice 972CG to determine if the penalty should be waived for reasonable cause in the same manner as replies to penalty assessment notice (CP215/15). See the appropriate section in IRM 20.1.7.3.4. to respond to replies for penalties proposed for late filing, magnetic media, and TINs. Also, see IRM 20.1.7.1.6.2. for complete adjustment actions. Also see IRM 20.1.7.9.1 for reasonable cause criteria and IRM 20.1.7.9.2.9 for special abatement conditions. Filers may be granted an extension for up 30 days to respond to the notice. For notices that were initially undeliverable, or required a recreate (see IRM 20.1.7.1.6.3.4), the new notice date is the date stamped when the notice is mailed a second time. See LEM 20.7.3.4. Campuses must review replies fully and give filers the opportunity to submit additional information regarding their case before making a decision of whether or not to assess the penalty. If the explanation establishes reasonable cause: Send letter 1948C explaining the decision, Input a TC 290.00 on MFT 13 or 55, using Blocking Series 15, for BMF accounts or on MFT 55 using BS 05 for IMF accounts Use Reason Code (RC) 62 and/or the appropriate 4th position Reason Code (Exhibit 20.1.1.-3), Hold Code (HC) 3, Penalty Reference Number (PRN) from the Notice 972CG and amount 0.00 . File Notice 972CG, correspondence, and a print of the Letter 1948C with your adjustment document.   If the filer agrees with part of the penalty and establishes reasonable cause for the remainder (reasonable cause not denied for any amounts) Send letter 1948C explaining the decision, an explanation of how to avoid future penalties and that the balance due notice will follow (if not paid in full). Use Reason Code 62 and the appropriate Penalty Reason Code (Exhibit 20.1.1–3), Input the assessment on MFT 13 or 55 for the agreed penalty amount using BS 52 if it's a first assessment on the module, or BS 53 if a previous adjustment is already present. Use Reason Code 62 and/or the appropriate 4th position reason code for the amount being waived, HC 3, PRN from 972CG and penalty amount for the part of the penalty being assessed. Monitor the assessment to ensure that it posts.   If the explanation does not establish reasonable cause or the abatement request is partially denied: Input the assessment for any penalty amount for which the filer did not provide an acceptable explanation. Do not use Reason Code 62 if the penalty is being assessed in full, and use Hold Code 0. If waiver or abatement is partially denied, use the appropriate Reason Code(s) for the portion being waived/abated and Hold Code 3. Use the PRN from the 972CG. Input a separate transaction using TC 290, 0 , BS 98, RC 62 in the 1st position, do not enter a 4th position code and HC 3. To delay the posting of the second transaction for one cycle use Posting Code Delay Code 1 with this transaction. Send Letter 854C stating the reason(s) the explanation was not accepted. Also state the penalty amount assessed and that a balance due notice will follow. Correspondence should only be sent to the responsible individual and not to a joint account. See IRM 20.1.7.1.9. File the case Monitor the assessments to ensure that they post. See (12)-(16) below before assessing the penalty if the reply indicates that the filer is no longer in business or there was a change in business organization, i.e. partnership to corporation. (Assess the penalty unless criteria in (12)-(16) below applies.)   Use care when adjusting penalty amounts when two or more penalties (late, magnetic media, or TIN) apply to the same document. Example: If 500 Forms 1099–DIV were filed late (April 5) and fifty of these returns had incorrect TINs, the proposed penalty on Notice 972CG would be calculated at 50 x $50 (TINs) plus 450 x $15 (late). If the filer submits a satisfactory explanation for the 50 incorrect TINs, but not for filing late, the penalty should be recalculated at 500 x $15 for the CP215/15 notice.   If a payment was received, the amount will be notated on the response page by the Deposit function. Acknowledge any payment received in correspondence with the filer. If a full payment is received and there are no disagreed items or a partial payment is received and the filer submits a satisfactory explanation for the remainder, input the adjustment on MFT 13 or 55. Use Hold Code 3 See LEM 20.7.1.6.3.4 for purge dates If Freeze Code —Z is on the account, send the case to Criminal Investigation. Do not assess the penalty, will go unpostable. Prior to assessing the penalty, check for undeliverables, (see IRM 20.1.7.1.7), or no response cases. Use BMFOL to check Form 941 (MFT 01) modules for the presence of Collection Compliance transaction: A TC 530 with CC10 (defunct corporation), TC 530 with CC07 (bankrupt/insolvent corporation), (See IRM 20.1.7.9.6 for more information on bankruptcies.) or TC 480/7890 (Offer in Compromise pending (OIC)). If a TC 530 with either closing code is present, do not assess the penalty.   Check the tax year in question and subsequent years. If an unreversed TC 480 is present, check for the case file assignment number and notify the responsible Collection Compliance function of the pending assessment. Collection Compliance must include this assessment in the OIC. A TC 480 may be reversed with: TC 481 — OIC requested, TC 482 — OIC withdrawn, or TC 483 — Correction of an erroneous TC 480.   Note: Since it is not unusual to have more than one TC 480 posted in a module, a careful review of the entire module should be done before taking any action.   Also, apply the criteria in (14) if a filer's response to Notice 972CG indicates they are either a defunct of bankrupt corporation; check for the appropriate transaction code. A monthly report should be submitted to the Penalty Analyst in the campus to measure how effective Notice 972CG is in prompting a response from filers. The report should be submitted by the 10th of the month for the previous month's activity. Title the report Notice 972CG Monthly Activity Report . Enter the name and the date at the top of the report. The campus should provide monthly as well as cumulative totals for each category. Number of Notice 972CG mailed and referred to Exam (RTC/FDIC Notices during mailout), total Notices mailed and referred to Exam. Number of receipts (replies) Notice 972CG Number of replies/no responses as follows: (1) Reasonable Cause Waiver Granted, (2) Reasonable Cause Waiver Denied — assessment for full amount, (3) Reasonable Cause Waiver Partially Denied — Partial Assessment, (4) Penalty Waived for Other than Reasonable Cause, (5) Partially Agreed — no disallowed items, (6) Fully Agreed, (7) Case closed to Exam, (8) Purged-assessment input for no reply and undeliverable cases, (9) Open replies (Cum receipts minus items 5–10), (10) No reply suspense (line 3 minus CUM receipts minus line 12), (11) Total of items 5 through 14 on report. Receipts (Replies) to CP 215/15. Abatements (after CP215/15): Full, Partial Referrals to Appeals, Number (abatements) requested or done by Appeals. Only count notices in one category. The monthly report should continue until the campus has purged no reply cases and resolved all open cases (reply received) for Notice 972CG. The penalty analyst will notify the unit when to stop reporting for abatements of CP215/15.   20.1.7.4  (08-20-1998) Failure to Furnish Correct Payee Statements IRC Section 6722 IRC section 6722 provides for a penalty when a payee statement is not timely or correctly furnished, The $50 penalty is imposed for each failure to: 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.   No more than one penalty will be imposed per payee statement, even though a statement may contain more than one failure. For purposes of IRC section 6722, the term payee statement means any statement required to be furnished as described in Reg. 301.6722–1(d)(2). The total amount imposed on any filer for all failures to furnish a payee statement during any calendar year shall not exceed $100,000. A composite substitute payee statement is a single document created by the filer to reflect several types of payments made to the same payee. Each composite statement shall be treated as though each type of payment (or other required information) were a separate statement with each type of payment being subject to the penalty. This statement must be on a form acceptable to the Service. See Publication 1179, Specifications for Paper Document Reporting and Paper Substitutes for Forms 1096, 1098, 1099 Series, and Forms 5498 and W-2G. The $50 penalty for failure to furnish payee statements is not reduced if returns are corrected or filed after the due date. The IRC section 6722 penalty should not be imposed if an error or omission is inconsequential. See IRM Section 20.7.3.3. 20.1.7.4.1  (08-20-1998) Intentional Disregard The Intentional Disregard of the Rules and Regulations Penalty applies when the facts and circumstances show that the filer knowingly or willfully failed to comply with the requirements of IRC sections 6722. Intentional disregard occurs when a filer who knows, or should know of a rule or regulation, chooses to ignore its requirements. The facts should show the filer: Was required to provide a statement, Knew or should have known of the requirement to provide the statement, and Consciously chose not to provide the statement or recklessly disregarded (i.e. ignored) the duty to provide the statement.   Treas. Reg. 301.6721–1(f)(3)(i) provides that a pattern of failures indicates intentional disregard. The greater the number of failures, the greater the likelihood some of those failures could be due to intentional disregard. Additional indications of the existence of intentional disregard are: Did the filer correct the failure promptly after the discovery of the failure, Did the filer correct the failure within thirty days after notification of the failure by the Service, Did the filer avoid an administrative inconvenience, and Was the cost of compliance greater than the IRC section 6722(a) penalty.   Intentional disregard may exist when it would be less expensive to pay the penalty under 6722(a) rather than comply with the requirement to provide a statement. Treas. Reg. 301.6722–1(c)(2). Check payee's prior history of compliance to determine intentional disregard. The Intentional Disregard of the Rules and Regulations Penalty amounts to: $100 for each payee statement required to be filed, or if greater: 10 percent of the amount of income required to be reported on payee statements for dividends, patronage dividends, interest, fishing boat operators, royalties, and wage and tax statement, or 5 percent of the amount required to be reported on the payee statements for brokers, exchange of partnership interest, or disposition of donated property payments.   Form 8300 Penalty. The Intentional Disregard penalty for failing to provide a payor of cash with a statement as required by IRC sections 6050I(e) is the greater of $100 or 10 percent of the amount required to be provided on the statement. These penalties are asserted by field Examination personnel. The taxpayer may be offered an administrative preassessment appeal.   There is no maximum dollar limitation for the Intentional Disregard of the Rules and Regulations Penalty under IRC section 6722. No more than one penalty per failure can be imposed, even if there is more than one failure on the same statement. 20.1.7.4.2  (08-20-1998) Exceptions and Special Rules The penalty shall not be assessed if an error or omission is inconsequential. An error or omission is inconsequential when the failure does not prevent: The timely receipt of correct information, or The payee from putting the information to its intended use.   Errors or omissions are never considered inconsequential if they relate to: A dollar amount, A significant item in the payee address, Use of the appropriate form for the information provided, whether or not it is an acceptable substitute for the official IRS form, and/or The delivery of the information return to the payee either in person or by first class mail (in a mailer which alerts the payee that the statement is enclosed) under the following: IRC section 6042(c), Returns Regarding Payments of Dividends and Corporate Earnings and Profits, IRC section 6044(e), Returns Regarding Payments of Patronage Dividends, IRC section 6049(c), Returns Regarding Payments of Interest, and or IRC section 6050N(b), Returns Regarding Payments of Royalties.   20.1.7.5  (08-20-1998) Failure to Comply with Other Information Reporting Requirements IRC Section 6723 For any information return or payee statement due (without regard to extensions) , a penalty of $50 per failure will be imposed for each failure to provide all the required information timely. No more than one penalty can be imposed for the same return. For example, if a return has more than one error or omission and the penalty amount for those failures differs, the penalty will be imposed at the higher amount. A penalty of $50 is imposed for failure to comply timely with specified information reporting requirements or for each failure to include correct information. The maximum penalty for failure to comply with all specified information reporting requirements is $100,000 per year. Multiple penalties may be imposed on one document if the failures relate to more than one of the following requirements: IRC section 6050K(c)1–notification of exchange of partnership interest, IRC section 6109–supplying identifying numbers, (1) includes his/her TIN on a return, statement or document other than an information return or payee statement, (2) furnishes his or her TIN to another person, (3) the TIN of any other person whose number is required to be shown on a return, statement of document other than an information return or payee statement, (4) the TIN of a return preparer. IRC section 215–Alimony, etc., Payments, (1) the person receiving separate maintenance is required to furnish his or her TIN to the individual making separate maintenance payments, and (2) the person making the separate maintenance payment is required to furnish on their return the TIN of the person receiving the separate maintenance payment. IRC section 6109(e)-Furnishing Number for Certain Dependents, Include on his/her return, the TIN for any dependent who is claimed as an exemption on an income tax return, and has reached 1 year of age before the close of the taxable year.   However, no more than one penalty per document may be imposed if the failure could be penalized for both : Failure to timely comply, or Failure to include all the required information.   20.1.7.5.1  (08-20-1998) Intentional Disregard The Intentional Disregard penalty as it applies to IRC section 6723 was repealed by P.L. 101–239. For returns and statements required to be filed after December 31, 1989, Intentional Disregard will not be considered. 20.1.7.5.2  (08-20-1998) Exceptions and Rules An inconsequential error or omission is not considered a failure to comply with a specified information reporting requirement. Therefore, the penalty shall not be assessed. The term inconsequential means any failure that does not make it difficult for the Service to put the information to its intended use, or prevent a payee from timely receiving correct information and reporting it on his or her return. 20.1.7.6  (08-20-1998) Regulations Requiring Returns on Magnetic Media IRC section 6011(e) Information Returns:: The magnetic media filing requirement for Forms 1099 changed as a result of OBRA '89. A filer must file on magnetic media when filing more than 250 returns of the same type. If a filer timely filed paper returns, but was required to file magnetic media returns, the $50 failure to file penalty will apply to the number of returns, of one type, required to be filed that exceed 250.   20.1.7.7  (08-20-1998) Failure to File Certain Information Returns, Registration Statements, etc. IRC section 6652(e) The penalty for failing to file information returns required in connection with certain plans of deferred compensation applies for each failure to file Forms 1099–R due after December 31, 1998. Specific information relating to Tax Exempt/Government Entities will be addressed by Tax Exempt/Government Entities. 20.1.7.8  (08-20-1998) Failure to Provide Reports on IRAs/Annuities As the result of the Deficit Reduction Act of 1984, (effective December 31, 1984) the trustee of an Individual Retirement Account, the issuer of an IRA, or Simplified Employment Pension (SEP) may be assessed a penalty of $50 for each failure to: Furnish or file a return (Form 5498) within the time and manner prescribed, or Furnish or file a disclosure statement, a governing instrument, or an amendment.   There is no limitation to the amount of the penalty for returns required under IRC section 6693(a). The penalty under IRC section 6693(a) shall not apply if the trustee or issuer of an annuity establishes reasonable cause. See IRM 20.1.7.9. 20.1.7.8.1  (08-20-1998) Overstatement of Designated Nondeductible Contributions IRC section 6693(b) IRC section 408(o)(4) generally requires any individual who makes a nondeductible contribution to an individual retirement plan for any taxable year, to file Form 8606, Nondeductible IRAs (Contributions, Distributions and Basis). A $100 penalty may apply if an individual overstates the amount of their nondeductible contributions for any taxable year. The penalty may be abated if the overstatement is due to reasonable cause. See IRM 20.1.7.9.1.   Deficiency procedures do not apply. 20.1.7.9  (08-20-1998) Waivers, Definitions and Special Rules IRC Section 6724 Generally, an information reporting penalty may be waived if it can be shown that the error was due to reasonable cause and not due to willful neglect. See IRM 20.1.1.3 for discussion of Penalty Relief. The term Penalty Relief includes Reasonable Cause, Statutory Exception, Administrative Waiver, or Service Error. 20.1.7.9.1  (08-20-1998) Reasonable Cause The Service may waive (abate or not assess) an information return penalty when a filer requests a waiver of the penalty and establishes reasonable cause. See LEM 20.1.7.9.1 " **NOTE–EVENTS OF SEPTEMBER 11, 2001, MUST BE CONSIDERED WHEN APPLYING THIS PROVISION." If the request properly establishes reasonable cause, the penalty may be abated using normal procedures. See IRM 20.1.7.1.5. If reasonable cause is not established, disallow the request using normal procedures. See IRM 20.1.7.1.5. If additional information is needed to substantiate a request for the waiver of a penalty due to reasonable cause, contact the taxpayer. In all cases involving unauthorized third party requests, correspond directly with the taxpayer to inform them of the action taken. Send Letter 135C to the unauthorized third party explaining that you have responded directly to the taxpayer and include a paragraph in the taxpayer's letter requesting that the taxpayer notify the third party of our direct reply to the taxpayer. See LEM 20.1.7.9 If the correspondence contains the penalty of perjury language it must contain the affected taxpayer's signature or the signature of the taxpayer's authorized representative. Return correspondence to the taxpayer with Letter 1382C. The signature requirements are as follows: For corporations , the statement must be signed by the president, vice-president, treasurer, assistant treasurer, chief accounting officer or other officer duly authorized to sign returns and other documents. The fact that an individual within the corporation signed the statement shall be accepted as evidence that the individual is authorized to sign on behalf of the corporation (IRC section 6062). For partnerships, the statement may be signed by any one of the partners. For joint individual accounts, the statement must contain the signature of one of the taxpayers who signed the original return to be considered a valid request.   Reasonable cause for the information return penalties exists when : the filer acted in a responsible manner, both before and after the failure occurred, and There are significant mitigating factors, or The failure was the result of circumstances beyond the filer's control.   Acting in a Responsible Manner would include exercising the same degree of care that a reasonably prudent person (or organization) would use in the course of its business in determining filing obligations and in handling account information such as account numbers and balances. The filer must act in a responsible manner both before and after the failure occurs. Acting in a responsible manner also includes taking steps to avoid the failure, for example: Requesting appropriate extensions of time to file when practical to avoid the failure, Attempting to prevent a failure if it was foreseeable, Acting to remove an impediment or the cause of the failure, and Correcting the failure as promptly as possible, generally within 30 days.   Where a penalty is imposed for missing or incorrect TINS, a filer must comply with special rules for acting in a responsible manner. See IRM 20.1.7.9.2. When reviewing a filer's request for a waiver, the following questions must be addressed to determine if the filer has acted in a responsible manner. Do the reasons address the penalty that was assessed? Does the length of time between the event cited as a reason and the filing date negate the event's effect? Does the continued operation of a business after the event that caused the filer's noncompliance negate the event's effect? Should the event that caused the filer's noncompliance or increased liability have reasonably been anticipated? Was the penalty the result of carelessness or did the filer appear to have made an honest mistake? (Carelessness and forgetfulness are the same as civil willful neglect and are not examples of ordinary business care and prudence). Has the filer provided sufficient detail (dates, relationships) to determine whether they exercised ordinary business care and prudence? Is a non-liable person being blamed for the filer's noncompliance? What is the nature of the relationship between the taxpayer and the individual? Is the individual an employee of the taxpayer or an independent third party such as an accountant or lawyer? Has the filer documented all pertinent facts, i.e., death certificate, doctor's statement, insurance statement for proof of fire, etc.? Does the filer have a history of being assessed the same penalty? Could the filer have requested an extension or filed an amended return?   A waiver should not be automatically granted where the filer claims ignorance of the filing requirements. However, ignorance of the law may be considered as one factor which may indicate that the filer acted in a responsible manner if all the other facts support this contention. Significant mitigating factors — For the filer to establish reasonable cause under this category, the filer must show that they acted in a responsible manner as well as the existence of a significant mitigating factor. Events generally considered to be significant mitigating factors include, but are not limited to: First time filer: prior to the failure, the filer had not previously been required to file this particular form or statement (See LEM 20.1.7.9. or The filer has a history of complying with the information return reporting requirements. See LEM 20.1.7.9. Significant consideration is given to: If the filer was previously penalized under IRC sections 6721, 6722, or 6723. Example: failures which are not penalized because they are within the " de minimis" exception are not considered to have been penalized for purposes of evaluating a filer's compliance history.   A filer may not continually rely on the same explanation to establish reasonable cause, when the filer's compliance history indicates a pattern of failures. A filer is expected to take significant steps to prevent future failures of the same type. Consider the Intentional Disregard provisions. Determine if the filer was previously penalized. If so, did the error rate decrease from one year to the next? Consider the Intentional Disregard provisions. The filer's history of compliance should be considered whether or not the filer specifically requests abatement on this basis. Compliance history must be considered, along with the other evidence provided, to determine if the penalty should be abated. The fact that the filer previously had a penalty should not be the only criteria used to decide if the penalty should be abated/waived. Example: A good compliance history may benefit a filer who can show that they acted in a responsible manner, but cannot show that an event beyond the filer's control caused the failure.   However, if the filer can show that he/she acted in a responsible manner and the failure was due to an event beyond the filer's control, then a penalty in a prior year should not be used as cause not to abate/waive the penalty.   The filer contacted a tax advisor who was competent on the specific tax matter, furnished necessary and relevant information, and was then incorrectly advised that the filing of a return was not required. If the filer exercises normal business care and prudence based on its information and knowledge in determining whether to secure further advise, reasonable cause may apply. Events beyond the filer's control — for the filer to establish reasonable cause under this category, the filer must show that it acted in a responsible manner,as well as the event being beyond the filer's control. Events generally considered beyond the control of the filer include (but are not limited to ) the following. Actions by the Service. To establish an event beyond the filer's control as the result of Actions by the Service, the filer must show it relied on erroneous written information provided by the Service. The filer must also show that reliance on the written advise was reasonable and that it relied in good faith on the information. The filer must provide: A copy of the written information provided by the Service including the name of the Service employee, and the date the erroneous advice was received, A copy of the request for information including, the steps taken and the specific facts given to the Service, and the answer received. This information should be used in determining whether the taxpayer has shown reasonable cause for taking a position on the return giving rise to the penalty. Reasonable cause will not be established if the filer did not provide the Service with all the facts and circumstances when requesting the advice. Reasonable cause may be established if the filer did not file a return after receiving erroneous information from the Service other than written, or the filer timely requested necessary tax forms and instructions, and the Service did not provide them timely.   Actions of an Agent. For a filer to establish events beyond the filer's control as the result of Actions of an Agent (imputed reasonable cause), the filer must show that: It exercised reasonable business judgment when contacting the agent, allowing the agent to timely file correct returns, or furnish correct payee statements, The filer provided the agent with proper information well in advance of the due date of the return or statement, and the agent satisfied the significant mitigating factors, or an event beyond the agent's control criteria required to establish reasonable cause. A filer who contracted with an agent and cannot establish reasonable cause based on the actions of the agent as described above, may be able to demonstrate reasonable cause on its own merits by having an established history of complying with the information reporting requirements, and otherwise acting in a responsible manner both before and after the failure occurred. See IRM 20.1.7.9.2.   