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Part 8. Appeals

Chapter 11. Penalties Worked in Appeals

Section 1. Return Related Penalties in Appeals

8.11.1  Return Related Penalties in Appeals

8.11.1.1  (08-15-2008)
Service's Position Regarding Penalties

  1. A penalty exists for failing to comply with almost every filing, paying, and reporting requirement in the Internal Revenue Code.

  2. IRC Subtitle F, Chapter 68 contains most of the civil penalty provisions. They are called "additions to the tax" , "additional amounts" , or "assessable penalties." For simplicity, they are referred to as " penalties" throughout this IRM section.

  3. Policy Statement 20–1, (formerly P-1-18), sets forth the Service’s position regarding penalties. See IRM 1.2.20, Policy Statements for Penalties and Interest Activities.

  4. IRM 20.1, Penalty Handbook, provides the following Servicewide instructions for working penalty cases:

    1. Information for all functions on types of penalties imposed by the Internal Revenue Code.

    2. Guidelines for allowing abatement based on reasonable cause exceptions.

    3. Types of penalties which can be appealed and the process for appealing.

  5. This IRM section provides Appeals procedures for controlling and working various types of penalty cases.

  6. This IRM section supplements the information in IRM 20.1, Penalty Handbook.

8.11.1.2  (08-15-2008)
Types of Penalties Received in Appeals

  1. Several types of proposed or assessed penalties can be protested to Appeals. Below are some examples discussed in IRM 20.1 and IRM 8.7:

    1. Deficiency

    2. Deficiency Type

    3. Post assessment Penalty Appeal

    4. Claim for Refund

    5. Special Claim for Refund

    6. Return Preparer Penalty, see IRM 8.11.3

    7. Offer in Compromise, see IRM 8.23

    8. Trust Fund Recovery Penalty, see IRM 8.25

  2. Some penalties are subject to the deficiency procedures of IRC Subchapter B of Chapter 63. A penalty based on a liability determined under the deficiency procedures is considered at the same time the tax deficiency is considered.

    Example:

    IRC 6662, Accuracy Related Penalty, IRC 6662A, Imposition of Accuracy-related Penalty on Understatements with Respect to Reportable Transactions, and IRC 6663, Fraud Penalty.

    IF THEN
    Additions to tax under IRC 6651, Failure to File and Failure to Pay relates to the deficiency Failure to File and the Failure to Pay penalty are subject to deficiency procedures.
    Addition to tax is not related to a deficiency Addition to tax must be assessed within the applicable statute of limitations.
    There is a related tax deficiency Fraudulent failure to file addition to tax is subject to the deficiency procedures and must be included in the statutory notice of deficiency (90–Day Letter).

  3. Without a related deficiency, the Tax Court will not consider the IRC 6651(f) penalty. The procedure is similar to the IRC 6651(a)(1), Late Filing penalty.

    Note:

    Taxpayers are granted pre-assessment appeal rights for the fraudulent failure to file addition to tax under IRC 6651(f). This applies even when there is no related tax deficiency.

  4. Deficiency Type —There are several "stand-alone" penalties that Congress specifically provided would not be subject to the deficiency procedure. The Service has provided a deficiency-type procedure for several of these penalties. Most taxpayers do not use the Special Claim for Refund rules provided by Congress for these penalties, since Appeals provides a pre-assessment deficiency type procedures.

  5. Post-assessment Penalty Appeal—These penalties are assessed before the taxpayer is given an opportunity to dispute them. Most of these penalties may be abated on grounds of reasonable cause.

  6. Claim for Refund —After penalties are paid, taxpayer are entitled to the claim for refund provisions. If denied, the taxpayer may bring suit in U.S. District Court or U.S. Court of Federal Claims.

  7. Special Claim for Refund — Congress provided special rules to mitigate potential hardship for taxpayers subject to certain "stand-alone" penalties which are not subject to the deficiency procedures. Examples of these penalties are:

    • Preparer Conduct Penalty under IRC 6694. See IRM 8.11.3,

    • Promoting abusive tax shelters under IRC 6700, aiding and abetting under IRC 6701, and frivolous return penalties under IRC 6702.

8.11.1.3  (10-23-2007)
Effect of Statutory Changes

  1. Since penalties may impact every IRC filing, paying and reporting requirement, most major tax acts contain revisions to the penalty sections in Chapter 68 of the IRC. For example:

    • American Jobs Creation Act of 2004, H. R. 4520, Pub. L. No. 108 — 357 (AJCA) - added IRC 6662A, Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions which gives special rules for amended returns in IRC 6662A(e). It added IRC 6664(d) which sets forth rules and standards for reasonable cause with respect to understatements. It modifies the present law accuracy-related penalty applicable to tax shelters. IRC 6662A and IRC 6662(d) are effective for taxable years ending after October 22, 2004. See IRM 20.1.5.13..

    • Legislative Affairs Update 2004–7 provides a section-by-section summary of 40 AJCA provisions with the greatest administrative impact on IRS.