Actions by the Payee or any other Person. For the filer to establish reas onable cause as the result of actions by the payee or any other person with respect to the return or payee statement, the filer must show that: The payee, or other person, failed to provide the necessary information to the filer, or The payee, or other person failed to provide correct information to the filer. The filer must provide documentary evidence when requested by the Service showing that the failure was attributable to the payee. See IRM 20.1.7.9.2.5 for special solicitation requirements that a filer must follow to establish reasonable cause if the failure of the filer to provide a TIN was due to the actions of the payee. The filer contacted a tax advisor who was competent on the specific tax matter, furnished necessary and relevant information, and was then incorrectly advised that the filing of a return was not required. If the filer exercises normal business care and prudence based on its information and knowledge in determining whether to secure further advice, reasonable cause may apply. Unavailability of business records—the business records must have been unavailable as a result of unforeseen conditions, and in a manner which would prevent timely compliance (ordinary at least a two week period prior to the due date (or extended due date) of the information return), and the unavailability was caused by a supervening event. **NOTE—THE EVENTS OF SEPTEMBER 11, 2001, SHALL BE CONSIDERED IN ALL DETERMINATIONS A supervening event includes, but is not limited to: A fire or other casualty that damages the business records or impairs the system for processing such records, A statutory or regulatory change that relates directly to the data processing and is made so close to the time the information return or statement is required that for all practical purposes the change cannot be made, The unavoidable absence (death or serious illness) of the person with the sole responsibility for filing as return or furnishing a statement. In the case of a corporation, estate, trust, etc., the death or serious illness must have been that of an individual having sole authority to file the return (not the individual preparingthe return). See LEM 20.1.7.9. If another person shares responsibility for filing the return and that other person is unaffected by the event, the event is not an event beyond the filer's control.   The return was delivered to the IRS after its due date by the United States Postal Service if it was correctly addressed, mailed, and postmarked before the due date by the United States Postal Service, or a private postal meter, (see LEM 20.1.7.9.) as long as delivery was within the time period a document mailed from the same point of origin ordinarily would be received if mailed on the last day prescribed for filing the return. If the return is received after the due date, the filer must establish the return was deposited in the mail on or before the due date, the delay in receiving the return was due to a delay in the transmission of the mail, and the cause of the delay. The taxpayer's statement that they erroneously addressed their return to the state taxing agency does not in itself constitute reasonable cause for filing late, since a properly addressed envelope is a legal requirement in determining timely mailing/filing (IRC section 7502(a)(2)(B)). Further documentation of the circumstances that resulted in the taxpayer misdirecting the returns must be considered evidence the taxpayer acted in a responsible manner and was nevertheless unable to file on time. Acceptable documentation must include all of the following: An excellent filing compliance record, Dated or certified mail documents showing filing made to the state or local taxing agency on or before the return due date, and Evidence that the act of misdirecting the return was due to extenuating circumstances, and not to carelessness or willful neglect. An example of an extenuating circumstance would be confusion caused by a death or serious illness in the immediate family at the time of filing.   Undue Economic Hardship related to filing on Magnetic Media. When a filer with over 250 returns or statements fails to file on magnetic media as required, the filer must show that they failed to file on magnetic media because of a lack of hardware and that to meet the requirement would have caused an undue economic hardship. See LEM 20.1.7.9. The filer must show that: The filer attempted to contract out the magnetic media filing, and the cost was prohibitive as determined on the due date of the return. The filer supported the prohibitive costs with two estimates from unrelated service bureaus or computer software/hardware companies. the filer filed the returns on paper. The undue economic hardship criteria does not prevent the filer from establishing reasonable cause based on other criteria that would be applicable to the magnetic media penalty. However, caution should be used to ensure that other reasonable cause criteria would be appropriate to the filer's failure to file on magnetic media.   Additional magnetic media events which may be considered beyond's the filer's control include: The filer relied upon an internal computer system which encountered major hardware and/or software problems. Reasonable cause should consider the filer's documentation of the following: (1) nature and severity of problems and efforts to correct in a timely fashion: (2) timely and consistent effort exercised by responsible officials within the organization to monitor problems and execution of corrective action, and (3) efforts undertaken by the filer to meet filing obligations, including but not limited to: (a) contracting out to third parties, and/or (b) filing the returns on paper to meet the due date. Reasonable cause may be met if the filer provides documented evidence that they contacted two service bureaus and was informed that service bureaus would not contract for preparation of magnetic media information returns without contracting for a range of data processing functions such as preparation of payroll/W–2 data, range of accounting functions such as preparation of Profit & Loss, balance sheets, etc., and other functions currently performed by the filer "in-house" or contracted to other third parties. Reasonable cause may be met if a filer is located in geographically remote areas (e.g., Alaska) and has found it impossible to arrange for a magnetic media processing service. Care should be taken to review filer's documentation to ensure they were diligent in repeated attempts to contract for such service sufficiently in advance of the filing due date. If the filer received an undue economic hardship waiver in a prior year, reasonable cause related to undue economic hardship will be determined on a case by case basis and not ordinarily be established for any subsequent year.   Also see 20.7.9.2.9 for the special abatement conditions that may require abatement of the penalty whether or not reasonable cause exists. 20.1.7.9.2  (09-30-2002) Responsible Manner In general, a filer will have acted in a responsible manner if the filer: Exercised reasonable care to, determine its filing obligations, and handle the account numbers and balances. Took significant steps to avoid a failure, such as Requested an extension of time to file; attempted to prevent a foreseeable failure; acted to remove the cause of a failure once it had occurred, and corrected the failure promptly once the cause of the failure had been removed.   Correction of a failure is ordinarily considered prompt if made within 30 days after: The cause of the failure is removed, The failure is discovered, or The filer's last regular submission for corrections is made (a submission is considered "regular" only if made at intervals of 30 days or less).   20.1.7.9.2.1  (09-30-2002) Missing TINs In general, if the filer failed to include a TIN because the payee failed to provide the TIN, the filer will have acted in a responsible manner only by making the required solicitations. The term "solicitation" means a request to the payee to provide a TIN. The TIN will be treated as missing if it Does not contain nine digits, or Includes a mixture of digits and letters.   20.1.7.9.2.2  (09-30-2002) Solicitations– Missing TINs In general, an initial solicitation and two annual solicitations are required for missing TINs. An initial solicitation must be made at the time the account is opened. The term account includes accounts, relationships, and other transactions. This requirement is considered met if the TIN is requested either orally or in writing. The request can be made by mail, telephone or other electronic means. If after the initial solicitation, the filer did not receive the TIN: A first annual solicitation must be made by December 31 of the year the account was opened (or the year the transaction occurred), if before December, or By January 31st of the following year (for accounts opened or transaction which occurred in the preceding December).   If after the first annual solicitation, a TIN was not received: A second annual solicitation must be made by December 31 of the first year following the calendar year in which the account was opened or transaction occurred. The initial and the first annual solicitations relate to the year the account was opened or the transaction occurred. The second annual solicitation relates to the year following the year the account was opened or transaction occurred.   Forms 1098 require an annual solicitation to the payee until a TIN is obtained. Once the payee's TIN is received, the filer must include the TIN on all information returns filed in the future. 20.1.7.9.2.3  (09-30-2002) Incorrect TINs In general, if the filer has been notified by the Service or a broker of an incorrect TIN, they will have acted in a responsible manner only by making the required annual solicitations. The TIN will be treated as incorrect if the name/TIN combination does not match or cannot be found on the Service or SSA records. Not currently issued TINs and Name/TIN mismatch accounts are considered to be incorrect for purposes of solicitations and penalty assessments under IRC section 6724. 20.1.7.9.2.4  (09-30-2002) Solicitations – Incorrect TINs In general, the filer is required to make an initial solicitation and no more than two annual solicitations for incorrect TINs. An initial solicitation must be made at the time the account is opened or transaction occurs. This requirement is considered met if the TIN is requested either orally or in writing. The request can be made by mail, telephone or other electronic means. If the filer is notified by the Service or broker that the TIN is incorrect: A first annual solicitation must be made by December 31 of the calendar year in which the filer has been notified, or January 31 of the following year if notified in December. The mailing of the "B" Notice under IRC section 3406(a)(1)(B) satisfies this requirement. See IRM 20.1.7.9.2.2.   If the filer is notified by the Service or broker in any calendar year, following the first notification that the TIN is incorrect: A second annual solicitation must be made by December 31 of the calendar year following the calendar year in which the filer was notified, or January 31 of the following year if notified in December. The mailing of the "B" Notice under IRC section 3406(a)(1)(B) satisfies this requirement. Note: Filers are not required to show that they backup withheld on payee accounts to satisfy the requirement for waiver of the penalty under IRC section 6724.   If a filer has been notified of an incorrect name/TIN combination under IRC section 3406(a)(1)(B), the filer generally must notify the payee that the payee's account contains an incorrect TIN within 15 business days after the date of the notice from the Service or a broker. Forms 1098 require an annual solicitation to the payee until a TIN is obtained. If a corrected TIN (or name) is received, the filer must include it on all information returns filed in the future. 20.1.7.9.2.5  (09-30-2002) Annual Solicitations An annual solicitation by mail must include: A letter stating that the payee must provide its TIN or the payee will be subject to a $50 penalty imposed by the Service, A Form W–9 or acceptable substitute form on which the payee may provide their TIN, and A return envelope.   An annual solicitation made by telephone must: Be made in a manner that will encourage the payee to provide their TIN, Be a completed call to each person with a missing TIN and include a conversation with an adult member of the household or to an officer of the business or the organization, Include a request for the TIN of the payee, and Inform the payee that if the payee fails to furnish their TIN, the payee is subject to a $50 penalty.   The filer must maintain concurrent records showing the solicitations were properly made, and provide concurrent records to the Service upon request. For solicitations required under IRC section 3406(a)(1)(B), see IRM 120.1.7.10.1. 20.1.7.9.2.6  (09-30-2002) Exceptions and Limitations When an information reporting provision specifically provides the time and manner for obtaining a TIN, the solicitation requirements in IRM 20.1.7.9.2 will not apply. To act in a responsible manner, the filer should comply with the time and manner requirements for requesting the TIN under the applicable IRC section. For Example: For Forms 1099–S, the filer is only required to make an initial solicitation on or before the related real estate closing date. For Forms 1098, the filer is required to do an annual solicitation until the TIN is received.   The penalty waiver provisions apply when: The solicitation requirements under Treas. Regs. 301.6724–1(e) or (f), or Treas. Regs. 31.3406(d)–5 are met.   Annual solicitation is not required for a year if: Payments were not made, or A return was not required to be filed.   If an account is closed in the same year in which a penalty notice is received for the account, the filer must do the solicitation if a payment is required to made or if the filer is otherwise required to file a return that year. To avoid making more than the required annual solicitations, filers should follow the provisions of Treas. Regs. 3406(a)(1)(B) and Reg. 31.3406(d)-5 for accounts subject to backup withholding mailing, rather than the mailing requirements for Treas. Regs. 301.6724–1(e) and (f). This would apply to Forms 1099–B, INT, DIV, OID, MISC, and PATR. If a filer fails to make one or more of the required solicitations, the filer may satisfy the solicitation requirement by: Making two consecutive annual solicitations in subsequent years, and After receiving the TIN, including it on any information return filed in the future.   The penalty will apply to: The years the solicitation was not made, and Subsequent years until the filer has completed the make-up solicitations.   Financial institutions are not required to make annual solicitation by mail on accounts with: Stop-mail, or Hold-mail instructions, As long as they deliver the solicitation in the same manner as they deliver the mail. In cases of window transactions, (one time transactions) as in the issuance of savings bonds.   A filer is not required to make annual solicitations by mail on accounts where: Previous solicitations have been returned as undeliverable, Other mailings have been returned as undeliverable, and No new address has been provided to the filer.   In general, no more than two annual solicitations are required to establish that the filer acted in a responsible manner. 20.1.7.9.2.7  (08-20-1998) Due Diligence Safe Harbor For information returns, filers may establish reasonable cause by satisfying the requirements for due diligence 6676(b) under the Interest and Dividend Tax Compliance Act of 1983. 20.1.7.9.2.8  (08-20-1998) TINs Special Rules For information returns which contained a missing or incorrect TIN consider reasonable cause criteria satisfied if at the time the account was opened the filer: Exercised due diligence, or fulfilled the requirements of Treas. Q/A-56 of section 35a.9999–1 (which describes the solicitation requirements under IRC section 6676(d) prior to its repeal by OBRA 89), and The TIN was requested as follows (1) according to the time and manner of the information provision under which the information return is filed, or if none then, (2) under IRC section 6109, Identifying Numbers, or (3) in a manner that would otherwise have satisfied reasonable cause criteria under IRC section 6676(a).   20.1.7.9.2.9  (08-20-1998) Special Abatement Conditions Bankruptcy. An unreversed TC 520 and a Freeze code — V are used to identify a payer/filer that is in bankruptcy status. These codes will be present on the MFTRA transcripts. If the unreversed TC 520 has a transaction date of October 22, 1994 or earlier, the assessment is generally prohibited by the Bankruptcy Reform Act of 1994 (The bankruptcy law supersedes the Internal Revenue Code). If there is a TC 520 and a — V freeze on the account: (1) Check directly with the Insolvency Supporting the Area. Insolvency Support will advise how to proceed. (2) The TC 520 and — V freeze must be present before a penalty abatement can be considered. However, the penalty should not be abated solely because the response states there is a bankruptcy. If there is no TC 520 and — V freeze on the account, but the payer can provide the necessary information, notify the Area Insolvency Support function. A bankrupt payer will know the bankruptcy petition date, the court where the petition was filed, and the docket number If a —Z freeze is on the account, refer the module to the Criminal Investigation Division. Do not assess the penalty.   Banks, Trusts Companies, Savings and Loans. Penalties and collection of penalties assessed against insolvent or bankrupt banks, trust companies, or savings and loan associations may be prohibited under IRC section 7507(a). Insolvency includes: The respondent is a bank, trust company or savings and loan association, and Tthe organization is bankrupt and/or protected under IRC section 7507(a).   If the reply to the penalty proposal or penalty notice indicates that: A failed savings and loan is under the receivership of the Resolution Trust Corporation (RTC), or A failed bank is under the receivership of the Federal Deposit Insurance Corporation (FDIC), refer the case to the Examination Classification Specialist for your service. The reply from RTC/FDIC may be received in response to either the penalty proposal notice or after the assessment is made. (Also see (5) below.) If Exam decides that the penalty should be waived, they will refer the case back to the penalty unit to close out the case (or proposal) or to abate the penalty. If the penalty will be sustained, Exam will return the case to the penalty unit to input the adjustment (or proposals) and/or correspond with RTC/FDIC. Exam will provide language to explain to RTC/FDIC why the penalty is not being abated. Exam will notify the penalty unit of their decision to abate or not abate within 10 working days. If not, the penalty unit will follow-up with the designated classification specialist. If a penalty proposal notice with RTC/FDIC shown is the entity was referred to Exam before being mailed, the response from Exam will indicate whether or not the campus should mail the proposal notice or close the case with no further action.   For imputed interest, see LEM 20.1.7.9.5. For state agencies, see LEM 20.1.7.9.5. If the taxpayer's response indicates that the information returns reported liquidation dividends (Form 1099–DIV), abate or do not assess the penalty or the applicable portion that applies to the liquidation distribution. IRC section 404(k) dividend distributions, reported on Form 1099–DIV, are not subject to penalties under IRC section 6721, 6722, or 6723. These dividends are not true dividend distributions reportable under IRC section 6042, but are Employee Stock Ownership Plan distributions reportable under IRC section 6047, and therefore are subject to penalties under IRC section 6652(e). The Service has allowed the filing community to report ESOP distributions on Form 1099–DIV. For multiple payee documents to an individual payee, see LEM 20.1.7.9.2.9. For magnetic media penalties resulting from corporate mergers , see LEM 20.1.79.2.9. If a filer is penalized for returns not required to be filed by law, the penalty must be reduced by the number of returns not required to be filed. The filing requirements for all returns are listed in Exhibit 20.1.7–4. These returns are being dropped systematically for the paper returns processed through OCR and for magnetic media filed returns. However, for DIS input returns, the returns must be counted manually to determine how many meet the penalty criteria, therefore, it is possible for some errors to occur by counting returns that should be deleted from the count based on the dollar amount. DIS returns can be identified by the presence of a campus code in the first two positions of the DLN. If the filer states that the returns were not required to be filed by law (based on the dollar amount), examine the PMF transcript for evidence of the DIS input returns before making a determination. If DIS input is verified, abate the applicable portion of the penalty. For example, if the filer submits 100 Forms 1099–INT late and indicates in the reply that 10 were not required to be filed, reduce the penalty by 10 times applicable penalty amount.   If all returns on the PMF transcript were filed on magnetic or electronic media or OCR processed (first two positions of the DLN are other than the campus code), send letter 1948C and advise the filer that returns not required to be filed were deducted before we calculated the penalty. If the filer claims that returns are not required to be filed by law for other reasons, check Exhibit 20.1.7–4 for exception. Additional exceptions to the filing requirements are shown in the Instructions to filers of Forms 1099, 1098, 5498, and W-2G. The penalty may be waived for a limited number of incorrect TINS if the TIN is incorrect due to a clerical or processing error and the following conditions are met: The filer must show that he acted in a responsible manner by requesting the TIN from the payee, An inadvertent processing or clerical error occurred in preparing the data, which caused the wrong name or TIN to be filed on the information return. Also see LEM 20.1.7.9.2.9 for unprocessable returns.   20.1.7.9.2.10  (08-20-1998) Transitional Rules For returns required to be filed or payee statements required to be furnished after December 31, 1989, and on or before April 22, 1991, (tax year 1989 and 1990) consider reasonable cause criteria satisfied, if the filer would have satisfied reasonable cause under the applicable IRC sections 6721, 6722, or 6723 and related regulations that were required prior to OBRA '89. 20.1.7.9.2.11  (08-20-1998) Civil Penalties Statute of Limitations No statute of Limitations applies to unfiled returns. Penalties may be assessed at any time. See IRC section 6501 (c)(3). For missing or incorrect information on a filed information return, the penalties must be assessed within 3 years after the due date of the return or the date filed, whichever is later. See IRC section 6501 (a). 20.1.7.10  (09-30-2002) Backup Withholding (BUWH) IRC Section (3406(a)(1)(B)) Under IRC section 3406(a)(1)(B), filers who receive a notification from the Service that a TIN is incorrect (or not currently issued) are required to send a backup withholding or "B" notice to payees. Notices CP 2100 or 2100A mailed to filers serve as notification from the Service of the requirement to send a " B" notice. The date of the CP 2100/2100A is considered the date of the official "B" notice. Notices CP 2100 and 2100A also contain payee records filed with missing TINs. Filers are not required to mail a " B" notice for missing TINs. However, they should use the listing to verify that they are already backup withholding on these accounts. The filer should request the TIN from the payee if it has not been requested previously. Backup withholding must continue until the TIN is received. This program applies only to Forms 1099 "B" , INT, DIV, OID, PATR and MISC filed for tax year 1989 or later. See Exhibit 20.1.7–5 for an explanation of the TIN validity process used to determine whether a TIN is incorrect. Notices are usually mailed to filers in October of each year. A "second pass" mailing is made in the subsequent calendar year, after late filed, previously unpostable or unprocessable returns have been processed. The second mailing normally takes place in March. The actions that the filer and payees must take upon notification of an incorrect TIN is determined by whether the notice is the first or second notification of an incorrect TIN for the same payee received within three calendar years. The CP 2100/2100A is generic and any mailing could include payee records for the first or second notification. It is the responsibility of the filer to track the status of accounts. When a filer receives a first notification of an incorrect TIN: The filer must send a copy of the first " B" notice, a Form W–9, Request for Taxpayer Identification Number and Certification, or an acceptable substitute and an optional reply envelope to the payee within 15 business days of the date of the notice or the date the CP 2100/2100A is received (whichever is later). The outer envelope must be clearly marked "Important Tax Information Enclosed" or "Important Tax Return Document Enclosed." Payees are required to respond within 30 calendar days. Filers who do not receive a newly signed Form W–9 from the payee within 30 calendar days of the date of the " B" notice must begin backup withholding.   If a filer receives a second notification of an incorrect TIN for the same payee within three calendar years: The filer must send a copy of the second " B" notice and an optional reply envelope to the payee within 15 business days of the date of the notice or the date the CP 2100/2100A is received (whichever is later). The outer envelope must be clearly marked "Important Tax Information Enclosed" or "Important Tax Return Document Enclosed." The payee must request verification of its TIN from SSA (for SSNs) or the Service (for EINs). Filers who do not receive verification from SSA Form 7028, or Service Letter 147C from the payee within 30 business days after the date of the second notice must begin backup withholding. The filer also has the option of beginning backup withholding on reportable payments immediately upon receipt of the second notification. Backup withholding must continue until the requested verification is received and must be stopped within 30 calendar days after the verification is received..   Filers must compare the listings of incorrect and/or not currently issued TINs received from the Service with their records to determine if the name/TIN combination included on the listings agrees or disagrees with their records. In general, if an account number is provided on the listing, the filer only needs to identify the account(s) with that corresponding number or designation that has the same name/TIN combination. If no account number is provided, the filer must use reasonable care to identify all accounts that relate to the same incorrect name/TIN combination. If the name/TIN combination on the listing agrees with their records, the filer must send the appropriate "B" notice. If the name/TIN combination on the listing disagrees with its records, the filer must determine whether: The mismatch was due to an error in their submission (when filing the information return). If so, the filer must correct its records and include the correct information on any future information returns they file. A "B" notice is not required. The information in their records has changed since filing the information return. If so, the filer must include that information on any future information returns they file. A "B" notice is not required, or The Service changed the information during processing. If so, the filer should notate their records and take no further action. A "B" notice is not required.   When backup withholding is required, filers must withhold 30 percent of the reportable payment. Filers must remit backup withholding using Form 8109, FTD Deposit Coupon, in each appropriate quarter and report those amounts annually on Form 945, Annual Return of Withheld Federal Income Tax. They must have an Employer Identification Number (EIN) to file both forms. An EIN can be obtained by calling the TELETIN number found on the back of Form SS–4, Application for Employer I.D. Number. 20.1.7.10.1  (09-30-2002) Processing CP 2100/2100A Notices Campuses will electronically receive tapes which will create CP 2100/2100A Notices followed by listings of Forms 1099–B, –DIV, –INT, –MISC, –OID, and –PATR filed with missing, incorrect, and/or not currently issued TINs. NOTE—This program is not part of the 972CG process. The CP 2100A Notice will be mailed to payers whose listings total 50 or fewer information returns. The CP 2100 Notice will be mailed to payers whose listings total between 51 and 250 information returns. MCC will mail the CP 2100 Notice with tape listings of missing, incorrect, and/or not currently issued TINs to payers whose listings include 251 or more information returns.   Campuses must retain the tape reels for 90 days after the date of the notice. This will ensure that they are available for recreate requests from filers. A separate tape will create a control listing of the filers, paper and tape, who will receive a notice. This listing will include the filer's TIN (EIN or SSN), name, address, (street, city, state and zip code), account access key, sequential number, and transmittal number, and tape/paper indicator. Mail labels will also be generated. Headquarters will notify each campus of the actual date that the tape files will be transmitted. 20.1.7.10.2  (09-30-2002) Mailing CP2100/CP2100A Notices Produce the CP 2100/2100A's and the accompanying listing and mail them to the filer. Each campus should ensure that they have the capability of providing a duplicate notice and listing. A complete package from the campus should contain: The CP 2100/2100A Notice (2 copies), and The listing of missing, incorrect, or not currently issued TINs.   A complete package from MCC should contain: The CP 2100 Notice (2 copies), and The magnetic tape listing of missing, incorrect or not currently issued TINs, and Publication 1281.   The notice and listing(s) should be mailed in an E–178 envelope as appropriate. Ensure that a garbled data review is performed. Misrouted mail: If a filer contacts the campus indicating that they have erroneously received a CP2100/2100A Notice for another filer, apologize and advise them to immediately return the notice to a designated contact person. Note: The campus should establish a designated contact person to expedite the return of misrouted mail. When received, mail the notice to the correct filer and complete the required local disclosure procedures.   20.1.7.10.3  (09-30-2002) Responses (CP2100/2100A Notices) The campus may receive correspondence and/or documentation concerning CP2100/2100A Notices, even though filers are not required to respond back to the Service. If the filer's response indicates that they do not understand why they received a CP 2100/2100A Notice, provide a brief explanation and refer them to Publication 1281, Publication 1679, or to the Information Reporting Program (IRP) Centralized Customer Service Sitein Martinsburg, WV. (The telephone number is referenced in both publications as well as on the CP 2100/2100A.) If the filer has submitted original Forms W–8, Certificate of Foreign Status, Form W–9, Request for Taxpayer Identification Number and Certification, or Form 4669, Employee Wage Statement, return them to the filer and advise the filer that the forms should be retained for their records. If copies of these forms are received from the filer, they do not have to be returned and, therefore, may be destroyed. If a filer submits examples of garbled data, apologize for the inconvenience and advise that no action is necessary. A " B" notice should not be sent to the payee. Filers are not required to file corrections for missing or incorrect names and TINs. Therefore, filers who contact the Service concerning the need to submit a correction for a missing or incorrect name or TIN in response to a CP2100/2100A notice should be advised that they are not required to submit corrections. Filers should be advised to update their records and reflect the correct information on any returns filed in the future. This also applies if the filer questions whether it's necessary to submit name/TIN corrections for other prior year returns related or unrelated to a CP 2100/2100A notice. However, filers who contact the Service concerning the need to submit corrections for name/TIN errors for returns filed for a current processing year return, may be encouraged to submit a correction if the contact is made on or before August 1 of the filing year. Filing the correction by August 1 would reduce the applicable information return penalty if the filer is not able to establish reasonable cause to have the penalty waived. If the contact is made after August 1, filers may be encouraged to submit the correction since this would allow the Service to update the payee's record during the processing year, but, the filer should be informed that filing the correction will not reduce the applicable $50 penalty. However, the penalty will be waived if filer is able to establish reasonable cause for filing the return with the missing or incorrect TIN. Filers are required to continue to submit corrections for other types of errors (other than names and TINs). If the filer is required to make a correction and there is also a name/TIN error on the same return, the filer should be advised to correct all information when submitting the return. Route corrected returns (current or prior year) to the Receipt and Control function for processing according to the guidelines in IRM 3(10)80. Occasionally, a filer will receive notification of missing, incorrect, and not currently issued TINs with a CP2100/2100A Notice when they have previously filed corrections. Due to processing cut-offs for the BUWH program, some corrections may not be taken into consideration for the first mailing of the CP2100/2100A's. The filer is not required to take any action provided their records have been updated. There is no requirement to backup withhold on exempt recipients. Refer to the Form W–9 instructions for the exceptions to backup withholding. Backup withholding is not required on nonresident aliens provided the filer has on file the proper certified documentation (i.e., Form W–8 series). A partnership may obtain credit for backup withholding shown on Form 1099 by placing that amount on Schedule K, line 13a of the Form 1065, and then carrying the amount through to each partner on Schedule K–1. Line 13a is then claimed as a credit on the individual Form 1040. Filers are not required to wait 30 business days following receipt of the CP 2100/2100A Notice to begin backup withholding; they may elect to impose backup withholding at any time after receipt of the CP 2100/2100A Notice. If a payee requests a copy of Form SSA–7028, inform them that the document is an SSA form and that SSA will mail it directly to the filer after the required research has been completed. If SSA makes a change because of the information submitted to them by the payee on Form SS–5, Application for a Social Security Number Card (Original, Replacement or Correction), a new Social Security Card will be mailed to the payee. If Form 941C, Statement to Correct Information Previously Reported on Employers Tax Return, is received from a filer who has an EIN, Form 941 filing requirements, and a previously filed Form 941 for the quarter specified, the form should be routed to BMF adjustments for resolution.   20.1.7.10.4  (09-30-2002) Undeliverable Notice Research for a different address using IDRS. If one is found, remail the notice. Do not change the original date on the undeliverable notice. Filers will have 15 business days from the date of receipt to complete all "B" notice mailings. If no other address is found, file the undeliverable notice, listing, and original envelope with the printed file copy and destroy 90 days after the notice date. 20.1.7.10.5  (09-30-2002) Recreating Notices Filers may contact either a campus or the IRP Centralized Customer Service Site to request recreates (copies) of CP 2100/2100A Notices. These requests may be received at any time after the initial mailing of each notice. The retention period for CP 2100/2100A Notices is four years from the original notice date. However, the procedures for filing requests for recreated notices differ for paper notices and tape notices, and are based on when a request is received. For paper notices: Campus are required to retain the tapes used to create CP 2100/2100A Notices for at least 90 days from the notice date. If a campus uses the method described in section 2a below, the printed file copy must also be retained for the 90-day period. Note — this program is not part of the 972CG process. Campus will fill all requests received for paper listings of missing and/or incorrect TINs within the 90 day period by: Retaining a printed file copy of the CP 2100/2100A Notice(s) and listing(s) mailed. Photocopying the file copy and mailing it to the filer, or Printing a CP 2100/2100A Notice and the accompanying listing(s) from the tapes using the " Control D" Method (restore or load the file, go into Control D, and use the find command to locate the TIN). Mail the recreate to the filer. NOTE — This program is not part of the 972CG process. After the 90-day period, Headquarters Office, Information Technology (IT) will fill recreate requests. Requests received by campus must be routed through the IRP Centralized Customer Service Siteto Headquarters Office IS. A contact sheet will be used for this purpose.   For tape notices: The IRP Centralized Customer Service Site will fill all requests received for tape listings of missing and/or incorrect TINs within the four-year retention period (i.e., 4 years from the original CP 2100/2100A Notice date). Requests for tape recreates received by campus must be routed, through the Management Support Branch analyst, to the IRP Centralized Customer Service Site.   Exhibit 20.1.7-1  (08-20-1998) 500 Series Reference Numbers           Reference numbers 500 through 514 are used for penalties assessed after December 31, 1989. These reference numbers are also used for penalty proposal notices (beginning with tax year 1992).             (1) Reference numbers 500—514:                 (a) will be used for tax years 1989 and subsequent by the IRP Program and apply to penalties assessed under IRC section 6721.                 (b) an explanation for each reference number is also contained on Notice 925.             (2) Reference numbers 52X—53X are reserved             Reference Description   Number               500 Late Filing Penalty                   A penalty is charged for each Form 1098, 1099, W–2G, or W–2 that was not correctly and timely filed. IRC section 6721             501 Magnetic Media Penalty                   A penalty is charged for each Form 1098, 1099, W–2G, or W–2 (over 250 forms of each type) not filed either electronically or by magnetic media as required by IRC section 6011(e)(2)(A). IRC section 6721             502 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. IRC section 6721             503 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. IRC section 6721             504 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 by magnetic media. (over 250 forms) IRC section 6721             505 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. IRC section 6721             506 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         ♦ submitted in the proper format as provided for in either the IRC, Treas. Regs., or SSA procedures. IRC section 6721             507 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 by magnetic media, (over 250 forms) and         ♦ filed with missing or incorrect TINs. IRC section 6721             508 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 by magnetic media (over 250 forms of each type) and         ♦ submitted in the proper format as provided for in either the IRC, Treas. Regs., or SSA procedures. IRC section 6721             509 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. IRC section 6721             510 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 (over 250 forms of each type) as required by IRC section 6011(e)(2)(A), and         ♦ filed with missing or incorrect TINs. IRC section 6721             511 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. IRC section 6721             512 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. IRC section 6721             513 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 (over 250 forms of each type),         ♦ 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. IRC section 6721             514 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,         ♦ not filed either electronically or using magnetic media (over 250 forms of each type),         ♦ 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. IRC section 6721           CAWR                     549 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.             550 Late Filing Penalty Form W–2                   ♦ A penalty is charged for each Form W–2 that was filed after the due date as required by IRC section 6051. Exhibit 20.1.7-2  (08-20-1998) 600 Series Reference Numbers (1) Three digit reference numbers in the 600 series are assessed/abated on MFT 13 or 55 and are the result of an action taken by a compliance function with access to the taxpayer's records.       (2) Reconsideration criteria should be applied to requests for abatement of a 600 series penalty reference number.       (3) The following 600 series reference codes are used for 1989 and subsequent tax years.       Reference Description Number       IRC section 6721     Failure to File an Information Return       600   A penalty is charged for each information return that was not:     ♦ filed timely,     ♦ filed accurately showing correct and complete information, or     ♦ filed in the correct format (i.e. paper, mag-media or other machine readable form).       651   Failure to file Form 8300 reporting cash transactions greater than $10,000.       652   Intentional Disregard of the requirement to file Form 8300 reporting cash transactions greater than $10,000.           IRC section 6722     Failure to Provide a Payee Statement       612   A penalty is charged for each payee statement that:     ♦ was not furnished on or before the due date to the person to whom the statement is due;     ♦ did not provide all the required information, or,     ♦ did not furnish correct information.       653   Failure to provide a written statement to each person named on the Form 8300.       654   Intentional Disregard of the requirement to provide a written statement to each person named on the Form 8300.           IRC section 6723     Failure to Comply With Other Information Reporting Requirements       621   A penalty is charged for the failure to comply with "Other Information Reporting Requirements" IRC Code Section 6722       674   IRC section 6723           Failure to provide a notice of exchange of partnership interest (6050K(c)(1)). Exhibit 20.1.7-3  (08-20-1998) PMF Civil Penalty Transcript       1. Entity Information.       2. Linked—Indicated a match between the IMF/BMF entities and the PMF entities.       3. Filing History:   a. Indicates if Information Returns were filed in the tax year.   b. Penalty indicator codes       4. Submission Record:   a. Original transmitted—Paper or magnetic media.   b. Amended transmitted—Paper or magnetic media.   c. Replace transmitted magnetic media only.   d. Number of documents subject to a penalty.   e. Received date for late filing.   f. DLN of the Form 1096, MSN of Form W–3.   g. Total money amount and withholding reported on forms filed.       5. Summary:   a. Total original, amended, replace documents submitted.   b. Number of documents subject to penalty.   c. Total amount reported.   d. Backup withholding.   e. Waiver and extensions granted.   f. Summary of penalties by return type.   g. Dollar amount of penalty assessed. Exhibit 20.1.7-4  (08-20-1998) Information Return Filing Requirements This image is too large to be displayed in the current screen. Please click the link to view the image. This image is too large to be displayed in the current screen. Please click the link to view the image. Exhibit 20.1.7-5  (08-20-1998) TIN Validation        The TIN Validation process compares the taxpayer identification number (TIN) and name control (the first four characters of a surname or first four characters of the first significant word in a non-individual's title) against certain IRS or Social Security Administration (SSA) files.       • The NAP–1 file, a number bank which contains all social security numbers (SSNs) ever issued and all of the name controls ever associated with those SSNs.       • The weekly accretion file, a weekly update to the NAP–1 received by SSA.       • The EIN/Name Control file, a file created and maintained by the Service which contains all employer identification numbers (EINs) and the name controls associated with them.       The matching process:       • The Service attempts to match each name and TIN combination provided on all information returns against the three files listed above.       • The first attempt is made against the NAP–1 file. If no match is found, an attempt is made against the EIN/Name Control file.       • If the TIN matches, an attempt to match the name control provided is made.       • If the name control is not provided, an attempt to develop name controls is made by creating name controls from each word separated by space on each name line. Both name lines 1 and 2 are read, totaling 80 characters, 40 characters for each name line.       • Extract matches are attempted first, followed by proximal matches.        Extract matches occur when the name/TIN combination provided on the information return exactly matches the name/TIN combination on either file. This applies to both SSNs and EINs.        Proximal matches allow for transposition of the second and third characters of the name control provided. NOTE: THIS APPLIES TO SSNs ONLY. 20.1.8.1  (07-05-2000) Introduction This Section covers the penalty provisions of the Internal Revenue Code (IRC) that apply to Employee Plans (EP) and Exempt Organizations (EO). Decisions on penalty issues are to be guided by the applicable statutes, regulations, and procedural instructions issued by the Service. All employees should keep in mind the objectives in this handbook and the Penalty Policy Statement P–1–18 when handling each penalty case. Other civil penalties that are common to EP/EO returns are discussed in the following Sections of IRM 20.1: Failure to File and Failure to Pay, IRM 20.1.2 Estimated Tax Penalty, IRM 20.1.3 Failure to Deposit, IRM 20.1.4 Return Related Penalties, IRM 20.1.5 Return Preparer Penalties, IRM 20.1.6 Information Return Penalties, IRM 20.1.7.   20.1.8.1.1  (07-05-2000) Failure to File and Failure to Pay When a delinquent income or excise tax return is received from an entity during an examination, the EP/EO employee will determine whether the failure to file and/or failure to pay penalties under IRC section 6651(a)(1) and (2) should be asserted. See IRM 20.1.2, Failure to File/Failure to Pay. The excise tax returns required to be filed in connection with employee plans and exempt organizations are: Form 5330, Return of Initial Excise Taxes Related to Employee Benefit Plans Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapter 41 and 42 of the IRC.   The income tax returns required of certain exempt organizations and trusts are: Form 990C, Farmer's Cooperative Association Income Tax Return Form 990PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation Form 990T, Exempt Organization Business Income Tax Return Form 1041, U.S. Income Tax Return for Estates and Trusts Form 1120POL, U.S. Income Tax Return for Certain Political Organizations.   If any portion of the tax is subject to a penalty under IRC section 6663, Fraud, that same portion of tax cannot be subject to a penalty under IRC section 6651, Failure to File Tax Return or Pay Tax. See IRM 20.1 5. 20.1.8.1.2  (07-05-2000) IRC section 6662(f)—Accuracy-Related Penalty—Substantial Understatement of Pension Liabilities IRC section 6662(a) imposes a penalty on a taxpayer equal to 20 percent of any income tax underpayment attributable to deductions for employer contributions to a defined benefit plan or retirement annuity plan where such deductions are based on a substantial overstatement of liabilities under the plan. 20.1.8.1.2.1  (07-05-2000) Penalty Assertion In general, there is an overstatement of pension liabilities if the actuarial determination of pension liabilities taken into account for deduction purposes, under IRC section 404(a)(1) or (2), exceeds the amount determined to be the correct amount of such liability. Examples of when an overstatement of pension liabilities may occur: When the valuation of such liabilities is based on unreasonable actuarial assumptions or methods that accelerate deductions either in a manner that is inconsistent with the regulations under IRC section 412, relating to acceptable funding methods, or by taking into account benefits in excess of those permitted under IRC section 415. When the Service has determined that deductions are to be disallowed because liabilities are overstated for other reasons based on the facts and circumstances.   A substantial overstatement occurs when the actuarial determination of the liabilities taken into account for purposes of computing the deduction under IRC section 404(a)(1) or (2) is 200 percent or more of the amount determined to be the correct amount. Due Date. This is an accuracy related penalty, and as such there is no due date. Penalty Computation. The penalty under IRC section 6662(a) is computed by multiplying the underpayment of tax attributable to the substantial overstatement of pension liabilities by 200 percent. No penalty is imposed unless the portion of the underpayment for the taxable year attributable to the substantial overstatement of pension liabilities exceeds $1,000. The penalty under IRC section 6662(a) by reason of any substantial overstatement of pension liabilities is identified by the EP specialist. 20.1.8.1.2.2  (07-05-2000) Penalty Relief IRC section 6664(c) provides for non-assertion of the penalty with respect to any portion of the underpayment if it is shown that there was a reasonable cause for such portion and the taxpayer acted in good faith with respect to such portion. See IRM 20.1.1.3 for a discussion of penalty relief. 20.1.8.1.3  (07-05-2000) How to Assess and Abate—EP Procedures Penalties on Employee Benefit Plan forms are assessed on Non-Master File. To assess penalties... The EP specialist must complete...     associated with income tax forms Form 5734, Non-Master File Assessment Voucher. Form 5734 and the case file (source documents) will be sorted by MFT code and forwarded to the service center Receipt and Control function on Form 3210, Document Transmittal.     NOT associated with an income tax return Form 8278, Computation and Assessment of Miscellaneous Penalties.   20.1.8.1.3.1  (07-05-2000) TE/GE Processing Procedures Penalties under this Chapter (except for the IRC section 6684 penalty) may be assessed without issuing a statutory notice of deficiency that is required for Chapter 41, 42 or 43 tax. Generally, the statute of limitations for assessment of these penalties will be the same as the statute for the return or statement to which the penalties relate. Some penalties such as the IRC section 6710 penalty do not relate to a return. These penalties should be assessed as soon as possible even though it appears they do not have a statute of limitations. Taxpayers who disagree with the assertion of a penalty are entitled to a post-assessment appeal under the provisions of Regs. 601.106(a)(1)(iv). The EP/EO specialist should advise the taxpayer of this right and explain the appeal may be filed prior to payment. For additional information on appealing penalties, see IRM 20.1.4. Penalties should not be assessed if the total amount of tax and penalty is less than the amount specified in Part 4 of the LEM. If a penalty is to be assessed using Non-Master File (NMF) procedures against a person (manager) or an organization (such as in an IRC section 6710 case) the EP/EO specialist will: Complete all blocks (except for the Document Locator Number (DLN) and the computation of interest) on the Form 5734 (Non-Master File Assessment Voucher). The Abstract Number can be found in the ADP and IDRS Information Book (Document 6209). Prepare a penalty case file to transmit Form 5734. Attach Form 3198 (Special Handling Notice) to the outside of the folder and annotate "Civil Penalty Assessment" . Include in the file any source documents providing the basis for the penalty assessment. Then forward the file to TE/GE-Special Procedures function (TE/GE-Special Processing Function) with instructions to assess the penalties immediately. If multiple penalties are being assessed, separate penalty files are required. If the penalty file is related to an unagreed issue and the specialist separates the file, the Form 3198 should state the fact of and reason for the separation.   If the case involves a NMF account (which is possible in an IRC section 6684 case) which is open on AIMS, the EP/EO specialist will provide the penalty information to TE/GE-Special Processing Function for preparation of Form 2859 (Request for Quick Assessment). Enter the penalty amount in Item 35 of Form 5599, EO Examined Closing Record. If the penalty is to be assessed through the Business-Master File (BMF), the EP/EO specialist will process the case as follows: Complete Form 5599. If a subsequent year delinquent return is secured and a failure to file penalty applies, prepare Form 3198 (Special Handling Notice) to request the assessment. Forward Form 3198 along with the delinquency return package to the TE/GE-SP. Include in Item 34 of Form 5599 the amount of the penalty.   20.1.8.1.3.2  (07-05-2000) Service Center Procedures (Reserved) This subsection is reserved. 20.1.8.1.4  (07-05-2000) Section Outline The following penalties are discussed in IRM 20.1.8.2, Exempt Organizations and Certain Trusts: IRC section 6652(c) IRC section 6684 IRC section 6685 IRC section 6710 IRC section 6711 IRC section 6714.   The following penalties are discussed in IRM 20.1.8.3, Employee Plans: IRC section 6652(d) IRC section 6652(e) IRC section 6652(h) IRC section 6652(i) IRC section 6690 IRC section 6692 IRC section 6693 IRC section 6704   20.1.8.2  (07-05-2000) Exempt Organizations and Certain Trusts Organizations which are exempt from federal income tax are organized and operated for one or more of the purposes designated in IRC section 501. Examples include the following types of organizations: charitable religious scientific educational political social business   Exempt Organizations under IRC sections 6033 and 6043(b) are required to file: Form 990, Return of Organization Exempt from Income Tax Form 990BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts & Certain Related Person Form 990PF, Return of Private Foundation or IRC section 4947(a)(1) Trust Treated as a Private Foundation.   Certain Trusts under IRC section 6034 are required to file Form 1041A, U.S. Information Return Trust Accumulation of Charitable Amounts. 20.1.8.2.1  (07-05-2000) Failure to File Certain Information Returns—IRC section 6652(c)(2) IRC section 6652(c) was added by Public law 91-172 and became effective for taxable years beginning after December 31, 1969. Public Law 104-168 amended IRC section 6652(c) for tax years ending on or after July 30, 1996. 