8.11.1.4  (08-15-2008)
Erroneous Advice

  1. IRC 6404(f) provides for abatement of penalties and the underlying tax consideration based on erroneous advice. on evaluating these situations. Penalty Handbook, IRM 20.1.1.3, provides additional details

  2. Basically there are three types of advice discussed in IRM 20.1.1.3:

    • written advice provided by the Service,

    • oral advice provided by the Service, and

    • advice provided by a tax professional.

8.11.1.5  (10-23-2007)
Appeals Post-Assessment Penalty Program

  1. Post-assessment penalty appeal procedures apply to all assessed additions to the tax, additional amounts, and assessable penalties.

  2. Appeals consolidates processing of post-assessment penalty appeal cases originating from Compliance.

  3. Appeals:

    1. assigns cases to designated Appeals Officers, or

    2. forwards the case to a local Appeals office when the taxpayer requests a face-to-face conference.

  4. For purposes of this IRM, the term Appeals Officer will refer to an Appeals employee assigned to the case who has the authority to resolve or settle issues.

8.11.1.5.1  (08-15-2008)
Receipt of Post-Assessment Penalties

  1. Generally post-assessment penalty appeal cases are received from -

    • W & I

    • Small Business Self-Employed (SBSE)

    • Large Mid-Size Business (LMSB)

    • Accounts Management

  2. If the taxpayer submits a written protest to an assessed penalty Compliance forwards the case to Appeals. Information on documents to be included with the case file are found in IRM 20.1.1 , Introduction and Penalty Relief.

  3. Appeals controls the case on ACDS. Refer to IRM 8.20.3 for a description of the ACDS fields.

  4. The general guidelines for processing receipts found in IRM 8.20.5 are followed with the exception of the following:

    • The ACDS TYPE code varies depending on the penalty in dispute. A full list of the ACDS type codes are found on the ACDS Utilities Menu.

    • Penalty appeal cases with the type code of " PENAP" with different MFT's are established as separate work units.

    • AIMS indicator = E

    • ACDS return field for STATDATE (statute date) or CODE (statute code) - Enter the information based on the following table:

      Statute date or Statute Code Description
      ASESD Penalties have been assessed
      Enter a valid statute date - see IRM 8.21.2, Exhibit 2-1 Entering a valid statute date means the penalties ARE NOT assessed

    • PropdPen proposed penalty - Enter the total dollar amount of the penalty for each tax period.

      Note:

      If there is more than one penalty for each tax period, total the amount for each period and enter the sum for the respective period.

  5. The following table identifies TC codes included in the proposed penalty field at the return level which have a type code of " PENAP" :

    Transaction Code Type of Penalty
    160 or 166 Failure to File
    170 or 176 Estimated Tax Penalty
    180 or 186 Deposit Penalty
    234 or 238 Daily Delinquency Penalty
    240 or 246 Miscellaneous Penalty (Missing Information)
    270 or 276 Failure to Pay
    280 or 286 Bad Check

  6. Attach the ACDS Case Summary Card (CSC) to the administrative file.

  7. Forward the case to the Appeals Team Manager(ATM) or designated official who takes the following actions:

    • Assigns case to an Appeals Officer on ACDS.

    • Sends ACDS uniform acknowledgment letter ( Letter 4141, Letter 4031, or Letter 4046) and includes Publication 4576, Orientation to the Penalty Appeals Process and Notice 1016, How to Stop Interest on Your Account.

  8. Depending on the complexity of the penalty issue, the case may be handled by either Centralized Penalty Group or assigned to an Appeals Officer in a local office.

8.11.1.5.2  (08-15-2008)
Procedures for Appeals Officers

  1. Appeals Officers have authority to abate previously assessed penalties.

  2. Upon receipt of the case the Appeals Officer verifies the following Case Summary Card (CSC) information:

    • Entity information (address and spelling),

    • TIN to ensure correct account is controlled on ACDS.

    • MFT

    • Type code

    • Feature Code

    • Representative information

    • Tax periods at issue covered by the Representative's authority

    • Statute Date or Statute Code - even though these penalties are generally , these fields must be validated within five (5) days of receipt. See IRM 8.21.3, Appeals Technical Employees Statute Responsibility.

    • Verify the uniform ACDS acknowledgment letter and enclosure were sent to the taxpayer

    • Verify all file data is present per IRM 20.1.1.

    • Update the Case Activity Record (CAR).

  3. If a correction is needed to ACDS take the following action(s):

    • Change the Taxpayer Address and Power of Attorney information by using the Address tab on the bottom tool bar of the Case Activity Record.

    • All other changes must be submitted to APS using secure E-mail. These changes include be are not limited to: TIN, tax years, statute, type, etc.

  4. Appeals Officers will resolve the cases as expeditiously as possible, generally within 90 days of receipt.

  5. Familiarize yourself with the most current edition of Document 6209, IRS Processing Codes and Information.

  6. When considering the penalty issue, use account information that is less than 60 days old. However, depending on the type of penalty, a current transcript may be necessary.

  7. Review the case and contact the taxpayer if additional information is necessary to provide prompt resolution.

  8. No contact is required if the case is fully conceded based upon the information in the file. The closing letter sent to the taxpayer confirms the decision to fully abate the penalty.