20.1.8.2.1.1  (07-05-2000) Returns by Exempt Organizations—IRC section 6652(c)(1) IRC section 6652(c)(1)(A) — Penalty Imposed on the Organization. IRC section 6033 and 6043(b) require exempt organizations to file returns, and IRC section 6034 requires certain trusts to file returns on the date and in the manner prescribed. IRC section 6652(c)(1) and (2) impose a penalty on organizations failing to meet the requirements of IRC section 6033, 6034 and 6043(b). IRC section 6652(c)(1)(A) imposes a penalty on exempt organizations required to file returns under IRC section 6033 of $20 for each day, for tax years ending on or after July 30, 1996, during which a failure to file continues (determined with regard to extensions) or for a failure to include any of the information required to be shown on a return filed under IRC section 6033 or to show the correct information. The penalty is not to exceed $10,000 (for tax years ending on or after July 30, 1996) or 5 percent of the gross receipts of the organization for the year, whichever is less. (For tax years ending prior to July 30, 1996, the penalty rate is $10 per day with a maximum of $5,000 or 5 percent of gross receipts.) IRC section 6652(c)(1)(A) imposes a penalty on an organization having gross receipts exceeding $1,000,000 for any year, with respect to the return required under IRC section 6033 for such year, of $100 per day with the maximum penalty of $50,000 per return. This applies to tax years ending on or after July 30, 1996.   IRC section 6652(c)(1)(B) — Penalty Imposed on the Manager or Person Failing to Comply. IRC section 6652(c)(1)(B) requires organization manager(s) to file returns required under IRC section 6033 after the Secretary has made demand for filing under that provision. A penalty of $10 is charged for each day after the expiration of the time specified in the written demand during which such failure continues. The maximum penalty imposed under this section on all persons for failure to file any one return is limited to $5,000.   IRC section 6652(c)(1)(C) & (D) — Public Disclosure Requirements of Tax Exempt Organizations IRC section 6104(d), as amended by Public Law 105-277, provides the public disclosure requirements for tax-exempt organizations described in IRC section 501(c) or (d) and private foundations. On April 9, 1999, the Service issued regulations under IRC section 6104(d) (Regulations 301.6104(d)-3, -4 and -5) applicable to tax-exempt organizations, other than private foundations. On January 13, 2000, the Service amended these regulations to make them applicable to private foundations. IRC section 6104(d), as amended, became effective for tax-exempt organizations, other than private foundations, on June 8, 1999, and for private foundations on March 13, 2000. IRC section 6104(d)(3) describes the types of information not required to be disclosed under IRC section 6104(d). In addition to the requirement that an organization make a copy of the annual return and application for recognition of tax exempt status available for inspection, an organization, except as provided in IRC section 6104(d)(4), must provide a copy of its annual return and application, if requested. IRC section 6104(d)(4) provides that there are limitations on the requirement to provide copies of returns or an application to a requester. An organization is not required to fulfill a request for a copy if: (1) the organization makes its return and application widely available as defined in Regulation 301.6104(d)-4 or, (2) the organization can meet the criteria outlined in Regulation 301.6104(d)-5 and establish that the request for copies is part of a harassment campaign. IRC section 6652(c)(1)(C) imposes a penalty of $20 a day on the person (as defined in IRC section 6652(c)(4)(C)) who fails to either make the return available for inspection or to provide a copy of the annual return. The maximum penalty on all "persons" is $10,000 with respect to one annual return. IRC section 6652(c)(1)(D) imposes a penalty of $20 a day on the person (as defined in IRC section 6652(c)(4)(C)) who fails to either make the application available for inspection or to provide a copy of the application. The Code does not set a maximum limit on the penalty.   IRC section 6652(c)(1)(D) — Public Inspection of Applications. As noted above, Public Law 105-277 made the public disclosure requirements applicable to private foundations consistent with the requirements applicable to other tax exempt organizations. The Service issued regulations under IRC section 6104(d), applicable to private foundations. However, for private foundation returns due before March 13, 2000, taking into consideration any extension for filing, the public inspection requirements of IRC section 6104(d) prior to the amendment apply to those returns. Prior to its amendment, IRC section 6104(d) required that foundation managers make the annual return available for inspection within 180 days after publication of a notice of its availability.   Prior to asserting penalties for failure to allow public inspection of returns and applications required under IRC section 6104, the Service should receive, in writing, the name of the person(s) who is under a duty to provide the return or application as well as the date of the failure and a description of the facts of the failure. 20.1.8.2.1.2  (07-05-2000) Trusts and Exempt Organizations—IRC section 6652(c) IRC section 6652(c)(2)(A) — Penalty on the Organization or Trust. IRC section 6652(c)(2)(A) provides for a daily delinquency penalty to be asserted on the exempt organization or trust that fails to file a return required under IRC section 6034 (trusts) or IRC section 6043(b) (terminations, etc., of exempt organizations) on the date and in the manner prescribed. The daily delinquency penalty for any one return for this section shall not exceed $10 per day for each day the failure continues, with a maximum penalty of $5,000 per return.   IRC section 6652(c)(2)(B) — Penalty on Managers. IRC section 6652(c)(2)(B) provides for a daily delinquency penalty to be asserted on the person that fails to comply with the demand that a return required under IRC section 6034 or 6043(b) be filed or information be furnished by a reasonable future date (90 days after the mailing date of the demand). The daily delinquency penalty for any one return for this section shall not exceed $10 per day for each day the failure continues, with a maximum penalty of $5,000 on all persons for the failure to file any one return.   20.1.8.2.1.3  (07-05-2000) Penalty Assertion Penalties for late filing of required returns are usually asserted at Service Centers when returns are processed. Penalties may be asserted by examining officers for delinquent returns secured by them, or for failures described above. IRC section 6652(c)(1)(A) and (c)(2)(A) penalties should be assessed using Master File procedures. All other IRC section 6652(c) penalties discussed in this Section should be assessed using Non-Master File procedures. See IRM 20.1.8.1.1.   20.1.8.2.1.4  (07-05-2000) Penalty Computation "Person" refers to any officer, director, trustee, employee or other individual under a duty to perform the act which is the cause of the violation. There is joint and several liability for these penalties whenever more than one person is liable. 20.1.8.2.1.5  (07-05-2000) Penalty Relief No penalties should be asserted under IRC section 6652 if any failure is due to reasonable cause. Recent examination of criteria previously identified as reasonable cause was clarified. Penalty relief falls into four separate categories. They are: Reasonable Cause Statutory Exceptions Administrative Waivers, and Correction of Service Error.   See IRM 20.1.8.1.3 and IRM 20.1.4 for post-assessment appeal procedures. See IRM 20.1.8.1.3 and Exhibit 20.1.8–3 for a discussion of penalty relief. 20.1.8.2.2  (07-05-2000) Assessable Penalties with Respect to Liability for Tax Under Chapter 42—IRC section 6684 IRC section 6684 was added to the Code by Public Law 91-172 and affects private foundation managers after December 31, 1968. Public Law 100-203, effective after December 22, 1987, IRC section 6684, makes the provisions also applicable to managers of "other tax-exempt organizations." 20.1.8.2.2.1  (07-05-2000) Penalty Assertion IRC section 6684 provides that a penalty may be asserted on any person, as defined by IRC section 7701(a)(1), liable for tax under Chapter 42, Private Foundations and Certain Other Tax Exempt Organizations (except IRC section 4940, Excise Tax Based on Investment Income or IRC section 4948(a), Application of Taxes and Denial of Exemption with Respect to Certain Foreign Organizations) when they acted improperly or failed to act if: that person was previously liable for private foundation tax, or the act or failure to act is both willful and flagrant.   The term "willful and flagrant" is defined in IRC section 507(a)(2)(A) as: Willful repeated acts (or failures to act), or Willful and flagrant acts (or failures to act).   The penalty is assessed using Non-Master File (NMF) procedures. See IRM 20.1.8.1.3 and IRM 20.1 4 for post-assessment appeal procedures. 20.1.8.2.2.2  (07-05-2000) Penalty Computation The penalty is equal to the amount of the excise tax for which it is determined the person is liable. 20.1.8.2.2.3  (07-05-2000) Penalty Relief The penalty does not apply if reasonable cause for the act or failure to act can be affirmatively shown by the person upon whom the penalty is imposed. See IRM 20.1.1.3 and Exhibit 20.1.8–3 for a discussion of penalty relief. 20.1.8.2.3  (07-05-2000) Assessable Penalty Regarding Public Inspection Requirements For Certain Tax Exempt Organizations—IRC section 6685 IRC section 6685 was added to the Code by Public Law 91-172 and became effective for taxable years beginning after December 31, 1969. IRC section 6685 was amended by Public Law 100-203, for years beginning after December 31, 1986. For a tax-exempt organization, other than a private foundation, the increase of the penalty to $5,000 became effective June 8, 1999. For private foundations, the increase in the penalty to $5,000 becomes effective on the 60th day after the Treasury issues final regulations under IRC section 6104(d) that apply to private foundations. This penalty applies to any officer, director, trustee, employee, or other individual who is under a duty to, and willfully fails to, comply with the public disclosure requirement of IRC section 6104(d). This amendment extend the penalty to managers of all tax-exempt organizations and for: Applications for exemption submitted to the Service after July 15, 1987, and Copies of applications for exemption on hand which were submitted prior to July 15, 1987.   This penalty will be assessed using Non-Master File procedures. The EO specialist will prepare a Form 5734 and a Penalty Case File. See IRM 20.1.8.1.3. The penalty in IRC section 6685 is in addition to the penalty imposed by IRC section 7207 (relating to Fraudulent Returns, Statements, or other Documents). 20.1.8.2.3.1  (07-05-2000) Penalty Assertion IRC section 6685 provides that the penalty is asserted for the willful failure to comply with the public disclosure requirements of IRC section 6104(d). Before asserting penalties for failure to comply with the public disclosure requirements of IRC section 6104(d), the Service should obtain a statement from an individual denied inspection, or a copy of an application for recognition of exemption or an annual information return. The statement should describe the request, including the date the request was made and the reason for the individual's belief that the denial was in violation of the legal requirements. The Service should also obtain a response from the person required to disclose its application and annual information returns. For this IRC section, a person is defined as any officer, director, trustee, employee, member, or other individual whose duty it is to perform the act. See IRM 20.1.8.1.3 and IRM 20.1.4 for post-assessment appeal procedures. 20.1.8.2.3.2  (07-05-2000) Penalty Computation Effective June 8, 1999, IRC section 6685 imposes a penalty of $5,000 with respect to each willful failure to disclose an application or return as required by IRC section 6104(d). For a willful failure to comply with the IRC section 6104(d) requirements that occur prior to June 8, 1999, the penalty is $1,000. For a person who is under a duty to comply with the IRC section 6104(d) disclosure requirements applicable to private foundations, IRC section 6685 imposes a penalty of $1,000 with respect to each willful failure to disclose an application or return as required by IRC section 6104(d). The penalty will increase to $5,000 on the 60th day after the Treasury issues final regulations under IRC section 6104(d) that apply to private foundations. 20.1.8.2.3.3  (07-05-2000) Penalty Relief The penalty may not be waived for reasonable cause. 20.1.8.2.4  (07-05-2000) Failure to Disclose that Contributions are Nondeductible—IRC section 6710 IRC section 6710 was added by Public Law 100-203 and is effective for solicitations made after January 31, 1988. IRC section 6710 imposes a penalty on an organization that fails to disclose that contributions or gifts made to this organization (or on behalf of this organization) are not deductible as charitable contributions for federal income tax purposes (IRC section 6113). 20.1.8.2.4.1  (07-05-2000) Penalty Assertion Each solicitation must disclose (in a conspicuous and easily recognized format) that contributions or gifts made to this organization are not deductible as charitable contributions for Federal Income Tax purposes. Generally, the penalty applies to organizations which are not described in IRC section 170(c) but are described in IRC section 501(c) and are tax exempt under IRC section 501(a). The penalty also applies to a political organization (as defined in section 527(e)). When asserting the penalty use NMF procedures in IRM 20.1.8.1.3. See IRM 20.1.8.1.3 and IRM 20.1.4 for post-assessment appeal procedures. 20.1.8.2.4.2  (07-05-2000) Penalty Computation IRC section 6710(a) provides for a penalty of $1,000 per day each day the failure occurred up to a maximum of $10,000 during any calendar year. IRC section 6710(c) provides an exception to the maximum annual penalty of $10,000. When it is shown that the failure was due to intentional disregard, the penalty shall be the greater of: $1,000 per day or 50 percent of the daily combined cost of all the solicitations where a failure to disclose occurred, and the penalty shall not be taken into account in applying such limitations to other penalties under IRC section 6710(a).   Consider the following when determining the day a failure to meet the requirement occurred. If the solicitation was... Then the failure occurs when the solicitation is...       By television or radio televised or broadcast. By mail mailed Not by mail but in written or printed form distributed By telephone made.   20.1.8.2.4.3  (07-05-2000) Penalty Relief IRC section 6710(b) provides that no penalty shall be imposed if the failure under IRC section 6710(a) was due to reasonable cause. IRC section 6710(c) does not provide a reasonable cause exception for the Intentional Disregard penalty. See IRM 20.1.1.3 and Exhibit 20.1.8–3 for a discussion of penalty relief. 20.1.8.2.5  (07-05-2000) Failure to Disclose Availability of Information or Service from Federal Government—IRC section 6711 IRC section 6711 was added by Public Law 100-203 and is effective for offers and solicitations made after January 31, 1988. 20.1.8.2.5.1  (07-05-2000) Penalty Assertion IRC section 6711 provides that when a tax-exempt organization offers to sell (or solicits money for) specific information or offers to provide routine service for any individual that could be readily obtained by such individual free of charge (or for a nominal charge) from an agency of the Federal Government, the tax-exempt organization must, when making such offer or solicitation make "an express statement" that the information can be obtained from the Federal Government. This requirement applies only if the information to be provided involves the specific individual solicited. For example, the requirement applies with respect to obtaining the social security earnings record or the social security identification number of an individual solicited. Material and/or services available from the Federal Government for less than $2.50, including postage and handling costs, meet the nominal charge requirement. The failure to make such express statement is due to the intentional disregard of this requirement. This penalty is assessed using NMF procedures in IRM 20.1.8.1.3. See Section 4 for post-assessment appeal procedures. 20.1.8.2.5.2  (07-05-2000) Penalty Computations For each day a failure occurred, the penalty shall be the greater of: $1,000 per day or 50 percent of the daily combined cost for all the offers and solicitations where a failure to disclose occurred.   Consider the following when determining the day a failure to meet the requirement occurred. If the solicitation was... Then the failure occurs when the solicitation is...       By television or radio televised or broadcast. By mail mailed   Not by mail but in written or printed form distributed   By telephone made.           20.1.8.2.5.3  (07-05-2000) Penalty Relief The penalty may not be waived for reasonable cause. 20.1.8.2.6  (07-05-2000) Failure to Meet Certain Disclosure Requirements—IRC section 6714 IRC section 6714 was added by Public Law 103-66 and is effective for quid pro quo contributions made after December 31, 1993. IRC section 6714 provides for a penalty to be asserted against organizations that did not disclose quid pro quo contributions in excess of $75 as required under IRC section 6115(a). 20.1.8.2.6.1  (07-05-2000) Penalty Assertion IRC section 6115(b) defines "quid pro quo contribution" as a payment: Made partly as a contribution and partly in consideration for goods or services provided to the payor (donor) by the donee organization; and Not made to a religious organization, in return for which the taxpayer received only an intangible religious benefit that generally would not be sold in a commercial transaction.   IRC section 6115 provides that organizations described in IRC section 170(c) (except governmental instrumentalities described in IRC section 170(c)(1)) are required to provide a written statement to each donor in connection with the solicitation or receipt of the contribution. That statement must provide the donor with a good faith estimate of the amount of the contribution that is deductible for Federal income tax purposes. The amount of the deductible contribution is limited to the excess of any money (and the value of any property other than money) contributed by the donor, that exceeds the value of the goods or services received.   The penalty is assessed using NMF procedures in IRM 20.1.8.1.3. See IRM 20.1.4 for post-assessment appeal procedures. 20.1.8.2.6.2  (07-05-2000) Penalty Computation IRC section 6714 provides for a penalty of $10 per failure to provide the required written statement to the payor (donor). The maximum penalty per fund raising event or mailing shall not exceed $5,000. 20.1.8.2.6.3  (07-05-2000) Penalty Relief The penalty does not apply if the organization can establish that the failure to provide the written statement was due to reasonable cause. When asserting the penalty use NMF procedures in IRM 20.1.8.1.3. See IRM 20.1.1.3 and Exhibit 20.1.8–3 for a discussion of penalty relief. 20.1.8.3  (07-05-2000) Employee Plans In general, TE/GE penalties involve plans which are subject to the Employee Retirement Income Security Act of 1974 (ERISA) which defer the receipt of compensation. The TE/GE penalties which are frequently encountered are discussed in this section. In general, TE/GE penalties are subject to deficiency procedures described in IRM 20.1.1.4. Where this is not the case, the exceptions have been noted 20.1.8.3  Employee Plans 20.1.8.3.1  (07-05-2000) Penalty Relief Recent review of criteria previously identified as reasonable cause has been clarified. See IRM 20.1.1.3 for a discussion of all forms of penalty relief. Penalty relief falls into four separate categories. They are: Reasonable Cause Statutory Exceptions Administrative Waivers, and Correction of Service Error.   IRM 20.1.1.3.3 discusses the fact that reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. United States v. Boyle, 469 U.S. 241 (1985), states that the responsibility to file, pay or deposit taxes cannot be excused by reliance on the advice of a tax advisor. It requires no special training or effort on a taxpayer's part to ascertain a deadline and ensure that it is met. 20.1.8.3.2  (07-05-2000) Annual Registration and Other Notification by Pension Plan—IRC section 6652(d)(1) IRC section 6652(d)(1) imposes a penalty on a plan administrator (see IRC section 6057(a)(1)) for the failure to file by the due date, the Schedule SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. In general, plans subject to this requirement are those which result in the deferral of compensation. Plans subject to this requirement include all qualified plans or annuities under IRC section 401(a) or 403(a), and, in general, other deferred compensation plans. Plans not subject to this requirement include: IRC section 414(d), government plans; IRC section 414(e), church plans where no IRC section 410(d) election has been made; Any plan which has not (after September 2, 1974) provided employer contributions; Any plan established and maintained by a society, order, or association described in IRC section 501(c)(8) or (9), if no part of the contributions are made by employers of participants in such plan; and Any plans exempted pursuant to ERISA section 102, such as top hat and excess benefit plans; Plans that cover only owners and their spouses.   20.1.8.3.2.1  (07-05-2000) Penalty Assertion In general, IRC section 6057(a) requires a plan administrator to file a registration statement for each plan year. This registration statement should include: The name of the plan; The name and address of the plan administrator; The name and taxpayer identification number of each participant in the plan, who—is separated from service covered by the plan during the plan year (if not reported in the year of separation, such separated participant must be reported in the following year); is entitled to a deferred vested benefit; and did not receive retirement benefits; The nature, amount and form of deferred vested benefit, and Other information the Service may require.   The Schedule SSA must be filed as an attachment to Form 5500, Annual Return/Report of Employee Benefit Plan. Due Date: See IRM 20.1.8.3.3.2. Extensions of time to file: See IRM 20.1.8.3.4(5). Assess penalties under IRC section 6652(d)(1) on the plan administrator (as defined in IRC section 414(g), Plan Administrator). Penalties under IRC section 6652(d)(1) are assessed on NMF. They are computed after the return is processed at the Master File, or they may be asserted by the EP/EO specialist. 20.1.8.3.2.2  (07-05-2000) Penalty Computation The penalty for failing to file on the due date, is equal to: $1 for each participant (for whom the required information was not filed); Multiplied by the number of days the failure continues. The penalty shall not exceed $5,000 for any plan year. For purpose of the penalty, the failure to report either the participant's name or SSN is considered a failure to report the participant.   Exceptions for (1)(d) above are granted for Foreign Nationals who are not required to have an SSN. For example: Form contains 10 names, but only 8 show an SSN. The penalty would be $2 times (1) (b) above. Form contains 50 names, but it showed 60 SSNs. The penalty would be $10 times (1)(b) above.   20.1.8.3.2.3  (07-05-2000) Penalty Relief IRC section 6652(d)(1) provides for non-assertion of the penalty if the plan administrator can show reasonable cause for the failure to timely file. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury. See IRM 20.1.1.3 for a discussion of penalty relief. 20.1.8.3.3  (07-05-2000) Change of Status Notice—IRC section 6652(d)(2) IRC section 6652(d)(2) imposes a penalty on the plan administrator for the failure to notify the Service, by the due date, of changes in the status of a plan as required in IRC section 6057(b). In general, the plans subject to this requirement are those plans which result in the deferral of compensation. Plans subject to this requirement include: All qualified plans or annuities under IRC section 401(a) or 403(a), and In general, other deferred compensation plans.   Plans not subject to this requirement include: IRC section 414(d), government plan; IRC section 414(e), church plan where no IRC section 410(d) election has been made; A plan which has not (after September 2, 1974) provided employer contributions; and A plan established and maintained by a society, order, or association described in IRC section 501(c)(8) or (9), if no part of the contributions are made by employers of participants in such plan. Any plans exempted pursuant to ERISA section 102 such as top hat or excess benefits plans.   20.1.8.3.3.1  (07-05-2000) Penalty Assertion IRC section 6057(b) requires the plan administrator to notify the Service of: Any change in the name of the plan; Any change in the name and address of the plan administrator; Termination of the plan; Merger or consolidation of the plan with any other plan; or Division of the plan into two or more plans.   Due Date: See IRM 20.1.8.3.3.2. Extensions of time to file: See IRM 20.1.8.3.4(5). Assess penalties under IRC section 6652(d)(2) on the plan administrator (as defined in IRC section 414(g), Plan Administrator). Penalties under IRC section 6652(d)(2) are assessed on NMF. They are computed after the return is processed at the Master File, or they may be asserted by the EP/EO specialist. 20.1.8.3.3.2  (07-05-2000) Penalty Computation The penalty for failing to file the form on the due date in the prescribed manner is equal to: $1 for each failure; Multiplied by the number of days the failure continues. The penalty shall not exceed $1,000 for failure to file any notification.   20.1.8.3.3.3  (07-05-2000) Penalty Relief IRC section 6652(d)(2) provides for non-assertion of the penalty if the plan administrator can show reasonable cause for the failure to timely file. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury. See IRM 20.1.1.3 for more information relating to penalty relief. 20.1.8.3.4  (07-05-2000) Information Required in Connection with Certain Plans of Deferred Compensation, Etc.—IRC section 6652(e) Prior to January 1, 1997, IRC section 6652(e) imposes a penalty for failure to file annual returns and statements by the due date and in the prescribed manner required under: IRC section 6058, relating to certain plans of deferred compensation; IRC section 6047, relating to certain trusts, annuity and bond purchase plans; and IRC section 6039D, relating to certain fringe benefit plans.   After December 31, 1996, IRC section 6652(e) continues to impose a penalty for failure to file annual returns and statements by the due date and in the prescribed manner required under: IRC section 6058, relating to certain plans of deferred compensation, and IRC section 6039D, relating to certain fringe benefit plans. However, IRC section 6047(d), relating to certain trusts, and annuity and bond purchase plans, is penalized under IRC section 6721.   In general, IRC section 6058(a), requires the employer, or the plan administrator, of each funded plan of deferred compensation, to file an annual return (Form 5500 (series), Annual Return/Report of Employee Benefit Plan). See Exhibit 20.1.8–1, Plans Filing Requirements, and Exhibit 20.1.8–2, Plans Exempt From Filing. Due Date: In general, the due date for the Form 5500, Annual Return/Report of an Employee Benefit Plan, and appropriate schedules is: Full plan year: The appropriate Form 5500 and its applicable schedules must be filed by the last day of the 7th month after the plan year ends. Short plan year: Form 5500 and its applicable schedules must be filed by the last day of the 7th month after the short plan year ends.   Extension of Time to File: A one time extension of time to file (up to 21/2 months) may be granted for filing the Form 5500 (series) and its required schedules. An extension of up to 6 months may be granted for filing Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans). Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) must be filed before the normal due date of the Form 5500 (series) and Form 5330.   Plans are automatically granted extensions of time to file Form 5500 and its required schedules until the extended due date of the Federal income tax return of the employer and are not required to file Form 5558, if all the following conditions are met: The plan year and the employer's tax year are the same; The employer has been granted an extension of time to file its Federal income tax return to a date later than the normal due date for filing the Form 5500; and A copy of the extension of time to file the Federal income tax return is attached to the Form 5500 filed with the Service.   Plans granted an extension under the conditions in (5) above, cannot further extend the due date by filing a Form 5558. 20.1.8.3.4.1  (07-05-2000) Penalty Assertion The penalty is imposed against the person responsible for failure to file. Failure to file the... The party liable for the penalty is...     Form 5500 series (annual return) The Plan administrator (within the meaning of IRC section 414(g)) or the employer (who may be jointly and severally liable).     Form 5310–A in the case of a merger, consolidation, or transfer of plan assets or liabilities. The Plan administrator Form 1096 or 1099R In the case of a (i) trust, the trustee; (ii) custodial account, the custodian; and (iii) an annuity contract, the issuer.   In general, IRC section 6058(b), requires a plan administrator to file an actuarial statement of valuation evidencing compliance with IRC section 401(a)(12). The Form 5310–A, Notice of Plan Merger, Consolidation, or Transfer of Plan Assets or Liabilities, was designated by the Service as the form to be used for satisfying the requirements. The Form 5310–A should be filed when there is a plan merger, consolidation, spinoff, or when there is a transfer of assets or liabilities to another plan, When meeting this criteria, Form 5310–A should be filed by the plan administrator or plan sponsor for a pension plan, profit-sharing plan, or a deferred compensation plan (except a multi-employer plan covered by PBGC insurance). The Form 5310–A must be filed at least 30 days prior to a plan merger, consolidation, spinoff, or transfer of liabilities to another plan. The form is late if not filed at least 30 days before any of these referenced activities.   The instructions to Form 5310–A provide that a Form 5310–A is not to be filed for: An eligible rollover that is paid directly to an eligible retirement plan in a direct rollover as described in IRC section 401(a)(31), Optional Direct Transfer of Eligible Rollover Distributions; or The plan merger or consolidation, spinoff, or transfer of plan assets or liabilities complies with Regs. 1.414(l)-1(d), Merger of defined contribution plans, Regs. 1.414(l)-1(h), De minimis rule for merger of defined benefit plan, Regs. 1.414(I)-1(m), Spinoff of a defined contribution plan, or Regs. 1.414(I)-1(n)(2), Spinoff of a defined benefit plan, de minimus rule.   In general, IRC section 6047(d) requires Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) and Form 1099–R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA's, Insurance Contracts, etc.) to be filed by the employer maintaining, or the plan administrator of, a plan from which designated distributions may be made, or by the issuer of a contract under which such distributions may be made. Designated distributions are defined in IRC section 3405(e)(1) and include, generally, any includible non-wage distributions from an employer deferred compensation plan, an IRA, or a commercial annuity. A separate Form 1099–R must be made for each payee, but is not required if the aggregate payment to the payee is less than $10. Form 1099–R is required to be furnished to the payee by January 31 following the year of the distribution; Form 1096 with Forms 1099–R is required to be filed with the Service by February 28 following the year of the distribution. The penalty under IRC section 6652(e) does not apply to Forms 1099–R due (determined without extensions) after December 31, 1996. Instead, the penalties under IRC sections 6721 and 6722 apply.   In general, IRC section 6039D requires every employer maintaining a specified fringe benefit plan, to file a Form 5500 and Schedule F, Fringe Benefit Plan Annual Information Return. Schedule F must be attached to page 1 of Form 5500 (series), Return/Report of Employee Benefit Plan. Plans generally required to file are IRC section 125, Cafeteria Plans and IRC section 127, Educational Assistance Programs, and IRC section 137, Adoption Assistance Programs. Plans generally not required to file are IRC section 127, Educational Assistance Programs (when only job-related training that is deductible under IRC section 162, Trade or Business Expenses), IRC section 79, Group Term-Life Insurance Purchased for Employees, IRC section 105, Amounts Received Under Accident and Health Plans, IRC section 106, Contributions By Employer to Accident and Health Plans; IRC section 120, Amounts Received Under Qualified Group Legal Services Plans; and IRC section 129, Dependent Care Assistance Programs.   Rev. Rul. 84-54, 1984-1 C.B. 260, provides that IRC section 6652(e) penalties do not apply to the failure to file the following Form 5500 schedules, but rather the penalties imposed by IRC sections 6692 and 6652(d)(1): Schedule B, Actuarial Information Schedule SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits.   Assess penalties under IRC section 6652(e) on the plan administrator (as defined in IRC SECTION 414(g), Plan Administrator). The penalty under IRC section 6652(e)— is assessed on NMF. is computed after the return is processed at the Master File, or it may be asserted by the EP/EO specialist.   20.1.8.3.4.2  (07-05-2000) Penalty Computation The penalty for failing to file the form on the due date in the prescribed manner is equal to: $25 for each failure; Multiplied by the number of days the failure continues. The penalty shall not exceed $15,000 on any person for the failure to file any return.   20.1.8.3.4.3  (07-05-2000) Penalty Relief IRC section 6652(e) provides for non-assertion of the penalty if reasonable cause can be shown. The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury. In Alton OB-Gyn, Ltd. v. United States, 789 F. 2d 515 (7th Cir. 1986), the taxpayer's reliance on a bank, as plan's trustee, to handle ministerial duties of taxpayer's pension and profit-sharing plans, did not constitute reasonable cause for the failure to timely file the required Form 5500 series return. 20.1.8.3.5  (07-05-2000) Failure to Give Notice to Recipients of Certain Pension Etc. Distributions—IRC section 6652(h) IRC section 6652(h) imposes a penalty for each failure to give notice concerning withholding to recipients of distributions from an employer's deferred compensation plan or an IRA as required by IRC section 3405(e)(10)(B). The penalty is imposed on the payor. 20.1.8.3.5.1  (07-05-2000) Penalty Assertion In general, IRC section 3405(e)(10)(B) requires that the "payor of: Any annuity or similar periodic payment must provide the "Payee" a notice of the right to elect not to have withholding made on such payment; or Any distribution which is not in the form of an annuity or a periodic distribution must provide the "Payee" a notice of the right to elect not to have withholding made on such payment.   In general, these requirements pertain to payments and distributions made from employer deferred compensation plans, individual retirement plans, and commercial annuities. Due Date: The notice of election must be transmitted no earlier than six months before the first payment and no later than when the first payment is made. For periodic payments, notice must also be provided at least once in each calendar year of the right to make and revoke the election. Temporary Regs. 35.3405-1 D-21, D-22, D-25, and D-26 provides examples of notices that can be used to satisfy the notice requirements.   The penalty under IRC section 6652(h) is identified by the TE/GE specialist. The penalty is assessed on NMF. 20.1.8.3.5.2  (07-05-2000) Penalty Computation The penalty under IRC section 6652(h) is $10 for each failure to give notice, up to a maximum penalty of $5,000 for all such failures per calendar year. 20.1.8.3.5.3  (07-05-2000) Penalty Relief IRC section 6652(h) provides for non-assertion of the penalty if the payor can show that the failure was due to reasonable cause and not willful neglect. See IRM 20.1.1.3 for a discussion of penalty relief. 20.1.8.3.6  (07-05-2000) Failure to Give Written Explanations of Qualifying Rollover Distributions—IRC section 6652(i) IRC section 6652(i) imposes a penalty for each failure to timely provide a written explanation of an eligible rollover distribution as required by IRC section 402(f), Written Explanation to Recipients of Distributions Eligible for Rollover Treatment. 20.1.8.3.6.1  (07-05-2000) Penalty Assertion In general, IRC section 402(f) requires plan administrators of qualified plans to provide a written explanation to recipients of eligible rollover distributions that explains: The rules under which a recipient may elect a direct rollover to an eligible retirement plan; Withholding of income tax if there is no direct rollover; The rules which permit tax deferral on the distribution if it is rolled over into an eligible retirement plan within 60 days of distribution; If applicable, the notice must also contain information regarding IRC section 402(d), Tax on Lump Sum Distributions, and Other Rules Applicable to Exempt Trusts.   In general an eligible retirement plan includes the following: IRC section 408(a), individual retirement accounts IRC section 408(b), individual retirement annuity (other than an endowment contract) IRC section 401(a), trusteed plans IRC section 403(a) annuity plans   An eligible rollover distribution means any distribution to an employee of all or part of the balance to the credit of the employee in a qualified trust, other than certain periodic payments, hardship distributions, and distributions required by IRC section 401(a)(9). Due Date: The explanation must be provided no less than 30 days and no more than 90 days before the date of the distribution. The penalty under IRC section 6652(i) is identified by the EP specialist. The penalty is assessed on NMF. 20.1.8.3.6.2  (07-05-2000) Penalty Computation The penalty under IRC section 6652(i) is $10 for each failure to provide a written explanation, up to a maximum penalty of $5,000 for all such failures per calendar year. In addition, effective for returns, reports, and other statements due after December 31, 1996, section 1455 of the Small Business Job Protection Act of 1996 (SBJPA) amends the computation of the IRC section 6652(i) penalty by changing the $10 penalty to $100 and the $5,000 maximum to $50,000. 20.1.8.3.6.3  (07-05-2000) Penalty Relief IRC section 6652(i) provides for non-assertion of the penalty if the payor can show that the failure was due to reasonable cause and not willful neglect. See IRM 20.1.1.3 for a discussion of penalty relief. 20.1.8.3.7  (07-05-2000) Fraudulent Statement or Failure to Furnish Statement to Plan Participant—IRC section 6690 IRC section 6690 imposes a penalty on a plan administrator who: Willfully fails to furnish a statement to a plan participant showing the information at the time and in the manner required by IRC section 6057(e), Individual Statement to Participant, or Willfully furnishes a false or fraudulent statement.   20.1.8.3.7.1  (07-05-2000) Penalty Assertion In general, the individual statement to a participant, required by IRC section 6057(e) and Regs. 301.6057-(1)(e) must include the following: A description of the participant's deferred vested retirement benefit; Information filed with respect to the participant on Schedule SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits; and Advise the participant of any benefits that are forfeitable in the event the participant dies before a certain date. See IRC section 6057(a).   Due Date: The due date for delivering the statement to the individual is no later than the due date (including extensions) for the Schedule SSA that reports information with respect to the individual. The penalty under IRC section 6690 can be identified by the EP specialist. The penalty is assessed on NMF. The penalty under IRC section 6690 is not subject to deficiency procedures described in IRM 20.1.4.3. 20.1.8.3.7.2  (07-05-2000) Penalty Computation The penalty is imposed at $50 for each act or failure with no maximum. 20.1.8.3.7.3  (07-05-2000) Penalty Relief IRC section 6690 provides a penalty for willfully failing to failing to provide the statement, or willfully furnishing a false or fraudulent statement. IMPORTANT NOTE: Therefore, this Code section does not provide for reasonable cause consideration.       20.1.8.3.8  (07-05-2000) Failure to File Acturarial Report—IRC section 6692 IRC section 6692 imposes a penalty on the plan administrator of a defined benefit plan to which IRC section 412 (Minimum Funding Standard) applies, when the plan administrator fails to file an actuarial report (Form 5500, Sch B), in the time and manner as required by IRC section 6059, Periodic Report of Actuary. 20.1.8.3.8.1  (07-05-2000) Penalty Assertion The penalty under IRC section 6692 is imposed if there is a failure to file Schedule B, Actuarial Information, which must be filed as an attachment to the appropriate Form 5500 (series) return. Failure to... Is considered a failure to file...     Provide a material item of information required by Schedule B the actuarial report.     Provide base information required by the actuarial report upon an actuarial valuation made in the time and manner required by IRC section 412(c)(9) the actuarial report.     Sign Schedule B by an enrolled actuary the actuarial report.   The penalty is imposed on the plan administrator. If more than one plan administrator is responsible for the failure, all are jointly and severally liable. Due Date: See IRM 20.1.8.3.3.2. The penalty under IRC section 6692 is assessed on NMF. The penalty may be computed when the return is filed or asserted by the EP specialist. 20.1.8.3.8.2  (07-05-2000) Penalty Computation The penalty is imposed at $1,000 for each failure to file. The penalty is computed after the return is processed at the master file. 20.1.8.3.8.3  (07-05-2000) Penalty Relief IRC section 6692 provides for non-assertion of the penalty if the responsible party can show that the failure was due to reasonable cause. Note: The failure of an actuary to give the plan administrator a complete Schedule B on time is not reasonable cause.   The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration by the appropriate individual that the statement is made under penalties of perjury. See IRM 20.1.1.3 for a discussion of penalty relief. 20.1.8.3.9  (07-05-2000) Failure to Provide Reports on Certain Tax-Favored Accounts or Annuities; Penalties Relating to Designated Nondeductible Contributions—IRC section 6693 Covered under this sub-section are each of the penalties imposed by IRC section 6693: IRC section 6693(a), Person required to report or file a disclosure statement; IRC section 6693(b)(1), Overstatement of Designated Nondeductible Contributions; IRC section 6693(b)(2), Failure to File Form; and IRC section 6693(c), Penalties Relating to Simple Retirement Accounts.   Note: Section 1455 of the SBJPA amends IRC section 6693(a) to provide that the penalty thereunder does not apply to information returns or payee statements regarding payments to other persons required by IRC section 408(i) or 6047(d). The failure to satisfy IRC sections 408(i) and 6047(d) regarding payments to other persons is penalized under IRC sections 6721 and 6722.   20.1.8.3.9.1  (07-05-2000) Penalty Assertion—IRC section 6693(a) IRC section 6693(a) imposes a penalty on the failure to furnish a report required by IRC section 408(i) and (l). IRC section 408(i) requires that: Annual calendar year reports be made on Form 5498, Individual Retirement Arrangement Information, concerning the status of the account or annuity. Each trustee or issuer required to file Form 5498 is also required to furnish the participant a statement containing the information required to be furnished on Form 5498 plus the value of the account or annuity at the end of the calendar year. A copy of the Form 5498 may be used to satisfy this requirement. The disclosure statements and copies of the governing instruments be provided to benefited individuals. A benefited individual is the individual for whom an individual retirement account, individual retirement annuity, or an endowment contract is established. A benefited individual also includes both the working and non-working spouse in the case of spousal individual retirement accounts.   Note: The penalty for failure to satisfy these requirements of IRC section 408(i) is imposed on the trustee of an individual retirement account or, in the case of an individual retirement annuity or endowment contract, the issuer. This includes an account or annuity that is part of a SEP or a SIMPLE IRA plan.   IRC section 408(l) requires that an employer who: Makes contributions to a simplified employee pension (SEP) on behalf of employees make reports to employees upon adoption of the SEP indicating its adoption, contribution requirements, and allocation basis. Adopts a SEP furnish employees a written statement each calendar year indicating the amount of employer contribution to the employee's IRA. This requirement is satisfied if the information is contained on the employee's W–2 for the calendar year in which the contribution is made. Note: The penalty for failure to satisfy these requirements of IRC section 408(I) is imposed on the employer maintaining the SEP.     Due Date: IRC section 6693(a): The annual report is to be filed, accompanied by transmittal Form 1096, on or before May 31 following the calendar year for which the Form 5498 is required. In general, the disclosure statement and a copy of the governing instrument must be received by the benefited individual at least seven days preceding the earlier of the date of establishment or purchase of the account, annuity, or endowment contract. Reports required on the adoption of a SEP are to be furnished to an employee no later than a reasonable time after the later of the time the employee becomes employed or the time of the adoption of the simplified employee pension arrangement. SEP contribution reports made on Form W–2 are required to be furnished to the employee no later than the later of 30 days after the contribution or January 31 the calendar year for which the contribution was made.   IRC section 6693(a) also applies to reports required to be filed under: IRC section 220(h) relating to medical savings accounts ( "MSAs" ); IRC section 529(d) (relating to qualified State tuition programs) (effective after December 31,1997); and IRC section 530(h) (relating to education individual retirement accounts).   20.1.8.3.9.2  (07-05-2000) Penalty Assertion—IRC section 6693(b)(1) and (2) IRC section 6693(b)(2) imposes a penalty on the failure to furnish information under IRC section 408(o)(4). IRC section 408(o)(4) requires that an individual who makes designated nondeductible contributions to an IRA for any taxable year or receives a distribution from an IRA to which nondeductible contributions have been made for any taxable year report such contributions or distribution, as well as other information, on Form 8606, Nondeductible IRAs. IRC section 6693(b)(1) imposes a penalty on the overstatement of designated nondeductible contributions made on Form 8606. The penalty for failure to satisfy the requirements of IRC section 408(o) is imposed on the taxpayer who made the contributions or received the distribution. Due Date. Form 8606 is required to be filed as an attachment to the Form 1040 (series). If no 1040 return is required, the Form 8606 must still be filed by the due date of the Form 1040. The penalty under IRC section 6693(a) and (b): Can be identified by the EP field agent; Is assessed on NMF; and Is not subject to deficiency procedures described in IRM 20.1.1.4.   20.1.8.3.9.3  (07-05-2000) Penalty Assertion—IRC section 6693(c) IRC section 6693(c) imposes a penalty on the failure to furnish certain information required under IRC section 408(i) and 408(l)(2) to participants in SIMPLE IRA plans described in IRC section 408(p). IRC section 408(l)(2) requires that the trustee or issuer of IRA set up to receive contributions under an employer's SIMPLE IRA plan each calendar year furnish the employer a summary description containing information regarding the SIMPLE IRA plan, the employer maintaining the plan, and the trustee or issuer. IRC section 408(l)(2) also requires that an employer maintaining a SIMPLE IRA plan notify eligible employees of their right to participate in the plan. Such notice must include a copy of the applicable summary description. IRC section 408(i) requires that the trustee or issuer of SIMPLE IRAs provide the SIMPLE IRA owners within 31 days after each calendar year a statement showing the account balance at the close of the calendar year and the account activity during that calendar year. A copy of the Form 5498 may be used to satisfy this requirement. Further information on the summary description, the notice, and the statement described above can be found in sections G and H of Notice 98-4, 1998-2 I.R.B. 25.   The penalty for failure to satisfy the requirement of IRC sections 408(i) and 408(l)(2) described above is imposed on: The trustee or issuer of IRAs set up to receive contributions made under a SIMPLE IRA plan, in the case of the summary description and the statement requirement. The employer, in the case of the notice requirement.   Due Date: The employer's notice to employees must be provided immediately before the 60-day election period (during which eligible employees can make or change salary deferral elections) described in IRC section 408(p) and Notice 98-4. The summary description must be provided to the employer by the trustee or issuer in time for the employer to meet its notice requirement, described above. (In most cases the summary description will be due the employer shortly before November 2 of each calendar year). The statement from the trustee or issuer is due the IRA owner no later than 31 days after the end of the calendar year.   20.1.8.3.9.4  (07-05-2000) Penalty Computation The computation for the penalties are as follows: The penalty for... Is...     Failure to file a report, described in IRC section 6693(a) at the time and in the manner required $50 for each failure to file.     Failure to file Form 8606, nondeductible IRAs $50 for each failure to file.     Overstating designated nondeductible Contributions $100 for each overstatement.     Failure to provide one or more notices, statements or summary descriptions described in IRC section 6693(c) $50 for each day such failure continues.       20.1.8.3.9.5  (07-05-2000) Penalty Relief IRC section 6693 provides for non-assertion of the penalty if it is shown that the failure is due to reasonable cause. Q&A H-1(3), Notice 98-4, 1998-2 I.R.B.25, provides that the penalty imposed on a trustee under IRC section 6693(c) does not apply when the trustee timely provides the required information directly to the employee covered by the SIMPLE IRA plan. Q&AG-3 of Notice 98-4 provides that the penalty imposed on an employer under IRC section 6693(c) does not apply when an employee covered by the SIMPLE IRA plan has selected his or her own trustee and the information regarding that trustee is not available at the time the employer is required to provide the notice containing such information to the employee, provided the employer takes steps to ensure the missing information reaches the employee as soon as reasonably possible.   The request for "penalty relief" due to reasonable cause must be made in the form of a written statement providing all the facts alleged as reasonable cause. The statement must contain a declaration, made by the appropriate individual, that the statement is made under penalties of perjury. See IRM 20.1.1.3 for a discussion of penalty relief. Exhibit 20.1.8-1  (07-05-2000) Plans Filing Requirements PLANS FILING REQUIREMENTS UNDER IRC SECTION 6058(A) Pension benefit plans required to file include defined benefits plan and defined contribution plans. The following are among the pension benefit plans for which a return/report must be filed: 1. Annuity arrangements under IRC section 403(b)(1). 2. Custodial accounts established under IRC section 403(b)(7) for regulated investment company stock. 3. Individual retirement accounts (IRAs) established by an employer under IRC section 408(c). 4. Pension benefit plans maintained outside the United States primarily for nonresident aliens if the employer who maintains the plan is: (a) A domestic employer, or (b) A Foreign employer with income derived from sources within the United States (including foreign subsidiaries of domestic employers) if contributions to the plan are deducted on its U.S. income tax return. For this type of plan, see Code D on line 6c.     5. Church plans electing coverage under IRC section 410(d). 6. A plan that covers residents of Puerto Rico, the Virgin Islands, Guam, Wake Island, or American Samoa. This includes a plan that elects to have the provisions of section 1022(1)(2) of ERISA apply. Exhibit 20.1.8-2  (07-05-2000) Plans Exempt from Filing PLANS EXEMPT FROM FILING UNDER IRC SECTION 6058(A) Do not file a return/report for an employee benefit plan that is any of the following: 1. A pension benefit plan maintained outside the United States if it is a qualified foreign plan within the meaning of IRC section 404A(e) that does not qualify for the treatment provided in IRC section 404(e)(5). 2. An annuity arrangement described in 29 CFR 2510.3-2(f). 3. A simplified employer pension (SEP) described in IRC section 408(k) that conforms to the alternative method of compliance described in 29 CFR 2520.104-48 or 29 CFR 2520.104-49. A SEP is a pension plan that meets certain minimum qualifications regarding eligibility and employer contributions. 4. A church plan not electing coverage under IRC section 410(d). 5. A governmental plan. Exhibit 20.1.8-3  (07-05-2000) EO REASONABLE CAUSE GUIDELINES TAX EXEMPT REASONABLE CAUSE GUIDELINES ( Note:   Penalties under IRC 6685 and IRC 6711 may not be waived for reasonable cause.) • The return was mailed in time but was returned to sender. • The return was filed in time but sent or deposited to the wrong IRS office. • Delay or failure to file was due to erroneous information given the taxpayer by an IRS employee. • Delay was caused by death or serious illness of the taxpayer, or a death or serious illness in his/her immediate family (see Note below). • Delay was cause by unavoidable absence of the taxpayer (see Note below). Note: In the case of a corporation, estate, trust, etc., the death, illness or absence must have been of an individual (or a member of the individual's immediate family) having sole authority to execute the return. • Delinquency was caused by destruction by fire or other casualty of the taxpayer's place of business or business records. • Taxpayer requested the proper forms in a timely fashion but the forms were not furnished in sufficient time to permit the timely filing of the return. • Taxpayer provides proof that he/she personally visited an IRS office on or before the due date of the return for the purpose of securing information or advice, and was unable to meet with an IRS representative. If the organization is a PRIVATE FOUNDATION: The organization has ninety days to file and pay after it receives a determination letter from the Service. If the organization is NOT A TAX-EXEMPT ORGANIZATION WITH UBIT or NOT A PRIVATE FOUNDATION (Not a Form–990–T or Form 990PF filer), is a membership organization (PTA, Boy Scout Troop, Garden Club, Homeowners Assn, etc.), and has no full-time employee responsible for administering the organization's finances, reasonable cause may be granted if the organization: a. Clearly shows it exercised normal care and prudence, but was unable to file the return timely due to little continuity or understanding of duties due to frequent officer changes, or b. Has no prior history of late filing and claims ignorance of the law (new organizations or those not previously required to file).