  9. The taxpayer may request a face-to-face conference. If this occurs, the centralized campus teams transfer the case to a local office for resolution. The Field office makes the necessary conference arrangements.

  10. Appeals will not concede penalty issues to obtain a concession on other issues in the case. Penalties should sometimes be settled, but the settlement must be based on the merits and the hazards surrounding each penalty standing alone.

8.11.1.5.2.1  (08-15-2008)
Applying Reasonable Cause

  1. Penalty cases handled in Appeals involve more complex and questionable reasonable cause issues.

  2. Decisions are made based on fact and the law, taxpayer circumstances and compliance history, and hazards of litigation.

  3. Refer to IRM 20.1 for reasonable cause criteria guidelines.

  4. The following questions are used to determine if the taxpayer has established reasonable cause:

    1. Do the taxpayer's explanations directly relate to the penalty that was assessed?

    2. Do the dates and times coincide with the taxpayer's explanation?

    3. Could the noncompliance have been anticipated and/or prevented?

    4. Did the taxpayer make an honest mistake?

    5. Has the taxpayer provided sufficient detail (dates, relationships, documents) to determine if ordinary business care and prudence was exercised?

    6. Is the taxpayer an individual, third party such as a reporting agent, accountant or lawyer?

    7. Is there a history of the taxpayer being assessed the same penalty?

    8. Were there prior abatements of the same or similar penalties?

8.11.1.5.2.2  (10-23-2007)
Case Activity Record (CAR) Documentation

  1. Key actions are required to be entered on the CAR along with the applicable time spent for each action. The following table provides the mandatory CAR codes for case activities which must be documented:

    CARATS code CARATS code definition
    CR Case Received
    CF/xx Conference type/xx =

    • FF - fact-to-face

    • ML - by mail

    • NN - not necessary

    • NR - no response

    • NS - no show

    • PC - telephone call

    • VC - video conference
    DM Determination Made
    AC-FR Final Determination Made

    Note:

    Additional CAR action codes are found on the ACDS utilities menu.

8.11.1.5.3  (08-15-2008)
Appeals Officer Closing Actions

  1. This section discusses the process used by the Appeals Officer to close penalty cases.

  2. Use ACDS-APGolf to generate all forms and letters.

  3. Prepare the Appeals Case Memo to outline the facts and circumstances supporting sustention or abatement of the penalty. IRM 8.6.2 provides additional information on the preparation of ACMs.

  4. Prepare the applicable ACDS closing letters:

    • Letter 1277 - Penalty Abatement Denied. Use the narrative section to provide the reason for denying the abatement request,

    • Letter 1278 - Penalty Fully Abated,

    • Letter 3324 - Proposal for Partial Abatement. This letter is issued prior to closing the case and provides the taxpayer 15 days to provide additional information supporting the request. If the Appeals Officer does not receive this information within the time allotted, close the case as proposed.

  5. Use the ACDS customized Form 5402:

    • show the affected tax periods included in the case

    • route the case to the APS unit who will process the adjustments

    • list penalty transaction codes

    • provide a source document to adjust the taxpayers account based on the case determination

    • include special instructions related to processing the case

    • notate the remarks section of the Form 5402 when a certified claim disallowance letter had been issued ( Letter 1363 and/or Letter 1364), instructing APS to enter this information in the Notes field on ACDS. The reason for this requirement is to ensure duplicate certified letters are not issued which may erroneously extend the two year period to file suit with the applicable court.

    • send feedback to Compliance when an address is provided in the Route To: field on the Form 5402.

      Note:

      See the discussion of APS closing procedures and explanation of the closing code and blocking series below. See IRM 8.11.1.5.4.

  6. Appeals Officers sign the closing letters -

    IF THEN
    The Appeals Officer is delegated settlement authority Mail the closing letters
    The Appeals Officer is been delegated settlement authority Do not mail the closing letters until the Appeals Team Manager/Team Leader has approved the decision.

  7. In rare situations, resolution of the case will involve a specific matter closing agreement. See IRM 8.13.1, Closing Agreement Manual.

8.11.1.5.4  (08-15-2008)
APS Closing Procedures

  1. When APS receives the case for closing.

  2. Assign the case to an APS employee on Processing Employees Automated System (PEAs).

  3. Review closing documents for special instructions.

  4. Review and update ACDS with the closing information.

    • Closing Codes for penalty cases are:

      Determination Made Closing Code
      Sustained (penalties are not removed) 14
      Abated (penalties are fully removed) 15
      Partially Abated (only part of the penalties are removed) 16

    • ACAPDATE is the date the Appeals Team Manager signs the Form 5402,

    • ACTIONentered is ACKCLS,

    • RevisedPen indicates the amount of the penalty sustained and is taken from Form 5402 or Form 8278,

      Form What to enter in RevisedPen
      Form 5402 use the total for each period in the AMT SUS (amount sustained column)
      Form 8278 subtracts the amount abated from the amount proposed

  5. Multiple tax periods may be listed on Form 5402 . However to satisfy Campus requirements for a source document, provide a copy of the form for each tax period with the applicable period highlighted on each copy.

  6. Input the IDRS adjustments,

  7. If the penalties are sustained input TC 290 $0.00 with Blocking Series 96X.

    Note:

    Only Appeals can use Blocking Series 96X, which creates a –N freeze on the account. Penalties cannot t be abated in the future unless Appeals reverses this freeze code. To reverse the –N freeze, input TC 290 $0.00 with Blocking Series 97X after the Appeals Officer/Appeals Team Manager verifies penalty abatement is appropriate. Then input Form 5402 with the penalty abatement amount.

  8. Additional information on adjustment actions are found in IRM 20.1.2Failure To File/Failure To Pay Penalties and IRM 2.4.16 Command Codes REQ54 and ADJ54.

  9. Maintain closed office file in accordance with IRM 1.15.10, Appeals Records Control Schedule.

8.11.1.5.5  (08-15-2008)
Closing Forms

  1. When assessing penalties use the most current version of Form 8278, Computation and Assessment of Miscellaneous Penalties:

    • Prepare Form 5402 and the ACM outlining the settlement of the case.

    • Prepare the appropriate closing letter, either Letter 1277 or Letter 1278 .

    • Prepare Form 8278 or other adjustment document when an assessment or abatement is part of the case closing.

    • Always use the most current version of Form 8278 as found on the IRS Publishing website for applicable Reference Numbers (RN's).

    Form 5402 provides a summary of the case resolution and identifies the penalties. Form 8278, may need to be prepared as the source document for IDRS actions. The following table provides guidelines to determine required documents:

    IF AND THEN
    Form 5402 is used the penalty is sustained enter transaction code (TC) 290 for zero dollars(–$0.00–) in the appropriate column in number 12 . Write in "Use blocking series 96X" .
    Form 8278 is used the penalty is sustained enter TC 290 (–$0.00–) in a blank space on the form. Write in "Use blocking series 96X."
    Form 5402 is used penalty previously sustained by Appeals is to be abated enterTC 290 with a blocking series 97X (reversal of penalty abatement refusal) in the appropriate column in number 12.
    Form 8278 is used penalty previously sustained by Appeals is to be abated enter TC 290 with a blocking series 97X ( reversal of penalty abatement refusal) in a blank space on the form.

    Note:

    Use of blocking series 96X (penalty abatement refusal) for the TC 290 (-0-) transaction prevents the abatement of a penalty sustained by Appeals. Only Appeals personnel are permitted to use blocking series 96X and 97X.

8.11.1.5.6  (08-15-2008)
Closing Letters

  1. Appeals Officers sign the closing letters

    IF THEN
    The Appeals Officer is delegated settlement authority Mail the closing letters
    The Appeals Officer is not delegated settlement authority Do not mail the closing letters until the Appeals Team Manager/Team Leader has approved the decision.

  2. In rare situations, resolution of the case will involve a specific matter closing agreement. See IRM 8.13.1, Closing Agreement Manual.

8.11.1.6  (08-15-2008)
Estimated Tax Penalty - Adjustment using Form 5403

  1. If an estimated tax penalty is considered during Appeals consideration of a deficiency related case, and an adjustment will be made use Form 5403.

  2. Estimated tax (ES) penalties are systemically-generated with TC 176 at the time a original return is posted to an account.

  3. To adjust a computer generated IMF estimated tax penalty, follow the instructions outlined in IRM 8.20.7 for entering adjustments to estimated tax penalty amounts on Form 5403.

8.11.1.7  (08-15-2008)
Closing Actions for Other Penalties

  1. Enter the Appeals findings and/or reason for adjustment in the blank space on Form 5402.

    • If the penalty is sustained, also enter the blocking series described in the If/Then Table in the following section.

    • Use the columns on the customized Form 5402 for account closing actions on IDRS and Appeals closing actions (last three columns) on ACDS. One form may be used for multiple penalties.

  2. When all case action has been completed, forward the case file to APS through the Appeals Team Manager. If the Appeals Officer is delegated settlement authority, forward the case file directly to APS depending on local procedure.

8.11.1.8  (08-15-2008)
Processing Master File Assessment of Certain Civil Penalties

  1. Process all miscellaneous civil penalties covered by the civil penalty module (CPM) system on Form 8278 , Computation and Assessment of Miscellaneous Penalties.

  2. All penalty cases must be controlled on ACDS. Refer to the ACDS utilities for the type code to be used for these cases.

  3. The following codes are used when processing actions for civil penalties.

    • MFT 55 for assessments against individuals (processed on the individual master file — IMF)

    • MFT 13 for assessments against business entities (processed on the business master file — BMF).

  4. Take all account actions through IDRS. All assessed miscellaneous civil penalty case files sent to Appeals by Compliance must contain a Form 8278.

  5. These penalty cases are not controlled on AIMS.

  6. Each Form 8278 -

    • includes a document locator number (DLN), and

    • reflects the penalty amount assessed.

  7. More than one penalty may be assessed on a Form 8278. Additional penalties must be for

    • the same calendar year or period, and

    • the same entity.