20.1.9.1  (08-07-1998) Overview This section of the consolidated penalty IRM discusses penalties assessed against taxpayers that are U.S. persons doing business outside the United States, and foreign entities doing business in the United States. Unless otherwise indicated, the term "U.S. person" includes individuals, corporations, partnerships, estates or trusts. Refer to IRC section 7701(a). 20.1.9.1.1  (08-07-1998) Chapter Outline The penalties listed below are discussed in detail in this section. As of the date of publication of this IRM, regulations have not been issued regarding the penalty or the application of the penalty so noted [*]. Therefore, the penalty should not be imposed until regulations are published. CAUTION: It is important that, before assertion of any penalty, the examiner be aware of the statute, regulations, any exceptions or limitations, etc. that may apply to the case at hand. This chapter only provides a brief description of each penalty and is not meant to be a substitute for research. IRC Section Description 6038(b) Failure to furnish information with respect to controlled foreign corporation. IRC section 6038(a). 6038(c) Failure to furnish information with respect to controlled foreign corporation. IRC section 6038(a). 6038A(d) Failure to furnish information or to maintain records by certain 25 percent foreign owned corporations. IRC section 6038A(a). 6038A(e) Failure to authorize an agent or failure of a reporting corporation to substantially and timely comply with a summons for records. IRC section 6038A(e). 6038B(b) Failure to furnish information on transfers of property to foreign persons. IRC section 6038B(a). 6038C(c)* Failure to furnish information or maintain records by a foreign corporation engaged in U.S. trade or business. IRC section 6038C(a). Regulations have not been issued. 6038C(d)* Failure to authorize an agent or failure of a reporting corporation to substantially and timely comply with a summons for records. IRC section 6038A(e). Regulations have not been issued. 6652(f)* Failure to provide information on foreign persons holding direct investment in U.S. real property. IRC section 6039C. Regulations have not been issued. 6677 Failure to file information returns with respect to certain foreign trusts. IRC section 6048. 6679* Failure to file required information with respect to certain foreign corporations or foreign partnerships. IRC sections 6035, 6046 and 6046A. Regulations have not been issued under IRC section 6046A. 6683 Failure of a foreign corporation to file return of personal holding company tax. IRC section 541. 6686 Failure by DISC or FSC to file return or supply information. IRC section 6011(c). 6688 Failure to meet requirements of coordination of U.S. and possession individual income tax as specified. IRC section 7654. 6689 Failure to file notice of redetermination of foreign tax. IRC sections 905(c) and 404A(g). 6712 Failure to disclose treaty-based return positions. IRC section 6114.   A quick reference chart of reporting/filing responsibilities of taxpayers, and applicable penalties is in Exhibit 20.1.9–1 of this section. The guidelines and administrative procedures for the penalties are discussed in IRM 20.9.2, Penalty Guidelines and Procedures. Exhibit 20.1.9–2 provides a list and description of the forms mentioned in this section. 20.1.9.1.2  (08-07-1998) Other Applicable Penalties U.S. and foreign taxpayers are subject to criminal penalties such as willful failure to file a return (IRC section 7203) and filing a false or fraudulent return (IRC section 7206). IRC sections 6662(e) (Substantial Valuation Misstatement under Chapter 1) and 6662(h) (Increase in Penalty in case of Gross Valuation Misstatements) address the coordination of IRC section 482 and the accuracy-related penalty. Specifically, these penalties apply to substantial and gross valuation misstatements attributable to IRC section 482 transfer price adjustments on returns with years ending after November 5, 1990. Return Related Penalties are discussed in another section of this IRM. Also refer to Rev. Proc. 94–33.   The following reporting/filing requirements are subject to penalties discussed in other IRM 20.1 sections. For example: Failure to File, Failure to Pay, Failure to Deposit and the Miscellaneous Penalty chapters. IRC sections 1441 and 1442—Withholding of Tax on Nonresident Aliens and Foreign Corporations. Forms 1042 and 1042S. IRC section 1445—Withholding of Tax on Dispositions of U.S. Real Property Interests. Forms 8288 and 8288A. IRC section 1446—Withholding Tax on Foreign Partner’s Share of Effectively Connected Income. Forms 8804, 8805, and 8813. IRC section 6039E—Information Concerning Resident Status. Statement required.   See Exhibit 20.1.9–2 for a list of forms mentioned in this section. 20.1.9.2  (08-07-1998) Penalty Guidelines and Procedures In General. Contained in this section are some items common to all the penalties discussed in this section. Exceptions are noted in the discussions of the specific penalties. Statute of Limitations. Penalties that are not considered taxes generally have no statute of limitation for assessment. For penalties subject to deficiency procedures, the limitation for assessment is three years after the return is due or filed, whichever is later. Refer to IRC 6501(c) for some exceptions. Reasonable Cause. Determinations as to whether or not reasonable cause exists must be based on a careful consideration of the facts and circumstances of each case prior to the assertion of a penalty. Examiners should consider any reason a taxpayer provides in conjunction with the guidelines, principles and evaluating factors set forth in the Reasonable Cause chapter 20.1.1, as well as the applicable IRC section and Treas. Regs. relating to the specific penalty. 20.1.9.2.1  (08-07-1998) Penalty Assertion The penalties included in this section are asserted by examiners (i.e. international examiners, revenue agents, tax auditors, or service center personnel). The examiner determines whether a taxpayer has failed to comply with the reporting/filing requirements, solicits any facts regarding reasonable cause from the taxpayer, and makes a determination of whether the taxpayer has established reasonable cause. If reasonable cause does not exist, or exists for only a portion of the time, the examiner then computes the amount of the penalty to be asserted. 20.1.9.2.2  (08-07-1998) Administrative Procedures In General. When an examiner secures a delinquent information return and/or statement, the examiner will date stamp and photocopy the document and place it in the Penalty Case File. The original delinquent information return and/or statement will be forwarded to the appropriate service center. Forms 5471 and 5472 Only. The examiner who secures a delinquent Form 5471 or 5472 will write in red "DELINQUENT RETURN—SECURED BY EXAMINATION—PENALTY CONSIDERED" across the top of the Form with the date received. A copy of the delinquent form with the above annotation must be forwarded to the Director, Service Center, 11601 Roosevelt Boulevard, Philadelphia, PA 19155, Attention: Statistics of Income Forms 5471 and 5472 Processing Coordinator, P:DP Unit F, Drop Point DP 335. Area Directors and Service Center Directors are authorized to make determinations that failure to file these information returns was due to reasonable cause.   Foreign information returns not secured by examiners in the International Enforcement Program (IEP). These returns will be routed through the local Case Processing Support to the Area Program Manager-International for evaluation regarding IEP participation. Refer to AIMS Handbook. 20.1.9.2.3  (08-07-1998) Assessment Procedures Certain penalties and additions to tax are treated as taxes and therefore are subject to the notice of deficiency procedures. IRC section 6671 provides that penalties shall be assessed and collected in the same manner as taxes, but its application is limited to the penalties contained in Subtitle F, Chapter 68B (Assessable Penalties). However, some of these penalties are by statute assessable without regard to deficiency procedures. Some of the penalties for failure to file information returns are governed by IRC section 6665(b). This IRC section specifically exempts failure to file under IRC section 6651 from deficiency procedures, except in the case of an addition to tax which is attributable to a deficiency in tax as defined in IRC section 6211. EXHIBIT 20.1.9–3 of this section lists those penalties subject to deficiency or non-deficiency procedures for assessment processing purposes. The penalties are generally assessed by the function’s closing unit in the field or in the service center. 20.1.9.2.3.1  (08-07-1998) Penalties NOT Subject to Deficiency Procedures Penalties not subject to deficiency procedures are usually assessed, collected, and posted to the Master File. Two MFTs (IMF 55, BMF 13) were created to process an assessment (or abatement) of these non-deficiency penalties via the Civil Penalty Module. These miscellaneous penalty cases are not controlled on AIMS. CAUTION: These penalties should not be entered on Forms 870, 4549, 4549A, or any other examination report. For the preparation of the International Examiners report refer to IRM 4.60. The taxpayer’s signature is not required with respect to these penalties. If the taxpayer agrees to the penalty assessment, solicit full payment. Payments will be processed using Form 3244. Transaction Code (TC) 640 should be used to indicate an advance payment and TC 670 should be used for any payments received after assessment.   The examiner will complete the computation of the penalty on Forms 3645 and 8278. Form 3645. A separate Form 3645 must be used for each tax period to be assessed. Under the "Explanation" section, provide a concise explanation of the reason(s) for assertion of the penalty and whether agreed or unagreed. The examiner will consider reasonable cause and record on Form 886–A, if needed, all pertinent information including, facts, law, taxpayer’s position and conclusion. This will be attached to Form 3645 which becomes part of the examination report. Form 8278. This Form is the adjustment document for the Civil Penalty Module. The penalty adjustment is posted to the module using the Reference Codes reflected on the Form 8278. (1) A separate Form 8278 is required for each tax year and code section for which a penalty assessment is made. That is, one Form 8278 cannot be used to assess penalties under different code sections, even if all penalties are to be assessed against the same tax year. Multiple violations of an IRC section are to be shown as a single assessment. (2) When additional penalties are to be assessed for continued failure after notification (e.g., under IRC section 6038A(d)), a Form 8278 must be prepared for each subsequent assessment that is to be made. (3) Refer to the back of the Form 8278 for preparation instructions. Note: For Box 5 of Form 8278, a Fiscal or Calendar Year may be used with Reference Codes 614, 619, 623, and 625. (4) The Reference Codes included in the Penalty Description section of Form 8278 are the Reference Numbers referred to in Exhibit 20.1.9–3 of this section.   Preparation of Penalty Case File. Examiners will establish a separate case file for penalties that contains: The Forms 3645, with 886A if needed, and 8278, A copy of the information return and/or statement, plus a copy of page one of the income tax return, A current transcript, The contact sheet or case history worksheet, Taxpayer’s statement of reasonable cause including a copy of any written advise given to the tax payer, any explanation for denying reasonable cause with a copy of the associated workpapers. Form 3198 should be attached to the outside of the penalty case file and annotated in the "Other" section as follows: "Assess [IRC Section] Civil Penalty as indicated on Form 8278."   NOTE: It is advantageous to maintain a copy of the penalty case file documentation with the tax case file (if one exists). This is done in order to assist in making an abatement determination or for appeal purposes while the penalty case file is still being processed. More than one penalty case file is required when penalties have been proposed under more than one IRC section. 20.1.9.2.3.2  (08-07-1998) Penalties Subject to Deficiency Procedures Penalties within this section that are subject to deficiency procedures are assessed just as any other penalty would be that relates to an examination determined deficiency (see 20.1.9.2.3.1 above). Form 5344 (initiated in examination) is used to assess penalties subject to deficiency procedures. The Case Processing Support area will code and edit the form using established procedures in the AIMS Handbook. Assessment amounts with the appropriate Reference Numbers are entered in the positive field portion of Item 15 of Form 5344. Abatement amounts are entered in the negative portion. 20.1.9.2.4  (08-07-1998) Abatement of Penalties (Unpaid Assessments) In certain instances, taxpayers will ask for reconsideration of a penalty that has been assessed but not paid. The examiner will determine whether all the facts were considered when the penalty was assessed. If the taxpayer shows reasonable cause after the penalty is assessed, abate the portion of the penalty only for the period for which the taxpayer shows reasonable cause. Enter Penalty Reason Code 62 (on Form 3870 or Form 5344, as appropriate) for adjustments involving reasonable cause consideration, whether or not the abatement is allowed. Refer to IRM 20.1.1.7 and Exhibit 20.1.1–3 for additional information on use of penalty reason codes. The procedures for abating the penalty are the same as they are for assessing the penalty.   If the taxpayer disagrees with the examiner’s final determination, an informal conference may be requested with the examiner’s manager. If the taxpayer still disagrees, the examiner will advise the taxpayer in writing (by appropriate pattern letter) that the adjustment has been reviewed. 20.1.9.2.5  (08-07-1998) Penalty Appeals IRM 20.1.4, Method of Appealing Penalties, provides a discussion of the various legislative and administrative remedies for those taxpayers disagreeing with the Service’s determination. The method for appealing penalties is dependent upon whether the penalties are subject to deficiency procedures or to postassessment appeals (see IRM 20.1.1.4.2 and IRM 20.1.1.4.1 respectively). 20.1.9.3  (08-07-1998) IRC Section 6038(b) [Dollar Penalty] Background. P.L. 97–248, (TEFRA), supplemented the existing reduction of the foreign tax credit under IRC section 6038 by adding a fixed dollar penalty of $1,000 up to $25,000 for failure to furnish information with respect to a controlled foreign corporation. This penalty applies to information for annual accounting periods ending after September 3, 1982. Reporting/Filing Requirement. IRC section 6038(a) and Treas. Reg. 1.6038–2(a) require a U.S. person to furnish information with respect to any controlled foreign corporation. The information required includes, among other things, foreign corporation entity data, stock ownership data, financial statements, and intercompany transactions with a related person. A taxpayer meets the requirement by providing the required information on a timely filed Form 5471. A Schedule M attached to Form 5471 is used to report related party transactions. The information is for the annual accounting period of the foreign corporation ending with or within the U.S. person’s taxable year. Form 5471 is filed with the U.S. person’s income tax return on or before the date required by law for the filing of that person’s income tax return. Treas. Reg. 1.6038–2(i).   20.1.9.3.1  (08-07-1998) Penalty Assertion The examiner must establish that the taxpayer: Was a U.S. person, Owned stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or more than 50 percent of the total value of shares of all classes of stock of the foreign corporation, and Failed to timely file the required information on Form 5471.   20.1.9.3.2  (08-07-1998) Penalty Computation In General. The basic penalty is $1,000 per failure to timely file complete information on the Form 5471 and Schedule M. Increase in Penalty for Continued Failure. If failure continues for more than 90 days after notice by the Area Director (or his/her authorized delegate), the penalty shall be increased in the amount of $1,000 for each 30 day period, or fraction thereof, during which such failure continues after the expiration of the 90-day period. Example. Taxpayer files Form 1120 return for the 1990 calendar year on March 15, 1991, but does not file required Form 5471. On February 1, 1992, notice is issued to the taxpayer regarding the penalty assessed. Examiner calculates the penalty from May 1, 1992, the first day after expiration of the 90 day period, to August 1, 1992, when the delinquent return was received. In addition to the $1,000 basic penalty, the taxpayer is assessed $3,000 because the failure to file information continued for three full months after expiration of the 90-day period. NOTE: The total penalties for IRC 6038(b) are limited to $25,000.   Coordination with IRC section 6038(c). The amount of the IRC section 6038(c) penalty is reduced by the amount of the dollar penalty imposed by IRC section 6038(b). 20.1.9.4  (08-07-1998) IRC Section 6038(c) [Reduction of Foreign Tax Credit] Background. P.L. 86–780 added IRC section 6038(c) (formerly (b)) effective for taxable years beginning after December 31, 1960. This section provides for a reduction in foreign tax credit for a failure to furnish information with respect to a controlled foreign corporation that is required to be filed under IRC section 6038. Language was later added limiting the foreign tax credit reduction to the greater of $10,000 or the income of the foreign corporation for the applicable accounting period, effective for annual accounting periods beginning after December 31, 1962. P.L. 97–248, (TEFRA) amended IRC section 6038 by redesignating subsection (b) as subsection (c), and by changing the subsection title to read Penalty of Reducing Foreign Tax Credit. The amendment was effective for annual accounting periods ending after September 3, 1982.   Reporting/Filing Requirement. See IRM 20.1.9.3 above. 20.1.9.4.1  (08-07-1998) Penalty Assertion Refer to IRM 20.1.9.3 above. 20.1.9.4.2  (08-07-1998) Penalty Computation In General. Application of IRC section 901. The amount of taxes paid or deemed paid is reduced by 10 percent. Application of IRC sections 902 and 960. The amount of taxes paid or deemed paid is reduced by 10 percent. The 10 percent reduction is not limited to the taxes paid or deemed paid by the foreign corporation with respect to which there is a failure to file information but may apply to the taxes paid or deemed paid by all foreign corporations controlled by that person. Additional Penalty for Continued Failure. If such failure continues for more than 90 days after notice by the Area Director (or his/her authorized delegate), the amount of the reduction is 10 percent plus an additional 5 percent for each 3-month period, or fraction thereof, during which such failure continues after the expiration of the 90-day period.   Limitation.The amount of the foreign tax reduction for each failure to furnish information with respect to a foreign corporation may not exceed the greater of: $10,000, or The income of the foreign corporation for its annual accounting period with respect to which the failure occurs.   NOTE: No taxes may be reduced more than once for the same failure. Also, the regulations have not been updated; where the IRC currently refers to a foreign corporation’s "post 1986 undistributed income" , the regulations still refer to "accumulated profits" . Coordination with IRC section 6038(b). The amount of the IRC section 6038C penalty is reduced by the amount of the dollar penalty imposed by IRC section 6038(b). 20.1.9.5  (08-07-1998) IRC Section 6038A(d) [Monetary Penalty] Background. IRC section 6038A(d) was added by P.L. 97–248, (TEFRA), for tax years beginning after December 31, 1982. It provides for a monetary penalty for failure to furnish information or to maintain records as required by IRC section 6038A. P.L. 101–239, (OBRA’89), amended IRC section 6038A, to be effective generally for tax years beginning after July 10, 1989, by: Reducing the level of foreign ownership of a U.S. subsidiary from 50 percent to 25 percent; Adding a record maintenance requirement; Adding an authorization of agent requirement; Increasing the monetary penalty from $1,000 to $10,000; Increasing the additional monetary penalty from $1,000 to $10,000 for each 30 day period during which the failure continues after receipt of notice of the failure; and Removing the $24,000 cap on the increase in the monetary penalty for continued failure.   P.L. 101–508, (OBRA’90), amended IRC section 6038A(a), changing the application of the reporting and record maintenance requirements and enacted IRC section 6038C to apply the rules of IRC section 6038A to foreign corporations engaged in U.S. trade or business at any time during the taxable year. Reporting/Filing Requirement. IRC section 6038A(a) and Treas. Reg. 1.6038A–2 require a reporting corporation to furnish the following information: name, business address, nature of business, country in which organized or resident, nature of relationship to reporting corporation, and description and value of transactions between reporting corporation and related party. A taxpayer meets the requirement by timely filing the required information on Form 5472. A separate Form 5472 must be filed with regard to each related party that has reportable transactions with the reporting corporation. Form 5472 is due on the same date, including extensions, as the income tax return that is required to be filed. A taxpayer must file Form 5472 at the appropriate service center, and must also file a copy of Form 5472 with any attachments and schedules at the Philadelphia Service Center (duplicate filing required). Failure to file at both places may result in a penalty assessment. A taxpayer is also specifically required to maintain relevant records sufficient to allow determination of the correct tax treatment of the transactions with a related party (as defined in IRC section 6038A(c)(2)). De minimis rules. A reporting corporation that has less than $10,000,000 in U.S. gross receipts for a taxable year is not subject to the record maintenance requirement or the authorization of agent requirement. If the total value of all gross payments (both made and received) from a foreign related party is not more than $5,000,000 and is less than 10 percent of its U.S. gross income, the reporting corporation is not subject to the record maintenance requirement and the authorization of agent requirement for those transactions.   Applicable Definitions. Reporting Corporation. A reporting corporation is a domestic corporation that is 25 percent foreign-owned. NOTE: Beginning on November 6, 1990, a foreign corporation engaged in a trade or business within the U.S. at any time during the taxable year is a reporting corporation under IRC 6038C. Prior to that time a foreign corporation was subject to the 25 percent foreign-owned requirement. 25 Percent Foreign-Owned. A corporation is 25 percent foreign-owned if it has, at any time during the taxable year, at least one direct or indirect 25 percent foreign shareholder (a person owning at least 25 percent of the total voting power of all classes of stock of such corporation entitled to vote, or the total value of all classes of stock of such corporation). The attribution rules of IRC section 318 apply—see IRC section 6038A(c)(5). Related Party. The term "related party" means any direct or indirect 25 percent foreign shareholder of the reporting corporation; any person who is related (within the meaning of IRC section 267(b) or 707(b)(1)) to the reporting corporation or to a 25 percent foreign shareholder of the reporting corporation; and any other person who is related within the meaning of IRC section 482 to the reporting corporation. Foreign Person. The term "foreign person" means any person who is not a U.S. person as defined in IRC section 7701(a)(30), except that any individual who is a citizen of any possession of the U.S. (but not otherwise a citizen of the U.S.) and who is not a resident of the U.S. shall not be treated as a U.S. person.   20.1.9.5.1  (08-07-1998) Penalty Assertion A penalty is asserted when the examiner determines that: A U.S. corporation is 25 percent foreign-owned during a taxable year, and has had transaction(s) with a related party, Has failed to timely file Form 5472 or Has failed to maintain records of the transaction(s) with the related party.   NOTE: The penalty also applies in the case of records maintained outside of the U.S. See Treas. Regs. 1.6038A–4(c) and 1.6038A–3(f)(2). A 25 percent foreign-owned corporation may be considered to have complied with the requirement to maintain records in the U.S. if it makes the records available to the Service within 60 days of the request to produce them or brings the records to the United States and complies with notice requirements under Treas. Reg 1.6038A–3(f)(2)(ii). If this is not done, however, the penalty would be applicable. 20.1.9.5.2  (08-07-1998) Penalty Computation In General. The basic penalty is $10,000, for each taxable year, for each related party, for which the Form 5472 was not filed, records were not maintained, or records maintained outside the U.S. were not produced. Increase in Penalty for Continued Failure. If any failure described above continues for more than 90 days after the day on which the Area Director (or his/her authorized delegate) mails notice of such failure to the reporting corporation, the penalty shall be increased in the amount of $10,000 for each 30-day period, or fraction thereof, during which failure continues after the expiration of the 90-day period. NOTE: The basic penalty is applied only once to each set of transactions with a related party, even though the taxpayer may be in violation of multiple failures (failure to file, failure to maintain records, and/or failure to comply with the non-U.S. maintenance requirements). After notification, the additional penalty can be assessed for each failure with respect to each related party. See Treas. Reg. 1.6038A–4. 20.1.9.5.3  (08-07-1998) Reasonable Cause The reasonable cause exception shall be applied liberally in the case of a small corporation that: Had no knowledge of the IRC section 6038A requirements, Has limited presence in and contacts with the United States, and Promptly and fully complies with all requests by the Area Director related to the failure.   NOTE: A small corporation can only qualify once under this special rule, because once notified by the IRS of the failure, the corporation will have knowledge of the IRC section 6038A requirements. The reporting corporation must make an affirmative showing of all the facts alleged as reasonable cause in a written statement. See Treas. Reg. 1.6038A–4(b) in its entirety for a discussion of reasonable cause as it relates to the applications of this IRC section. 20.1.9.6  (08-07-1998) IRC Section 6038(e) [Noncompliance Penalty] Background. P.L. 101–239, (OBRA’89], effective for tax years beginning after July 10, 1989, requires that a foreign related party must authorize the reporting corporation to act as its limited agent for the purpose of an IRS summons regarding transaction(s) with the related party. The penalty for failure to authorize an agent or for failure to produce records is described in IRC section 6038A(e)(3). Meeting of Requirement. A taxpayer meets the requirement by providing an executed authorization of agent within 30 days of a request by the Service or, in the case of production of records, by complying with the request for books, records or documents. The penalty is not imposed if a taxpayer quashes a summons other than on grounds that the records were not maintained as required by IRC section 6038A(a). Applicable Definitions. See the definitions discussed in IRM 20.1.9.5 above. 20.1.9.6.1  (08-07-1998) Penalty Assertion A penalty is asserted when the examiner determines that: The reporting corporation has failed to respond substantially and timely to a proper summons for records, or A foreign related party, upon request fails to authorize the reporting corporation as its agent for IRS summons purposes, pursuant to the requirements set forth in Treas. Reg. 1.6038A–5.   NOTE: The Examination Handbook provides specific guidance for implementing IRC section 6038A(e). 20.1.9.6.2  (08-07-1998) Penalty Computation The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information avail- able to the Service. See IRC section 6038A(e)(3). The noncompliance penalty is reflected in the notice of deficiency. 20.1.9.6.3  (08-07-1998) Statute of Limitations The running of any period of limitations under IRC sections 6501 and 6531 may be suspended as provided in IRC section 6038A(e)(4)(D). 20.1.9.6.4  (08-07-1998) Reasonable Cause THERE IS NO REASONABLE CAUSE EXCEPTION TO THIS PENALTY. 20.1.9.7  (08-07-1998) IRC Section 6038B(b) Background. P.L. 98–369, (TRA’84), added IRC section 6038B which requires information to be furnished with respect to certain transfers of property by a U.S. person to a foreign corporation. This section also includes a substantial penalty for failure to furnish the information. Reporting/Filing Requirement. Transfers of Property. IRC section 6038B(a) and the temporary regulations issued thereunder require that any U.S. person that transfers property (including stock or securities) in an exchange described in IRC section 367(a) or (d) to a foreign corporation must report certain information concerning the transfer. See Treas. Reg. 1.6038B–1T(a). These rules are generally effective with respect to transfers occurring after December 31, 1984, in taxable years ending after such date. A taxpayer meets the requirement by filing Form 926 along with the Federal income tax return at the Internal Revenue Service Center where that return is required to be filed. Temporary regulation 1.6038B–1T(b)(1) states that notwithstanding any statement to the contrary on Form 926, the form and attachments must be filed with the transferor’s tax return for the taxable year that includes the date of the transfer.   Description of Transfer. A transfer is described in IRC section 367(a) if a U.S. person transfers property to a foreign person in connection with an exchange described in IRC section 332, 351, 354, 356, or 361, provided an exception in IRC section 367(a) is not applicable. An exchange described in IRC section 332 is subject to IRC section 6038B only in limited instances. See (4)(b) below. A transfer is subject to IRC section 6038B if a person has made an election under IRC section 1492(2)(B) to apply the principles of this section to a transfer described in IRC section 1491. NOTE: A transfer is described in IRC section 367(d) if a U.S. person transfers intangible property to a foreign corporation in an exchange described in IRC section 351 or 361.   Transactions Not Covered. IRC section 336 distributions. Although IRC section 6038B(a)(2) provides that U.S. persons may be required to provide information with respect to IRC section 336 distributions to foreign persons, the temporary regulations limit the application of IRC section 6038B to transfers described in IRC section 367(a) or (d). Thus, IRC section 336 distributions by U.S. persons to foreign persons are not subject to IRC section 6038B. See Treas. Reg. 1.6038B–1T(b)(2). IRC section 367(e) distributions. Although IRC section 6038B(a)(1) provides that U.S. persons may be required to provide information with respect to distributions described in certain IRC sections including 355 and 332, the regulations under IRC section 6038B state that no notice shall be required with respect to a distribution described in IRC section 367(e). See Treas. Reg. 1.6038B–1T(b)(2). Because IRC sections 355 and 332 are both described in IRC section 367(e), no reporting under IRC section 6038B generally is required with respect to such distributions. However, a transfer of intangible property by a U.S. subsidiary to its foreign parent pursuant to an exchange described in IRC section 332 is described under IRC section 637(a) and is thus subject to reporting under IRC section 6038B. See Treas. Reg. 1.367(a)–5T(e).   20.1.9.7.1  (08-07-1998) Penalty Assertion A penalty is asserted when the examiner establishes that the taxpayer: Is a U.S. person and has made a transfer described in IRC section 367(a) or (d) to a foreign corporation, Has failed to file timely Form 926 and attachments as specified in IRC section 6038B, and Has not shown that such failure to comply was due to reasonable cause.   20.1.9.7.2  (08-07-1998) Penalty Computation If a U.S. person fails to furnish information in accordance with IRC section 6038B regarding some or all of the property transferred, then, with respect to such property: It is not considered to have been transferred for use in the active conduct of a trade or business outside the U.S. and does not qualify for any other exception under the regulations of IRC section 367(a), and gain must be recognized with respect to that property to the extent provided in IRC section 367(a); The U.S. person must pay a penalty equal to 25 percent of the amount of gain realized on the transfer of such property (without regard to whether gain is recognized on the transfer); and The period for limitations on assessment of tax on the transfer of such property does not begin to run until the date on which the U.S. person does comply with the reporting requirements.   Example. On January 1, 1989, in an IRC section 351 exchange, domestic corporation ABC transferred to NEWCO, a wholly-owned foreign subsidiary, the following property: machinery to be used in the active conduct of NEWCO’s trade or business outside the U.S., inventory, and all the stock of XYZ, another wholly-owned foreign subsidiary of ABC. ABC did not furnish any information to the IRS with respect to the transfer as required by IRC section 6038B. The adjusted basis, the fair market value, and resulting gain/loss for the property transfer is as follows: As a result of the failure to report: (1) The $50,000 gain on the transfer of the machinery must be recognized regardless of the fact that under IRC section 367(a)(3), and Treas. Reg. 1.367(a)–2T, no gain (other than any depreciation recapture required under Treas. Reg. 1.367(a)–4T(b)) would have been required to be recognized if ABC had properly reported the transfer of the machinery. (2) The $40,000 gain on the transfer of the inventory does not qualify for an exception. This gain must be recognized. Treas. Reg. 1.367(a)–5T(b). (3) The $90,000 loss realized on the transfer of the XYZ stock is not recognized under IRC section 367(a) and Treas. Reg. 1.367(a)–1T(b)(3)(ii). In addition to the above, ABC must pay a penalty equal to 25 percent of the $90,000 gain, or $22,500.   ASSET ADJ. BASIS FMV GAIN/(LOSS) Machinery $100,000 $150,000 $50,000 Inventory $ 60,000 $100,000 $40,000 XYZ stock $290,000 $200,000 ($90,000)   20.1.9.7.3  (08-07-1998) Statute of Limitations NOTE: The exception of IRC section 6501(c)(8) only applies to the tax imposed by reason of IRC section 367(a), (d), or (e) and not to the IRC section 6038B(b) penalty. 20.1.9.8  (08-07-1998) IRC Section 6038C(c) [Monetary Penalty] Background. P.L. 101–508, (OBRA’90), added IRC section 6038C. This addition makes foreign corporations engaged in U.S. business subject to the same information reporting and record maintenance requirements that apply under IRC section 6038A to U.S. 25 percent foreign-owned corporations, and penalizes them in the same manner. Refer to IRM 20.1.9.5 above. Reporting/Filing Requirements. Foreign corporations subject to this section must maintain any records that were in existence on or after March 20, 1990. 20.1.9.8.1  (08-07-1998) Penalty Computation NOTE: Regulations under IRC 6038C have not been issued. Therefore, no penalty can be asserted at this time unless the taxpayer has destroyed records in existence on or after March 20, 1990. See Treas. Reg. 1.6038A–3(h).