  8. Assess all miscellaneous civil penalties against only one individual.

    Note:

    An exception is IRC 6702(a) - for frivolous tax returns penalties on married filling joint accounts, see IRM 20.1.10.9, Frivolous Tax Submissions.

  9. Joint returns forwarded to Appeals must include a Form 3198, Special Handling Notice, and indicate whether the penalty is to be assessed against the primary or secondary SSN.

8.11.1.8.1  (08-15-2008)
Closing Miscellaneous Civil Penalty Cases

  1. Prepare Form 5402, Appeals Transmittal and Case Memo, for each case. In addition, it may be necessary depending on the penalty to prepare Form 8278 for processing IDRS actions.

  2. The following table provides guidance for completing Form 5402:

    IF AND THEN
    There is an assessed penalty amount the miscellaneous civil penalty is fully or partially abated complete the appropriate column in number 12 of Form 5402
    There is an assessed penalty amount the miscellaneous civil penalty is sustained show a zero (0) in the appropriate columns in number 12 and enter a TC 290 (–$0.00–) with a blocking series 96X on the Form 5402
    There is an assessed penalty amount the amount is subsequently abated show a zero (0) in the appropriate columns in number 12 and enter a TC 290 with a blocking series 97X on Form 5402

  3. Line by line instructions for preparing Form 8278 are found on the back of the form.

    IF AND THEN
    There is an assessed penalty amount the miscellaneous civil penalty is fully or partially abated show the amount in column 9(e) and the amount abated in column 9(f) of the Form 8278.
    There is an assessed penalty amount the miscellaneous civil penalty is sustained show a zero (0) in column 9(f) and enter a TC 290 (–0–) with a blocking series 96X in a blank space on the Form 8278.
    There is a sustained penalty the amount is subsequently abated show a zero in column 9 (f) and enter a TC 290 with a blocking series 97X on Form 8278.

  4. The use of a TC 290 for -$0.00- with blocking series 96X (penalty abatement refusal) alerts anyone looking at the account that Appeals considered the penalty issue and either fully sustained or partially sustained it.

    Note:

    Only Appeals personnel are permitted to use the 96X blocking series.

  5. A TC 290 with a blocking series 97X reverses a penalty abatement indicator and allows additional action related to the penalty.

    Note:

    Only Appeals personnel are permitted to use the 97X blocking series.

  6. If the penalty was recommended by Compliance, attach a Form 3198, Special Handling Notice, to the administrative file and note that Appeals sustains the assessment.

8.11.1.9  (08-15-2008)
Frivolous Suit Penalty, IRC Section 6673

  1. The IRC 6673 penalty is imposed by Tax Court against a taxpayer who initiates proceedings in the court primarily to delay the case or whose position in the proceedings is frivolous or groundless.

  2. The penalty is imposed on various types of cases which include both deficiency and Collection Due Process (CDP) cases.

  3. Processing instructions for the penalty assessment for CDP cases is found in IRM 8.22.3 Back-End Processing for Collection Due Process and Equivalent Hearing Cases.

  4. The penalty amount cannot exceed $25,000, is assessed at the same time as the deficiency, and is collected as part of the tax.

  5. The key items to remember when processing the IRC 6673penalty assessment on non-CDP cases are:

    1. Assertion of the penalty is included in the Tax Court decision document.

    2. Enter the penalty amount on Form 5403, Item 12 (Penalty) with a transaction code (TC) 240, Miscellaneous Civil Penalty. Enter the Penalty Reference Number (PRN) 643 should be entered in item 15. Refer to . IRM 8.20.7, General Closing Procedures, for information on preparing Form 5403.

    3. If a taxpayer has more than one year docketed in the Tax Court and the penalty is imposed, input the total amount on Form 5403 of the earliest year.

8.11.1.10  (08-15-2008)
IRC 6703 Claims for Refund Processing on IRC 6700 and 6701 Penalties

  1. Under IRC 6703(c), the following procedural rules apply to the penalties under IRC 6700 and IRC 6701:

    1. The burden of proof is on the Government.

    2. The deficiency procedures do not apply.

    3. Collection is suspended on penalties asserted under IRC 6700 and 6701 if the taxpayer pays 15 percent of the penalty and files a claim for refund within 30 days after notice and demand. If the claim is denied, continue to suspend collection if the taxpayer files suit in District Court within 30 days after issuance of the claim denial or 30 days after the expiration of 6 months from the filing of the claim, whichever date occurs first. If the taxpayer does not timely file suit in District Court, the prohibition on collection ends. The statutory period for collection is suspended during the period the government is prohibited from collecting.

    Note:

    a) and b) above also apply to the penalty under IRC 6702(a).

  2. IRC 6700 provides a penalty for promoting abusive tax shelters.

    1. For activities before October 22, 2004 the penalty is the lesser of:

    • $1,000, or

    • 100% of the gross income derived from the activity. The taxpayer must establish that gross income is less than $1,000.

      Note:

      The penalty for activities after October 22, 2004, is 50% of the gross income derived (or to be derived) from the activity if a false or fraudulent statement is provided regarding tax benefits of the activity.

  3. The penalty is imposed for fraudulently representing the tax benefits of the shelter or for making a gross valuation overstatement (exceeds 200 percent of correct valuation) as to value of the property or services.

    1. Although the penalty is subject to abatement on grounds the promoter has a reasonable basis for the valuations and made the valuation in good faith, the penalty cannot be appealed under the post assessment penalty procedures in Treas. Reg. 601.106(a)(1)(iv). However, the penalty is subject to the special claim for refund rules under IRC 6703.

    2. IRC 7408 permits the Government to seek a District Court injunction against the promoter engaged in conduct subject to the IRC 6700 penalty in order to prevent recurrence of the conduct. The injunctive suit can be filed in the District Court where the promoter resides, does business, or conducts activity subject to the IRC 6700 penalty.

  4. IRC 6701 provides a $1,000 (individual) or $10,000 (corporation) penalty for aiding and abetting understatement of tax liability.

    Note:

    This penalty is not subject to a reasonable cause or reasonable basis determination.

  5. IRC 6702(a) provides a $5,000 penalty for filing a frivolous tax return.

    1. These penalties no longer have the special claim provisions of IRC 6703(c) as their reason to appeal.

    2. Penalties under IRC 6702(a) for returns filed after December 31,1989, may be appealed under the post assessment penalty program.

    Note:

    This penalty is not subject to a reasonable cause or reasonable basis determination.

    Note:

    A change was made to IRC 6702 in Pub. L 109–432 effective for frivolous tax returns filed or submissions made or issues raised after April 2, 2007. The change increased the penalty to $5000, and provided for a frivolous submissions penalty of $5,000. See Notice 2007-30, 2007 I.R.B. 883 (April 2, 2007).

8.11.1.10.1  (10-23-2007)
IRC 6703 Appeals Claim Procedures

  1. Work IRC 6703 claim cases on an expedited basis.

  2. The period of limitation on collection is tolled during the period the Service is prohibited from collecting the unpaid amount.

  3. The prohibition on collection of the unpaid amount only runs for 30 days after the earlier of:

    • Six months from the date the claim for refund is filed, or

    • The day on which the claim for refund is denied

    unless the taxpayer begins a proceeding in the appropriate United States District Court for the determination of his liability within the 30-day period. If the taxpayer does timely begin a proceeding, prohibition on collection continues until there is final resolution of the IRC 6703 proceeding.

  4. Issuance of a Claim Disallowance letter ( Letter 1364) by certified mail is necessary when the claim is disallowed to begin the two-year period in which to file a refund suit under IRC 6532.

  5. Consider an IRC 6703 claim for refund in the same manner as any other claim for refund.

    • Settle claims based on potential hazards of litigation.

    • Base decisions on the facts and circumstances of each case, subject to the approval of the Appeals Team Manager (ATM).

    • Coordinate decisions to abate IRC 6700 penalty with local Counsel prior to taking abatement action.

  6. Control cases on Appeals Centralized Database System (ACDS). Refer to IRM 8.20.3 for procedures for controlling cases on ACDS.

  7. Send the following correspondence to the taxpayer:

    IF THEN
    The determination is to abate the penalty Send the taxpayer a letter acknowledging the abatement.
    The determination is to sustain the penalty Send the taxpayer a certified letter of Claim Disallowance (Letter 1364) by certified mail.

  8. Process any abatement action on Form 8278, Computation and Assessment of Miscellaneous Civil Penalties.

8.11.1.11  (10-23-2007)
IRC 6707 Promoter Penalty Cases

  1. Promoter penalties under IRC 6707 were designated as Appeals Coordinated Issues on July 23, 2003 (along with other preparer and promoter penalties).

  2. In accordance with IRM 8.2.1.6, Appeals Officers (AOs) or Appeals Team Case Leaders (ATCLs) who have this issue must use Form 13381 to make a referral to Appeals Technical Guidance through their manager upon assignment or preliminary review.. This form is on both ACDS and the Appeals web site.

  3. AOs and ATCLs who are considering a case with the IRC 6707 issue must contact the Appeals Technical Guidance Coordinator prior to scheduling the initial conference to obtain the most current information. They must also secure the Coordinator's review and concurrence before finalizing a settlement on the issue.

  4. The ACDS record for this case must be updated to include the feature code "AI" .

  5. A listing of the Appeals Technical Guidance Coordinators is found on the Appeals web site.

8.11.1.12  (08-15-2008)
Processing Fraud Penalty Cases

  1. Appeals has authority to eliminate or partially concede the fraud penalty under IRC 6663 or the fraudulent failure to file penalty under IRC 6651(f) , to an amount less than 75 percent but greater than zero in any case under its sole jurisdiction.

    Caution:

    In any case where criminal prosecution against the taxpayer was recommended to the Department of Justice, the recommendation or concurrence of Counsel is required whether or not the criminal prosecution recommendation resulted in a conviction. This also applies to any related taxpayer involved in the same transaction and to the same taxpayer with respect to any tax year or period affecting the tax year or period for which criminal prosecution was recommended. (See Delegation Order No. 66, as revised.) The concurrence of Counsel is required for the reduction of any criminal fraud income item. To indicate concurrence, the appropriate official in Counsel’s office signs in the space provided at the bottom of Form 5402. Refer to IRM 8.7.1.9 for cases in which a recommendation for criminal prosecution is pending.