20.1.9.9  (08-07-1998) IRC Section 6038C(d) [Noncompliance Penalty] Background. P.L. 101–508, (OBRA’90), added IRC section 6038C(d). This section requires that a foreign related party authorize the reporting corporation to act as its limited agent for summons purposes and requires that the reporting corporation maintain and produce records regarding transaction(s) with the foreign related party. This penalty parallels the penalty discussed above in IRM 20.1.9.6. The difference is that the IRC section 6038A(e) penalty applies to 25 percent foreign-owned U.S. corporations, and IRC section 6038C(d) penalty applies to foreign corporations engaged in a trade or business in the U.S. at any time during the taxable year, within the meaning of IRC section 864(b).   Meeting of Requirement. The requirement is the same as that of IRC section 6038A as found in IRM 20.1.9.6. Foreign corporations subject to this section must maintain any records that were in existence on or after March 20, 1990. Definitions. See the definitions discussed in IRM 20.1.9.6 above. 20.1.9.9.1  (08-07-1998) Penalty Computation NOTE: Regulations under IRC 6038C have not been issued. Therefore, no penalty can be asserted at this time unless the taxpayer has destroyed records in existence on or after March 20, 1990. See Treas. Reg. 1.6038A–3(h). 20.1.9.10  (08-07-1998) IRC Section 6652(f) Background. IRC section 6652(f) provides a penalty for failure to meet reporting requirements under IRC section 6039C. Reporting/Filing Requirements. IRC section 6039C requires any foreign person holding a direct investment in U.S. property interests for a calendar year to file a return. The requirement is met by providing information such as name and address, a description of all U.S. real property interests, and other information prescribed by regulation.   20.1.9.10.1  (08-07-1998) Penalty Assertion The penalty is applicable when it has been established that the foreign person has failed to meet the above requirements. 20.1.9.10.2  (08-07-1998) Penalty Computation NOTE: Regulations under IRC 6039C have not been issued. Therefore, the penalty is not to be assessed for failure to file as required by this section. 20.1.9.11  (08-07-1998) IRC Section 6677 Background. P.L. 87–834, The Revenue Act of 1962, added IRC section 6677 effective on October 17, 1962. This section provides a penalty for failure to file an information return with respect to a foreign trust as required under IRC section 6048. Reporting/Filing Requirement. Form 3520 is required to be filed by a U.S. Person who either creates a foreign trust or transfers money or property to a foreign trust. The form is due no later than the 90th day after the creation of the trust or transfer of the money, or property to a trust. Form 3520A is required to be filed by a U.S. person who previously filed a Form 3520, as long as the trust has at least one U.S. beneficiary. The form is due by the 15th day of the fourth month following the end of the taxable period covered by the return.   20.1.9.11.1  (08-07-1998) Penalty Assertion A penalty is asserted when it has been established that the grantor or transferor of a foreign trust has failed to meet filing requirement discussed above. The penalty applies if the Forms 3520 and 3520–A do not contain all of the required information. 20.1.9.11.2  (08-07-1998) Penalty Computation The penalty for failure to file a timely, complete Form 3520 is 5 percent of the amount transferred to a trust. For failure to file a timely, complete Form 3520–A, the penalty is 5 percent of the value of the corpus of the trust at the close of the taxable year. The penalty is limited to $1,000 for failure to file either Form 3520 or Form 3520A. 20.1.9.12  (08-07-1998) IRC Section 6679 Background. P.L. 87–834, the Revenue Act of 1962, added IRC section 6679 effective on October 17, 1962. This section, as amended, provides a penalty for failure to furnish information and timely file a return under IRC section 6035, 6046, or 6046A. IRC section 6035 requires a U.S. citizen or resident who is an officer, director or 10 percent shareholder of a foreign personal holding company to file Form 5471 with Schedule N by the due date of the taxpayer’s income tax return, including extensions. IRC section 6046 requires Form 5471 with Schedule O, to be filed by the due date of the taxpayer’s income tax return, including extensions and must be filed by: A U.S. Citizen or resident who is an officer or director of a foreign corporation, 5 percent or more in value of the stock of which is owned by a U.S. person, A U.S. person who owns 5 percent or more in value of the stock of a foreign corporation, Each person who is treated as a U.S. shareholder under IRC section 953(c), or Each person who becomes a U.S. person while owning 5 percent or more in value of the stock of a foreign corporation.   IRC section 6046A requires any U.S. person who acquires or disposes of an interest in a foreign partnership, or whose interest in a foreign partnership changes substantially to file such form as Treas. Regs. provide. The return is due on the 90th day after the day on which the U.S. person becomes liable to file (or later date if prescribed by regulations). 20.1.9.12.1  (08-07-1998) Penalty Assertion The examiner must establish that the taxpayer has not provided the required information on a timely filed return. 20.1.9.12.2  (08-07-1998) Penalty Computation The penalty is $1,000 per failure. NOTE: Regulations under IRC sections 6046A have not been issued. Therefore, until issued the penalty under IRC section 6679 should not be assessed for failure to file as required by this IRC section. 20.1.9.13  (08-07-1998) IRC Section 6683 Background. P.L. 89–809 (11–13–66), the Foreign Investors Tax Act of 1966, added IRC section 6683 effective on January 1, 1967. This section provides a penalty for failure to file a true and accurate return of the tax imposed by IRC section 541 (Personal Holding Company Tax). Reporting/Filing Requirement. Any foreign corporation which is a personal holding company (as defined in IRC section 542) is subject to personal holding company tax with respect to its income from sources within the U.S. A Schedule PH must be filed with a Form 1120. The due date is the same as for Form 1120.   20.1.9.13.1  (08-07-1998) Penalty Assertion A penalty is asserted when it has been established that a foreign corporation is a personal holding corporation, and has failed to timely file Schedule PH (Form 1120). 20.1.9.13.2  (08-07-1998) Penalty Computation The penalty is computed by multiplying the personal holding company’s income tax (including personal holding company tax imposed by IRC section 541) by 10 percent. 20.1.9.13.3  (08-07-1998) Statute of Limitations The personal holding company tax may be assessed at any time within 6 years after the Form 1120 for such year was filed. Treas. Reg. 301.6501(f)–1. 20.1.9.14  (08-07-1998) IRC Section 6686 Background. P.L. 92–178, The Revenue Act of 1971, added IRC section 6686 effective for taxable years ending after December 31, 1971. Reporting/Filing Requirement. IRC section 6011(c) requires the following taxpayers to furnish certain information to their shareholders, furnish certain information to the IRS, and keep satisfactory financial books and records: A DISC or IC–DISC is required to supply its shareholders information on Schedule K (Form 1120 DISC or Form 1120 IC–DISC), which is due to the shareholders on or before the last day of the second month following the close of its taxable year; A FSC is required to file Form 1120–FSC by the 15th day of the third month after the end of corporation’s tax year; A corporation that has elected to be an Interest Charge DISC effective for taxable years beginning after December 31, 1984, (or a DISC for prior years) is required to file Form 1120–IC–DISC, (or Form 1120–DISC in the case of taxable years of DISCs beginning prior to January 1, 1985) due on or before the 15th day of the 9th month following the end of its tax year; and A DISC, IC–DISC, or FSC shall keep records supporting its reporting of gross income, deductions, credits and other matters on its income tax forms.   20.1.9.14.1  (08-07-1998) Penalty Assertion A penalty is asserted when the examiner has established that: The entity is a DISC, former DISC, an IC–DISC, FSC, or former FSC as defined in IRC sections 992(a) and 922, and has failed to timely file Form 1120–DISC, Form 1120–IC–DISC, or Form 1120–FSC, as applicable, or The entity is an IC–DISC or DISC and has failed to supply timely information to shareholders on Schedule K.   20.1.9.14.2  (08-07-1998) Penalty Computation The penalty under IRC section 6686 is $100 for each failure to supply information to shareholders on Schedule K. This penalty is limited to a total of $25,000. The taxpayer is assessed a penalty of $1,000 for each failure to file Form 1120–DISC, Form 1120–IC–DISC, or Form 1120–FSC. 20.1.9.14.3  (08-07-1998) Statute of Limitations NOTE: It is the Service’s position that there is no statute of limitations for the DISC or IC–DISC. 20.1.9.15  (08-07-1998) IRC Section 6688 Background. P.L. 93–406 amended IRC section 6667 by renumbering it as IRC section 6688, and making it effective for taxable years beginning after December 31, 1972. This section provides a penalty for failure to provide the IRS with information allowing it to implement the provisions of IRC section 7654 with respect to bonafide residents of Guam, American Samoa, The Northern Mariana Islands and the Virgin Islands. NOTE: TRA ’86 made IRC section 7654(a) applicable to the Virgin Islands and American Samoa although the current regulations under IRC section 7654 are only applicable to Guam and The Northern Mariana Islands. Reporting/Filing Requirement. The implementation of IRC section 7654(a) requires that bona fide residents of the above cited U.S. possessions provide information allowing for the proper allocation of income between the U.S. and such possessions. Pending new regulations under IRC section 7654, bona fide residents of these U.S. possessions must generally maintain records that identify the proper allocation of income between the U.S. and such possessions.   20.1.9.15.1  (08-07-1998) Penalty Assertion The examiner asserts a penalty on establishing that an individual, as described above, has not filed timely information. 20.1.9.15.2  (08-07-1998) Penalty Computation The examiner computes the penalty at $100 per failure to report. 20.1.9.16  (08-07-1998) IRC Section 6689 Background. IRC section 6689 was added by P.L. 96–603 applicable for taxable years beginning after 1979. This section provides a penalty for failure to notify the Service of a foreign tax redetermination with respect to: The amount of foreign taxes paid or accrued pursuant to IRC section 905(c), The amount of the deduction for certain foreign deferred compensation plans under IRC section 404A(g).   Reporting/Filing Requirement. Foreign Tax Redetermination. A taxpayer is required to notify the Service of any foreign tax redetermination that may affect U.S. tax liability. A taxpayer must provide notice by filing Form 1040X or 1120X and Form 1116 or 1118 within 180 days after a foreign tax redetermination. See Treas. Reg. 1.905–4T(b). If a foreign tax redetermination results in an additional assessment of foreign tax, the taxpayer has the 10-year period provided by IRC section 6511(d)(3)(A) to file a claim for additional foreign tax credits. NOTE: When a foreign tax redetermination affects the indirect or deemed paid credit under IRC section 902 for taxable years after 1986, the taxpayer must provide notice by filing Form 1120X and Form 1118 for all tax years affected by the foreign tax credit redetermination. See Treas. Reg. 1.905–3T(d)(2)(iii). Notwithstanding the requirement in 1 above, Treas. Reg. 1.905–4T(d) provides that in no event shall the notice be required prior to the issuance of an announcement or regulations concerning the manner in which the notice must be filed. NOTE: Until guidance has been issued, the timeliness standard is effectively suspended, and the penalty may not be enforced. Redetermination of IRC Section 404A Deduction. A taxpayer is required to notify the Service, in the time and manner specified in regulations, if the foreign tax deduction for deferred compensation expense is adjusted. See IRC Section 404A(g)(2)(B).   Definition. Foreign Tax Redetermination. Treas. Reg. 1.905–3T(c) defines a foreign tax redetermination as a change in the foreign tax liability that may affect a U.S. taxpayer’s foreign tax credit and includes: A refund of foreign taxes, A difference between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to differences in the units of foreign currency paid and the units of foreign currency accrued, or A difference between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to fluctuations in the value of the foreign currency relative to the dollar between the date of accrual and the date of payment.   20.1.9.16.1  (08-07-1998) Penalty Assertion A penalty is asserted when the taxpayer has failed to notify the Service of a foreign tax redetermination. 20.1.9.16.2  (08-07-1998) Penalty Computation The examiner determines the deficiency attributable to the foreign tax redetermination and to this deficiency is added a penalty computed as follows: 5 percent of the deficiency if the failure is for not more than 1 month, with An additional 5 percent of the deficiency for each month (or fraction thereof) during which the failure continues, but not to exceed in the aggregate 25 percent of the deficiency.   NOTE: If this penalty applies, then the penalty imposed under IRC section 6662(b)(1)), formerly in IRC section 6653(a), relating to failure to pay by reason of negligence or disregard of rules or regulations, shall not apply. 20.1.9.16.3  (08-07-1998) Statute of Limitations IRC section 6501(c)(5) independently suspends the normal statute of limitations for additions to tax resulting from a redetermination of foreign tax. IRC section 905(c) contains special rules for such changes. 20.1.9.17  (08-07-1998) IRC Section 6712 Background. IRC section 6712 was added by P.L. 100–647, TAMRA’88, for returns the due date for which occurs (without extensions) after December 31, 1988. This section provides a penalty for failure to disclose a treaty-based return position. Reporting/Filing Requirement. IRC section 6712 enforces IRC section 6114. IRC section 6114 generally requires that if a taxpayer takes a position that any treaty of the U.S. overrules or modifies any provision of the IRC, the taxpayer must disclose the position. A taxpayer meets the disclosure requirement by attaching Form 8833 or a statement to the appropriate tax return in the format outlined in Treas. Reg. 301.6114–1(d) with taxpayer’s name, TIN or EIN, address, name and address of payor of income, a statement of citizenship or residency, and a statement of facts regarding each separate position taken. NOTE: A taxpayer may be able to aggregate certain similar types of income as a single payment or income item for disclosure purposes. See Treas. Reg. 301.6114–1(d)(4)(i) for guidance on rules for aggregating separate payments or income items.   20.1.9.17.1  (08-07-1998) Penalty Assertion The penalty is asserted when the examiner determines that the taxpayer failed in a material way to disclose a treaty based return position under IRC section 6114. 20.1.9.17.2  (08-07-1998) Penalty Computation The penalty is $1,000 for each separate treaty-based position taken and not properly disclosed, in the case of an individual taxpayer. For a C corporation, the penalty is $10,000 for each separate failure to disclose a treaty-based position. 20.1.9.17.3  (08-07-1998) Waiver Criteria Treas. Reg. 301.6712–1(b) provides the Director, Compliance, the Area Director, or the Director of the Service Center with the authority to waive, in whole or in part, the penalty imposed under IRC section 6712 if the taxpayer’s failure to disclose the required information is not due to willful neglect. An affirmative showing of lack of willful neglect must be made in the form of a written statement setting forth all the facts alleged to show lack of willful neglect and must contain a declaration by the taxpayer that the statement is made under penalties of perjury.

20.1.10.1  (08-12-1998) Overview This section of the consolidated penalty IRM discusses the miscellaneous penalties not included in the other chapters. 20.1.10.1.1  (08-12-1998) Common Features In general, each penalty discussed in this chapter is unique and will stand alone unless otherwise indicated. Exceptions and additional information are noted in the discussions of the specific penalties. However, some general procedures will apply. Statute of Limitations.Penalties that are notconsidered taxesgenerally have no statute of limitationfor assessment. For penalties subject to deficiency procedures (generally, income taxes) or non-deficiency procedures (generally, employment or excise tax) the limitation for assessment is three years after the return is due or filed, whichever is later. See IRM 20.1.4 for a discussion of deficiency versus non-deficiency procedures. Reasonable Cause.Determination as to whether or not reasonable cause exists must be based on a careful consideration of the facts and circumstances of each case prior to the assertion of a penalty. Examiners should consider any reason a taxpayer provides in conjunction with the guidelines, principles and evaluating factors identified in the Penalty Relief Chapter. See IRM 20.1.3, Penalty Relief, as well as the applicable IRC section and Treas. Regs. relating to the specific penalty. Abatements.Information on penalty abatements and penalty reason codes (PRC) are discussed in IRM 20.1.1. Penalty Transaction Codes.See Exhibit 20.1–5 for a list of penalty transaction codes. Penalty Reference Numbers.See Exhibit 20.1–6 and 20.1–7 for a list of penalty reference numbers. 20.1.10.1.2  (08-12-1998) Who Asserts/ Assesses A service center or compliance function may determine that a penalty should be imposed. At a service center the penalty may generate automatically, or compliance functions consider the penalty during an examination or during personal contact with the taxpayer.   Reference numbers are used to assess non tax return related penalties (conduct or information returns). Five hundred (500) series referenced numbers are generally generated as a result of computer matching programs and used to identify the failure. Six hundred (600) series reference numbers are generally used to assess penalties as the result of an examination or other compliance activity. See Exhibit 20.1.1–6 and 20.1.1–7 for a complete list of current reference numbers.   20.1.10.2  (08-12-1998) IRC section 6166(g)(3) IRC section 6166, Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business, under certain circumstances provides for the deferral of tax and/or installment payment plan for tax imposed by IRC section 2001. IRC section 6166(g)(3), Failure to Make Payment of Principal or Interest, provides that if any payment payable under IRC section 6166(a) is not paid when due but is paid within 6 months of the due date, there is imposed a penalty in an amount equal to 5 percent of the amount of the payment multiplied by the number of months (or fractions thereof) after the due date and before payment is made. The estate tax installment agreement is monitored in the Service Center Accounting Branch. The service center procedures for assessment/abatement will be the primary focus under this penalty section. 20.1.10.2.1  (08-12-1998) Penalty Computation During the four year principal deferral (or shorter period if elected by the executor), the Estate is billed for interest only. If the taxpayer fails to make the installment (interest) payment, CP–191, Notification to Service Center Accounting to update the installment billing clerks file, will not generate. A manual review of the payment pending file will be necessary 45 days after the installment due date. If the review shows an unpaid installment, research: IDRS for misapplied payment, and Form 4768, Application for Extension of Time to File U.S. Estate Tax Return and/or Pay Estate Tax.   If no payment or extension is located: Compute the Late Installment (LI) Penalty on the unpaid installment (interest) at 5% per month (or fraction thereof) from the installment due date to the date of Notice and Demand. Input TC 240 for LI Penalty on IDRS. Compute interest on the unpaid installment (interest) from the installment due date to the date of Notice and Demand. Input TC 340 for interest on IDRS. Prepare and issue Form 6335, Unit Ledger Card, for the unpaid installment, including accrued penalty and interest. Suspense for 45 days.   If after 90 days, no response is received from Service Center Collection Branch (SCCB), contact them to determine status of account. 20.1.10.2.2  (08-12-1998) Assessment If the taxpayer fails to make the installment (principal and interest) payment, a manual review of the payment pending file will be necessary 45 days after the installment date. Compute Late Installment (LI) penalty on the unpaid installment (principal and interest) at 5% per month (or fraction thereof) from the installment due date to the date of Notice and Demand. Input TC 240 for LI Penalty on IDRS. Compute Failure to Pay (FTP) Penalty on the principal portion of the installment from the installment due date to the date of Notice and Demand. Input TC 270 for FTP penalty on IDRS. Compute interest (at the existing rate) on the unpaid installment (principal and interest) from the installment due date to the date of Notice and Demand. Input TC 340 for interest on IDRS.   Use Hold Codes, Priority Codes, Posting Delay Codes and Penalty Reasons Codes as applicable. See IRM 3.15.60 and Document 6209 for additional information regarding these codes and indicators. Prepare and issue "Certified Letter" (return receipt requested) for the unpaid installment, accrued penalty and interest. Suspense for 45 days. If the payment is not received within 45 days of the Certified Letter, see IRM 3.17.243. 20.1.10.2.3  (08-12-1998) Penalty Relief No penalty relief provisions, including reasonable cause, exist. It should be noted, however, that prior to the due date of the payment, the estate may seek an extension of the time for payment under IRC section 6161, Extension of Time for Paying Tax. 20.1.10.3  (08-12-1998) IRC section 6652(a) Reserved. See LEM 20.1.10.3. 20.1.10.3.1  (08-12-1998) IRC section 6652(j) IRC section 6652(j) provides a penalty of $100 per failure to provide the certification as required by IRC section 142(d)(7). Form 8703, Annual Certification by Operator Qualified Residential Rental Project is required to be filed by March 31 after the close of the calendar year for which the certification is made. Form 8610, Annual Low-Income Housing Credit Agencies Report, is required to be filed by February 28 of the year following the calendar year for which an allocation of credit is made.   The Service does not apply the penalty when the failure to timely file Form 8703 or Form 8610 is due to reasonable cause and not willful neglect. The penalty is subject to deficiency procedures. Effective January 1, 1997, procedures for assessment/abatement will be in IRM 3.11.25. Currently, Philadelphia Service Center processes these forms in a special processing unit. 20.1.10.3.2  (08-12-1998) IRC section 6652(k) See LEM 20.1.10.3.2. 20.1.10.3.3  (08-12-1998) IRC section 6652(l) See LEM 20.1.10.3.3. 20.1.10.4  (08-12-1998) IRC section 6653 IRC section 6653, Failure to Pay Stamp is administered by the Bureau of Alcohol, Tobacco and Firearms. 20.1.10.5  (08-12-1998) IRC section 6657 Generally, this penalty will be assessed by the Service Center using penalty transaction codes. TC 280—Manual assessment of a bad check penalty, or TC 286—Computer generated assessment of a bad check penalty initiated by the posting of any one of the following Transaction Codes: 611, 621, 741, 651, 661, 671, 681, 691 and 721. TC 287 is computer generated which reverses the Transaction Code 280 or 286 if the status is 06 and the module balance is debit and net 28X amount equals the module balance.   A CP 587 notice will be sent to the taxpayer informing them of the dishonored check or money order and any applicable penalty and interest assessed. 20.1.10.5.1  (08-12-1998) Bad Check Penalty IRC section 6657 provides for the assertion of a penalty when a taxpayer’s check or money order is dishonored. For checks or money orders that were dishonored: On or before November 10, 1988, a penalty in an amount equal to: (1) 1% the amount of the check, or (2) if the amount of the dishonored check/money order was $500 or less; then the penalty was $5 or the amount of the check/money order whichever was less. After November 10, 1988, the Technical Corrections Act of 1988 increased the amount of the penalty to: (1) 2% of the amount of the check, or (2) if the amount of the dishonored check/money order if $750 or less; then the penalty is $15.00 or the amount of the check/money order, whichever is less.   20.1.10.5.2  (08-12-1998) Assessment A dishonored check/money order is identified on IDRS when a payment/deposit is reversed. For example, check/money order received with a return is identified as a TC 610. If the check/money order received with the return, was dishonored when presented to a bank, it would be identified on IDRS as a TC 611. When a payment/deposit received by the Service is dishonored, the dishonored payment will be reversed using one of the following: TC 611, 621, 641, 651, 661, 671, 681, 691, 721. The penalty associated with the dishonored check/money order will be identified on IDRS as a TC 280 or TC 286.   20.1.10.5.3  (08-12-1998) Penalty Relief The taxpayer may request penalty abatement by providing a reason why the check/money order was dishonored. Review the request for abatement, bank letter or other information to determine if the penalty should be abated (see 20.1.1.3, Penalty Relief). When it is determined that the penalty should be abated: Input a TC 281 for the amount of the penalty previously assessed Indicate the reason for the penalty abatement in the adjustment remarks area. Use reason codes, penalty reason codes, hold codes, priority codes, or posting delay codes as required. Notify the taxpayer that the penalty has been abated (letter 608C or by telephone).   When it is determined that the penalty should not be abated: Provide the taxpayer with a written explanation (854C or equivalent) Input TC 290 .00, BK 98/99, RC 62.   20.1.10.5.3.1  (08-12-1998) Reasonable Cause In addition to the reasons discussed in IRM 20.1.1.3, the following should be accepted as reasonable cause for dishonored checks. The taxpayer furnished evidence that their bank account contained sufficient funds at the time the check was submitted, but due to an error the check/money order was dishonored in error. In this situation, the bank should provide a letter of explanation. A check was not honored because of the death of the taxpayer after the date the check was issued. Payment of a check was stopped on the advice or recommendation of an employee of the Service. No penalty will be assessed on third party checks involving cash register seized property. See LEM 20.1.10.   20.1.10.6  (08-12-1998) IRC section 6674 IRC section 6674 provides for a penalty for a Willful Failure to Furnish (IRC section 6051 or 6053(b)) or for Willfully Furnishing a False or Fraudulent Statement (31.6051–1 or 31.6053–2) to an employee. IRC section 6051, Receipts for Employees IRC section 6053(b), Statements Furnished by Employers   20.1.10.6.1  (08-12-1998) Penalty Computation The penalty is $50 for each willful failure to provide or furnishing a false or fraudulent statement. 20.1.10.6.2  (08-12-1998) Assertion When an indication of willful failure is discovered, the investigating Compliance office will suspend the inquiry and report findings to the Criminal Investigation function. Examination will assert the civil penalty. 20.1.10.6.3  (08-12-1998) Penalty Relief Reasonable cause provisions do not apply to IRC section 6674. See IRM 20.1.1.3. 20.1.10.7  (08-12-1998) IRC section 6675 IRC section 6675 provides for a penalty if an excessive claim is filed for certain federal excise taxes. IRC section 6420—gasoline used on farms; IRC section 6421—gasoline used for certain nonhighway purposes; and IRC section 6427—fuels not used for taxable purposes.   20.1.10.7.1  (08-12-1998) Penalty Computation The penalty is an amount equal to the greater of: Two times the excessive amount; or $10.   The penalty does not applyto excessive credit taken for such taxes on an income tax return. The penalty may applyto excessive payment on the claim. 20.1.10.7.2  (08-12-1998) Reserved Reserved. 20.1.10.7.3  (08-12-1998) Penalty Relief Reasonable cause does apply. See IRM 20.1.1.3. 20.1.10.8  (08-12-1998) IRC section 6697 IRC section 6697 provides for a penalty to be imposed on a regulated investment company or a real estate investment trust which uses the deficiency dividend procedure of IRC section 860 to retain its qualified status. Prior to 1987, this penalty applied to a real estate investment trust. 20.1.10.8.1  (08-12-1998) Penalty Computation The amount of the penalty is equal to the interest charge paid by the trust on the deficiency dividend. The penalty may not exceed 50% of the deficiency dividend deduction allowed by IRC section 860(a). 20.1.10.8.2  (08-12-1998) Assertion The penalty may be assessed and collected without the normal deficiency procedure. For tax years beginning after 1986, the penalty does not apply to a real estate investment trust (REIT) that uses the deficiency dividend procedure to retain its qualified status. 20.1.10.8.3  (08-12-1998) Penalty Relief Reasonable cause does not apply. See IRM 20.1.3. 20.1.10.9  (08-12-1998) IRC section 6702 IRC section 6702 provides for an immediate assessment of a $500 civil penalty against individuals who file frivolous income tax returns or frivolous amended income tax returns. The penalty is not based on tax liability. There does not need to be an underpayment of tax or understatement of liability in order for the penalty to be imposed in addition to any other penalty. The intent of the law is to stop the flow of returns, amended returns, or documents which purport to be returns, that contain altered line items or claim clearly unallowable deductions or credits based on a frivolous position. The penalty can be asserted on a frivolous Form 1040, Form 1040X Amended Return, Form 843, Claim and others which: Do not contain sufficient information to judge the correctness of the tax, or Contain information that on its face indicates the self-assessment is incorrect, and The conduct referred to in (a) or (b) is due to a position which is frivolous or a desire to delay or impede the administration of the tax laws.   Some of the schemes which may cause the assertion of the penalty are: Unallowable deductions such as the gold standard, discounted Federal Reserve Notes and War tax; Wages are not income; Constitutional claims (i.e., Fourth, Fifth and Sixteenth amendments); Invalid returns; and Nonprocessable returns.   The frivolous return penalty is not applied against partnerships, corporations or estates. Statute of Limitations. A frivolous return: Does not constitute a valid return when the Service is unable to process the return, therefore, the IRC section 6702 penalty may be assessed at any time. Does constitute a valid return when the Service is able to process the return. Therefore, the IRC section 6702 penalty must be assessed within 3 years after the return was filed.   See Exhibit 20.1.1–6, for the applicable penalty reference numbers. 20.1.10.9.1  (08-12-1998) Penalty Computation The civil penalty is $500 per frivolous document. A taxpayer can have multiple penalties. However, for a joint return, only one $500 penalty is assessed against the husband and wife, per frivolous document. See LEM 20.1.10. 20.1.10.9.2  (08-12-1998) Assertion Generally, the service center identifies frivolous returns and assesses the penalty. If the field receives a return that warrants a frivolous return penalty, the employee should indicate this on a Form 3198, Special Handling Notice, attached to the original return. A Form 8278, Computation and Assessment of Miscellaneous Penalties, will be completed and used for assessment unless the penalty is related to a joint return. The Non-Master File Assessment Voucher, Form 5734, will be used for the joint assessment of the penalty. See IRM Part 5.1.1, Collection for further information. 20.1.10.9.3  (08-12-1998) Penalty Relief Taxpayers seeking judicial review of the imposition of the penalty must first pay the entire penalty. A Letter of Disallowance is sent to the taxpayer and the taxpayer can file suit contesting this penalty in the district court or U.S. Court of Federal Claims. 20.1.10.10  (08-12-1998) IRC section 6705 IRC section 6705 provides a $500 penalty for Failure by Broker to Provide Notice to Payors that a payee is subject to backup withholding. Under IRC section 3406(d)(2)(B), a broker who acquires a readily tradable instrument for a payee (customer) must notify the payor of such instrument within 15 days of the acquisition that the payee is subject to backup withholding if either of the following conditions exist: The payee fails to furnish the TIN to the broker. The IRS notifies the broker that the TIN is incorrect. The payee has not provided the broker with a certification that the payee is not subject to backup withholding, or The IRS has notified the broker before the acquisition that the payee is subject to backup withholding.   Any broker who intentionally fails to provide the required notice is subject to the penalty of $500 for each such failure. The penalty applies to payments made after 1983. 20.1.10.10.1  (08-12-1998) Penalty Computation The penalty is computed at $500 per failure by the broker to provide the notice to the payor. 20.1.10.10.2  (08-12-1998) Assertion Compliance employees request the assessment of the penalty using Form 8278. The penalty is assessed using penalty reference number 632. 20.1.10.10.3  (08-12-1998) Penalty Relief Reasonable cause does not apply. See Exhibit 20.1.10–1. 20.1.10.11  (08-12-1998) IRC section 6706(a) IRC section 6706(a) provides for a penalty of $50 for Failure to Show Information on Debt Instrument. In the case of any debt instrument having original issue discount, the following information must be shown on the Debt Instrument, Amount of the original issue discount, and The issue date.   Statutory notice of deficiency procedures do not apply to this penalty. 20.1.10.11.1  (08-12-1998) Penalty Computation In the case of any debt instrument having original issue discount that does not contain the required information, a penalty of $50 per failure to show information on a debt instrument will be assessed.

20.1.10.11  IRC section 6706(a) 20.1.10.11.1  Penalty Computation 20.1.10.11.1.1  (08-12-1998) Assertion This penalty is asserted by Compliance. 20.1.10.11.1.2  (08-12-1998) Penalty Relief Reasonable cause does apply. See IRM 20.1.1.3. 20.1.10.11.2  (08-12-1998) IRC section 6706(b) IRC section 6706(b) provides for a penalty of 1% of the aggregate issue price of such issue, not to exceed $50,000 for Failure to Furnish Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. An issuer of a publicly offered debt instrument (obligation) having Original Issue Discount (OID), such as a bond, debenture, or note, must file Form 8281. Form 8281 must be filed within 30 days of the date of issuance of an OID instrument. A separate Form 8281 must be filed for each issue. Statutory notice of deficiency procedures do not apply to this penalty. 20.1.10.11.2.1  (08-12-1998) Penalty Computation A penalty of 1% of the aggregate issue price of a publicly offered original discount instrument, not to exceed $50,000 for the failure to notify the Service within the time specified will be assessed. 20.1.10.11.2.2  (08-12-1998) Assertion The Multi-Functional Compliance Team (MFCT) in Detroit Data Center (DDC) has primary responsibility for this program. 20.1.10.11.2.3  (08-12-1998) Penalty Relief Reasonable cause does apply. See IRM 20.1.3. 20.1.10.12  (08-12-1998) IRC section 6707 Failure to register a tax shelter: IRC section 6111(a) defines those people required to register a tax shelter and the time for the required registration. IRC section 6707(a) provides a penalty for those people who fail to register or fail to register timely. Form 8264, Application for Registration of a Tax Shelter, is used for this purpose.   Failure to furnish identifying number: IRC section 6111(b)(1) defines the requirements to furnish a tax shelter identification number to an authorized person upon request. IRC section 6707(b)(1) provides a penalty for each failure to do so.   Failure to include an identifying number on a return: IRC section 6111(b)(2) defines the requirement to include the identification number on any return as required. IRC section 6707(b)(2) provides a penalty for each failure to supply the number as required.   The penalty applies to interests in tax shelters which are first offered for sale after August 31, 1984. 20.1.10.12.1  (08-12-1998) Penalty Computation After 10/22/86: IRC section 6707(a) provides a penalty of 1 percent of the aggregate amount invested in the tax shelter or $500, whichever is greater, for the failure to register a tax shelter. IRC section 6707(b)(1) provides a penalty of $100 for each failure to furnish an identifying number as required. IRC section 6707(b)(2) provides a $250 penalty for each failure to include an identifying number on a return.   Prior to 10/23/86: For failure to register a tax shelter shall be an amount to the greater of $500 or the lesser of (i) 1 percent of the aggregate amount invested in such shelter, or (ii) $10,000. IRC section 6707(b)(1) provides a penalty of $100 for each failure to furnish an identifying number as required. IRC section 6707(b)(2) provides a $50 penalty for each failure to include an identifying number on a return.   20.1.10.12.2  (08-12-1998) Assertion These penalties are asserted by Examination function. 20.1.10.12.3  (08-12-1998) Penalty Relief The reasonable cause exception applies to the penalties in IRC section 6707 except the penalty under section 6707(b)(1). See IRM 20.1.1.3 for a discussion of reasonable cause. 20.1.10.13  (08-12-1998) IRC section 6708 The requirement to maintain a list of investors in potentially abusive tax shelters is defined in IRC section 6112. IRC section 6708 provides a penalty for each investor not included on the list. The penalty applies to tax shelters which are first offered for sale after August 31, 1984. August 31, 1984 to October 22, 1986—$50,000 maximum. After October 22, 1986—$100,000 maximum.   20.1.10.13.1  (08-12-1998) Penalty Computation IRC section 6708 provides a penalty of $50 for each investor not included on the list with a maximum penalty of $100,000 after October 22, 1986. Prior to October 23, 1986, maximum penalty of $50,000. 20.1.10.13.2  (08-12-1998) Assertion These penalties are asserted by Examination function. 20.1.10.13.3  (08-12-1998) Penalty Relief The penalty is not asserted if there is reasonable cause and the failure was not due to willful neglect. See IRM 20.1.1.3 for a discussion of reasonable cause. 20.1.10.14  (08-12-1998) IRC section 6709(c) IRC section 6709(c) provides for a penalty of $200 for Failure to File a report with respect to any mortgage credit certificates required by IRC section 25(g). Any person (lender) who makes a loan that is a certified indebtedness amount on any Mortgage Credit Certificate (MCC) must provide IRS with information regarding the issuance of MCCs under IRC section 25. Form 8329 is due by January 31 following the close of the calendar year in which the lender made certified indebtedness loans. Each issuer (states and political subdivisions) of MCCs are to provide IRS with information required by IRC section 25 and Treas. Reg. 1.25–8T(b). Form 8330 must be filed on a quarterly basis beginning with the quarter in which the election was made. 20.1.10.14.1  (08-12-1998) Penalty Computation Reserved. 20.1.10.14.2  (08-12-1998) Assertion This penalty is asserted by Compliance. 20.1.10.14.3  (08-12-1998) Penalty Relief Reasonable cause does apply. See IRM 20.1.1.3. 20.1.10.15  (08-12-1998) IRC section 6715 IRC section 4081 imposes a tax on certain removals, entries, or sales of diesel fuel. Generally, diesel fuel that is dyed pursuant to the regulations under IRC section 4082 is exempt from tax. Effective January 1, 1994, IRC section 6715 imposes an assessable penalty on the misuse of dyed fuel. Generally, misuse occurs when a person sells, holds for sale, uses, or holds for use, dyed fuel for a taxable use. A typical taxable use is use as a fuel in a registered diesel-powered highway vehicle. The IRC section 6715 penalty also applies if a person wilfully alters, or attempts to alter, the strength or composition of the dye in dyed fuel. 20.1.10.15.1  (08-12-1998) Improper Sale of Dyed Fuel If any dyed fuel is sold or held for sale by any person for any use that such person knows or has reason to know is not a nontaxable use of such fuel, then such person shall pay an IRC section 6715 penalty in addition to the tax (if any). "Dyed fuel" means any dyed diesel fuel, whether or not the fuel was dyed pursuant to IRC section 4082. "Nontaxable use" has the meaning given to the term by IRC section 4082(b). 20.1.10.15.1.1  (08-12-1998) Improper Use of Dyed Fuel If any dyed fuel is held for use or used by any person for a use other than a nontaxable use and such person knew, or had reason to know, that such fuel was so dyed, then such person shall pay an IRC section 6715 penalty in addition to the tax (if any). "Dyed fuel" means any dyed diesel fuel, whether or not the fuel was dyed pursuant to IRC section 4082. "Nontaxable use" has the meaning given to the term by IRC section 4082(b). 20.1.10.15.1.2  (08-12-1998) Willful Alteration of Dye Concentration If any person willfully alters, or attempts to alter, the strength or composition of any dye or marking done pursuant to IRC section 4082 in any dyed fuel, then such person shall pay a penalty in addition to the tax (if any). This penalty does not apply in the following cases: Diesel fuel that is dyed pursuant to the regulations under IRC section 4082 is blended with any undyed liquid and the resulting product satisfies the dyeing requirements of the regulations under IRC section 4082. Diesel fuel that is dyed pursuant to the regulations under IRC section 4082 is blended with any other liquid (other than diesel fuel) that contains the type and amount of dye required for diesel fuel dyed in accordance with the regulations under IRC section 4082. Diesel fuel that is not dyed pursuant to the regulations under IRC section 4082 is blended with diesel fuel that is dyed pursuant to IRC section 4082 and the blending occurs as part of nontaxable use.   20.1.10.15.2  (08-12-1998) Penalty Computation For the first violation, the amount of the penalty on each act is the greater of— $1,000, or $10 for each gallon of the dyed fuel involved.   For additional violations, the amount in (1)(a) is determined by multiplying $1,000 times the number of prior penalties imposed by IRC section 6715 on such person (or a related person or any predecessor of such person or related person). Thus, for example, if 50 gallons of dyed fuel is involved in a person’s first violation, the penalty would be $1,000 because that amount is greater than 50 X $10. If 150 gallons of dyed fuel is involved in that person’s second violation, the penalty would be $2,000 because that amount ($1,000 X 2 violations) is greater than 150 X $10. If a penalty is imposed under IRC section 6715 on any business entity, each officer, employee, or agent of such entity who willfully participated in any act giving rise to such penalty is jointly and severally liable with such entity for such penalty. 20.1.10.15.3  (08-12-1998) Assessment This penalty is assessed by Area Office Examination using Form 5734, Non Master File Assessment Voucher or Form 2859, Request for Quick or Prompt Assessment. Use penalty Reference Number (PRN) 656 on forms requiring a PRN. 20.1.10.15.4  (08-12-1998) Penalty Relief This is no reasonable cause exception to this penalty. 20.1.10.16  (08-12-1998) IRC section 7268 IRC section 7268, Possession with Intent to Sell in Fraud of Law or to Evade Tax, is administered by the Bureau of Alcohol, Tobacco and Firearms. See LEM 20.1.10. 20.1.10.17  (08-12-1998) IRC section 7270 IRC 7270, Insurance Penalties, provides for penalties for the issuance of insurance policies by foreign insurers with the intent to evade tax. 20.1.10.18  (08-12-1998) IRC section 7271 IRC section 7271, Penalties for Offenses Relating to Stamps, is administered by the Bureau of Alcohol, Tobacco and Firearms. See LEM 20.1.10. 20.1.10.19  (08-12-1998) IRC section 7272 IRC section 7272 relates to penalties for failure to register as required by subtitle E, Alcohol, Tobacco and certain other excise taxes. 20.1.10.20  (08-12-1998) IRC section 7273 IRC section 7273, Penalties for Offenses Relating to Special Taxes, is administered by the Bureau of Alcohol, Tobacco and Firearms. See LEM 20.1.10. 20.1.10.21  (08-12-1998) IRC section 7275 IRC section 7275, Penalties for Offenses Relating to Airline Tickets and Advertising, provides that any person who violates the provisions of this section is guilty of a misdemeanor for each violation and upon conviction shall be fined not more than $100. 20.1.10.22  (08-12-1998) IRC section 7304 IRC section 7304, Penalty for Fraudulently Claiming Drawback, is administered by the Bureau of Alcohol, Tobacco and Firearms. See LEM 20.1.10. 20.1.10.23  (08-12-1998) IRC section 7342 IRC section 7342 provides for a Penalty for Refusal to Permit Entry or Examination against a person who refuses to admit any officer or employee of the Treasury Department or refuses to permit him to examine such article or articles. 20.1.10.23.1  (08-12-1998) Penalty Computation For each refusal to permit entry or examination: $500 for each refusal, or $1000 for each refusal related to a place where taxable fuel is stored or produced (see Section 4083(c)(3)).   20.1.10.23.2  (08-12-1998) Assertion This penalty is asserted by Compliance using Reference Number 655 on any document used to assess/assert this penalty. 20.1.10.23.3  (08-12-1998) Penalty Relief There is no reasonable cause exception to this penalty. If the taxpayer disagrees with the penalty, two options are available: Make an administrative appeal to the Exam group manager at the time the violation is found or Pay the penalty and file a timely Form 843 claim for refund.   If the claim is disallowed, the taxpayer can file suit in either US District Court or US Court of Federal Claims per IRC 6532. If the penalty was erroneously assessed, it must be abated. 20.1.10.24  (08-12-1998) IRC section 7519 IRC section 7519(f)(4) provides for a penalty for Failure to Pay on the Date Prescribed if a partnership or S corporation fails to comply with the required payment rules. 20.1.10.24.1  (08-12-1998) IRC section 7519(f)(4)(a) IRC section 7519(f)(4)(a) provides for a ten percent underpayment penalty on Section 444 election payment amounts unpaid on or before the payment due date, May 15. The Section 444 ten percent election penalty is subject to reasonable cause (effective 7/97). See the AIMS Handbook, BMF and NMF Adjustments, regarding Section 444 elections. 20.1.10.24.2  (08-12-1998) Assessment For tax returns filed after December 31, 1991, TC 246, reference code 684 will be computer-generated to assess the ten percent election penalty when Form 8752 posts to a tax module (MFT 15) which is not fully paid by May 15. The ten percent election penalty may be manually assessed, if applicable and not computer-generated at the time the return posted by inputting TC 290 with reference code 684 for the correct penalty amount to MFT 15. (The manual penalty assessment will result in TC 240 with reference code 684 posting to master file MFT 15.) The ten percent election penalty may be manually abated by inputting TC 290 with reference code 684 for the correct NEGATIVE amount to MFT 15. (The manual penalty abatement will result in TC 241 with reference code 684 posting to master file MFT 15.) Exhibit 20.1.10.24-1  (08-12-1998) Penalty Relief—Application Chart Penalty Relief Chart IRC Section Type of Penalty Reasonable Cause Relief Other Relief         6166(g)(3) Failure to Make Payment of Principal or Interest Payment of Estate Tax No No         6652(a)(2) Failure to File Certain Information Returns with Respect to Certain Payments Aggregating less than $10 N/a N/a         6652(j) Failure to File Certification with Respect to Certain Residential Rental Projects Yes Yes         6652(k) Reserved             6652(l) Reserved             6653 Failure to Pay Stamp Tax (AT&F) N/a N/a         6657 Bad Check Yes Yes         6674 Fraudulent Statement or Failure to Furnish Statement to Employee No No         6675 Excessive Claims with Respect to the Use of Certain Fuels Yes Yes         6697 Assessable Penalties with Respect to Liability for Tax of Regulated Investment Companies No No         6702 Frivolous Income Tax Return No No         6705 Failure by Broker to Provide Notice to Payors No No         6706(a) Failure to Show Information on Debt Instrument Yes Yes         6706(b) Failure to Furnish Information to Secretary Yes Yes         6707 Reserved Yes           6707(b)(1) Failure to Furnish Tax Shelter ID # No           6708 Reserved             6709(c) Penalties with Respect to Mortgage Credit Certificates Yes Yes         6715 Dyed Fuel Sold for Use or Used in Taxable Use No Yes         7268 Reserved             7271 Reserved Yes Yes         7272 Penalties for Failure to Register as Required by Subtitle E             7273 Reserved No No         7275 Penalties for Offenses Relating to Airline Tickets and Advertising             7304 Reserved             7342 Penalty for Refusal to Permit Entry or Examination No No         7519(f)(4) Required Payments for Entities Electing Not to Have Required Taxable Year. Yes No