  2. The following table provide actions which may be required based on the statute of limitation and the case resolution:

    IF AND THEN
    The three-year period of limitations for assessment has not expired for a non-docketed case there is a partial concession of the fraud penalty to an amount less than 75% of the fraudulent portion of the underpayment but greater than zero secure a closing agreement.
    The three-year period of limitations for assessment has not expired for a docketed case there is a partial concession of the fraud penalty to an amount less than 75% of the fraudulent portion of the underpayment but greater than zero it is usually not necessary to secure a closing agreement because the stipulated-decision filed with the court is sufficient. Always consult with Counsel when considering a closing agreement in a docketed cases.
    Period of limitation for assessment has expired except for fraud the evidence warrants litigating the penalty execute a closing agreement where mutual concession settlement is worked out for

    • a deficiency with no fraud penalty, or

    • fraud penalty representing less than 75% of the fraudulent portion of the underpayment but greater than zero

    Period of limitations for assessment has expired except for fraud the evidence of fraud is insufficient to warrant litigation concede the deficiency in tax and the fraud penalty

  3. Return a case to the Compliance office when it appears important new information or evidence was purposely withheld from the Compliance Officer or where information requires extensive verification and consideration by the area office. See IRM 8.2.1.2 for instructions.

  4. Consult with your Appeals Team Manager when any new information or evidence implies a fraud potential in the case under Appeals jurisdiction. With the concurrence of the ATM

    • in docketed cases, where fraudulent documents have impeached the credibility of the taxpayer, cease the settlement negotiations and notify counsel that you are forwarding the case for trial preparation.

    • in non-docketed cases, return the new evidence for Compliance's review and consideration of fraud penalty assertion.

  5. In all mail order ministry/vow of poverty cases where the civil fraud penalty has been asserted, consult local SB/SE Counsel prior to closing the case if there is any substantial doubt about whether the fraud penalty should be sustained or conceded.

8.11.1.13  (08-15-2008)
Accelerated Appeals Procedures (AAP) for IRC 6707A Penalties

  1. Generally, IRC 6707A penalty cases originate in Compliance (Large and Mid-Size Business (LMSB), Small Business and Self Employed (SBSE) or Tax Exempt/Government Entities (TE/GE)).

  2. Accelerated Appeals Procedures (AAP) are available to taxpayers who receive a 30-day letter proposing an IRC 6707A penalty. Once the 30-day letter is issued, the taxpayer or an authorized representative can request that Appeals consider the proposed penalty by filing a protest with Compliance.

  3. Upon receipt of the taxpayers protest, Compliance contacts the Appeals AAP Case Coordinator responsible for the State where the taxpayer resides. The AAP Case Coordinators list is found on the case routing page of the Appeals website.

  4. Compliance continues examining of the taxpayer’s return(s) and developing of other issues while Appeals considers the AAP-IRC 6707A penalty case.

  5. Cases involving IRC 6707A penalties are generally assigned to Appeals Officers who are mediation trained.

8.11.1.13.1  (08-15-2008)
Appeals AAP Case Coordinator Responsibilities

  1. The Appeals AAP Case Coordinator facilitates in assigning, scheduling, and closing AAP cases in Appeals.

  2. Once the Appeals AAP Case Coordinator is notified that a protest was filed and the case is going to be sent to Appeals, he/she determines which Appeals Officer will be assigned the case and advises Compliance, generally within two business days, of the following:

    • The Appeals Office that will handle the case.

    • Name of the Appeals Officer (AO) assigned the case.

  3. At the same time, a secure E-mail is sent to the Appeals Officer, his/her ATM and the Appeals Processing Services (APS) Processing Team Manager (PTM) responsible for creating and assigning the case on ACDS

  4. The AAP Case Coordinator obtains the following information from Compliance:

    1. Taxpayer's Name and Address

    2. Power of Attorney's (POA) Name and Address

    3. TIN

    4. MFT

    5. Tax Periods

    6. Dollar Amount of Penalty in each Tax Period

    7. Date of Protest

  5. For each AAP 6707A case, the AAP Case Coordinator maintains a log containing the following information:

    • Name of AO

    • Name of TP

    • Date Compliance notified Appeals a protest was received

    • Date the case was assigned to the AO

    • Date the case was returned to Compliance

8.11.1.13.2  (08-15-2008)
APS Case Receipt Procedures

  1. Appeals intends to complete consideration of AAP penalty cases not more than 90 days after receipt by the AO. Therefore, special case receipt procedures are necessary.

  2. Compliance mails the AAP penalty case file directly to the assigned Appeals Officer.

  3. The APS Processing Team Manager(PTM) immediately creates and assigns the case on ACDS using information received in the E-mail from the AAP Case Coordinator.

  4. APS follows general guidelines for establishing cases on ACDS as detailed in IRM 8.20.5, Processing and Establishing New Receipts, with the following exceptions:

    ACDS Field IRC 6707A
    Type Code 6707
    MFT Code P5 will be used ONLY for IRC 6707A cases
    Feature Code AI and IT
    Date Received earlier of:

    • date of E-mail sent to the AAP Case Coordinator

    • date of phone call

    • date file received if no prior notification
    REQAPPL date of the protest
    AIMS Indicator E (exempt) This case is not to be controlled on AIMS.
    Statute Code Exam
    Penalty Amount Amount taken from Form 8278

  5. If APS receives the case in error, immediately (no later than one day from receipt of the case in Appeals) take the following actions:

    • Research ACDS to determine if the case is controlled.

    • If controlled, send the AAP penalty case file to the assigned Appeals Officer.

    • If not controlled, immediately contact the AAP Case Coordinator notifying them of receipt of the case to obtain the name of the Appeals Officer to be assigned. Create the case on ACDS and forward to the Appeals Officer.

8.11.1.13.3  (08-15-2008)
Appeals Officer Procedures for AAP Penalty Cases

  1. AAP penalty cases are considered high priority cases.

  2. Appeals intends to complete consideration of AAP penalty cases not more than 90 days of after receipt by the AO.

  3. Prepare Form 13381,Appeals Technical Guidance Referral. Send it to their ATM who in turn forwards it to the TGC responsible for the issue.

  4. Within five days of receipt take the following actions:

    • Verify the accuracy of the information on ACDS and complete a meaningful and thorough preliminary review of the case.

    • Verify that ACDS feature codes AI and IT are on the system. If the feature codes are missing, update the system through CARATS.

    • Verify penalty dollar amounts.

    • Enter the CARATS code CR-NR to show actual receipt of the case.

    • If additional ACDS changes are required, forward to APS requesting expedite action.

  5. Either the Appeals Officer or the ATM mails a uniform acknowledgement letter, to the taxpayer and/or authorized representative on the day the case is received..

  6. Where appropriate, Appeals Officers are encouraged to use teleconferencing or video-conferencing.

  7. Throughout consideration of the case, work closely with the TGC to identify acceptable resolutions of the case to minimize the time necessary for review and concurrence of a proposed resolution.

  8. If Compliance asks to participate in the conference, coordinate with all parties involved.

  9. Hold conferences on dates and in locations reasonably convenient to taxpayers and representatives. Generally, they are held at Appeals offices, suboffices, or other IRS-staffed posts of duty that are not temporary or part-time locations. However, managers may approve holding the conferences at other sites when feasible and necessary to provide a convenient conference opportunity. Ordinarily, the amount in dispute is not an important factor in approving another conference site.

  10. If possible, resolve the case in one conference. Communicate and coordinate any delays with the Appeals AAP Case Coordinator and your ATM.

8.11.1.13.4  (08-15-2008)
Appeals Officer Closing Process for AAP Cases

  1. Complete an Appeals Case Memorandum (ACM) in every AAP penalty case.

  2. Make the ACM brief, concise, and succinct but ensure there is sufficient discussion to clearly explain or support the resolution recommended. See IRM 8.6.2, Appeals Case Memo Procedures, for general information on preparing an ACM.

  3. Within five days of reaching resolution, the Appeals Officer submits Form 5402, the ACM, and any proposed agreement forms to the TGC for review and concurrence. The TGC generally informs the AO of their decision within two days of receipt of the ACM.

    Note:

    If the Appeals Officer and the TGC disagree on the proposed resolution, immediately elevate the issue to the respective Appeals Team Managers, Area Directors, and Executives who have two business days to resolve the conflict. See IRM 8.7.3 ,Technical Guidance Program, for additional information.

  4. Include instructions to APS on Form 5402, Appeals Transmittal and Case Memo, showing the address of the Compliance office that will get the e case will return the case to the same person and address in Compliance who sent it. Enter the following statement on Form 5402.

    EXPEDITE CLOSING REQUIRED --- ACCOUNT ADJUSTMENTS PROCESSING WILL BE HANDLED BY COMPLIANCE -- NO ADJUSTMENTS WILL BE MADE BY APPEALS PROCESSING SERVICES

  5. Prepare a closing letter for the signature of the ATM. The ATM signs the documents within two business days of receipt and forwards the case to the local APS for closing.

8.11.1.13.5  (08-15-2008)
APS Closing Procedures for AAP Cases

  1. Process the closing within one (1) day of receiving the APP penalty case for closing. Follow guidelines in this section paying attention to the closing code and handling of the case.

  2. Use general closing guidelines for additional ACDS updates required at closing. See IRM 8.20.7, General Closing Procedures.

  3. The following ACDS Closing Codes for these types of cases are as follows:

    ACDS Closing Code Description
    14 penalty fully sustained
    15 penalty fully conceded
    16 penalty compromised

  4. Expedite processing is required for these cases.

    Note:

    APS does not make any adjustments on these cases.Do not make an assessment. Compliance processes all adjustments or assessments in accordance with their procedures.

  5. Prepare the closed office file as outlined in IRM 1.15.10, Appeals Records Control Schedule.

  6. APS prepares Form 3210 and send the file to the original Compliance office by overnight mail. Return it to the same person and address who sent it.


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